On recent trips to the West, I’ve discovered that the further from China people are, the worse the economy looks.
Having President Xi Jinping in town might lessen the gloom: after his recent US trip, he is visiting Britain this week.
The recent stock-market correction, currency devaluation, and data disappointments have exacerbated concerns about China’s slowdown. We are all impacted by this. Investors in the West seem shaken, and will look to President Xi for explanation and, more importantly, reassurance.
“Recent turmoil should not be mistaken for a drastic worsening of fundamentals”
Real economic activity is slowing in China, and risks remain: the ongoing property-market correction, excess capacity in the manufacturing sector, high debt levels.
However, recent turmoil should not be mistaken for a drastic worsening of fundamentals. If anything, such setbacks have prompted policy makers to give greater priority to reform, and to ease policies more decisively.
Time lag in impact of new policies
We have seen down-payment requirements being reduced for first-time homebuyers. Sales tax on small cars has been halved. Targeted fiscal spending is up 15 per cent in the first eight months of 2015. This is in addition to a more accommodative monetary policy, including five interest rate cuts and three reserve requirement ratio reductions since November last year.
The impact of such easing is yet to be seen. These policies feed through to the real economy with a lag of five to nine months, according to People’s Bank of China researchers.
And inevitably policy makers may not always get it right. Looking back, the stock market policy was unfortunate. Faced with an already frothy market, the government picked an unnecessary fight that was difficult to win. It was nonetheless a valuable lesson for policy makers as they learn how to interact with a more open financial system.
Currency devaluation was necessary
The recent episode of renminbi (RMB) depreciation illustrates another key challenge China faces: the scope for its multiple policy objectives to be misread by the market.
The RMB fixing reform on 11 August was intended to meet the IMF’s call for a more market-driven foreign exchange (FX) regime, increasing the RMB’s eligibility to Special Drawing Rights (SDR) inclusion.
The devaluation was needed to close the onshore spot-fix gap, but many interpreted it as a competitive devaluation to boost growth. What was intended as a positive reform turned into worldwide FX turbulence.
“One senior official told me that the government will continue to press the reform accelerator to the floor unless jobs data show signs of stress”
Could the intention have been better communicated? Certainly. But for an economy of China’s scale to simultaneously transform its domestic market and open up to the rest of the world, the task is enormous and there are bound to be bumps along the way.
One senior official told me that the government will continue to press the reform accelerator to the floor unless jobs data show signs of stress. We should give recognition to such determination as the key is to keep taking the right steps to deliver a more open and sustainable economy.
Market liberalisation has been accelerated
This is hard when cyclical headwinds are strong and market confidence is fragile. So it is encouraging to see China accelerating market liberalisation amidst the recent turbulence. The range of reforms includes allowing foreign public institutions to access onshore interbank FX market, and relaxing the eligibility for RMB cross-border pooling.
Just this past week saw the launch of China International Payment Systems, where multinationals like IKEA were amongst the first to effect payments internationally via the new platform in RMB.
China is evolving and maturing
With more reforms on the way, the world should adjust the way it sees China. It is an economy that is evolving and maturing.
Admittedly, Chinese manufacturers still face the triple whammy of over-capacity, weak end-demand, and rising wages. But Beijing is motivating manufacturers to move up the value chain, boost productivity and manage cost, there will undoubtedly be more casualties.
“The consumer demographics that attracted western countries to invest in China remain compelling”
In fact China’s challenged manufacturers are becoming a less significant part of the story, as the economy shifts towards services and innovation, with the tertiary sector now accounting for roughly half of China’s GDP.
The slowdown in retail sales in China has been significantly impacted by China’s clampdown on corruption. But the consumer demographics that attracted western countries to invest in China more than a decade ago remain compelling.
The government is getting to grips with large but manageable state debts by swapping local government loans for bonds and imposing a ceiling on those governments’ debt levels.
“I see a China that is fast opening up. The process will not be painless. But the West should be constructive participant”
And for every Trans-Pacific Partnership Agreement that is said to hurt China’s long-term competitiveness, there will be a corresponding ‘One Belt One Road’ that promises a boost to trade and investment growth.
Perceptions affect confidence, and I believe the perceptions of China in the West are skewed. I see a China that is fast opening up, a government that is determined to reshape its economy and drive through much-needed and long-ranging reforms.
The process will not be painless, but the West should be constructive participants. With genuine exchange, there are policy areas where China could learn from the West’s insights. After all, a China whose economy is more sustainable, predictable and market-oriented is good for the world.