The latest reform agenda and the widening trading band of the Chinese currency Renminbi against U.S. dollar are all signals that China is heading for more-balanced and market-oriented economic reforms, and the process is beneficial to the whole world, said experts in London.
BENEFIT THE WHOLE WORLD
China’s economic slowdown is clearly bad news for commodity exporters, but the world as a whole should actually benefit from slower but better-balanced growth in China, said Julian Jessop, chief global economist at Capital Economics, in his analysis piece.
The London-based economic research company attributes the recent lackluster economic data of China to seasonal impact of Chinese New Year, when many factories shut down for the holiday.
Fears that the recent weak data may be early indication of a “hard landing” are overdone, noted Jessop.
“A slowdown in China driven by a shift away from net exports towards consumption could in principle boost activity elsewhere. Meanwhile, any resulting weakness in commodity prices should be a net positive for the rest of the world,” said Jessop.
“A controlled slowdown now should reduce the chances of a crash landing later. This is also the context in which to view the clampdown on shadow banking: better to allow a few defaults now than to see potential bad debts spiral out of control,” he said.
Capital Economics expects China’s GDP growth at or slightly above 7.5 percent in the first quarter of 2014.
Andrew Colquhoun, senior director of sovereign at Fitch Ratings, also said that Chinese data are highly seasonal and first quarter weakness is normal.
Though the January-February data show a slowdown, it was reflecting in part the previous monetary policy tightening, said Colquhoun in a research report.
“We think tighter monetary and credit conditions are aimed at reining in credit growth, particularly ‘shadow banking’ activities perceived as riskier for financial stability. The slowdown also coincides with the government signalling a shift towards greater tolerance of corporate defaults by allowing China’s first on shore corporate bond default in recent times,” added Colquhoun.
Fitch uplifted China’s growth forecast from previous 7.0 percent to 7.3 percent for 2014 last week.
MORE FLEXIBILITY OF CURRENCY
The People’s Bank of China (PBoC) is signalling that this weekend’s widening of the RMB’s, or Chinese yuan’s, trading band means that the currency’s days as a “one-way bet” are over, but fundamentals stills point to a stronger currency over the medium term, said Mark Williams, chief Asia economist at Capital Economics, in the China Economic Update report.
The PBoC announced Saturday that the RMB’s daily trading band against the U.S. dollar will be widened from the current one percent to two percent from Monday. The move will meet market demands and further liberalize the RMB exchange rate, said the central bank in a statement.
“The message from the PBoC in its accompanying statement is that this will allow greater two-way movement of the currency in future. This is of course true in terms of how far the RMB can, in principle, move in any given day. In fact, a two percent band would be enough to contain all but the most extreme moves of any free-floating currency,” said Williams in his China Economic Update report.
With China still a strong draw for inward investment of all forms and the current account surplus likely to rebound, market pressures will in most circumstances push the RMB towards the strong-side of its band, said Williams.
“We view the PBoC’s tolerance of greater exchange-rate volatility as a financial stability measure, aimed at deterring some speculative activity driven by perceptions of inevitable yuan appreciation,” he said.
INTEREST RATE LIBERALIZING
The booming of Alibaba’s Yu’E Bao, which was launched in June 2013, is pushing the interest rate liberalization in China forward, Qinwei Wang, Chine economist at Capital Economist told Xinhua.
“There is an echo of developments in the 1970s in the United States when money market funds were created to get around Regulation Q, which capped American deposit rates,” said Wang.
But China’s online version have some distinguishing characteristics, including being ease to use, low requirements to set up an account and relatively low risk, noted Wang. The innovation is forcing major banks bowing to market pressure and launching similar products to protect their customer base.
Yu’E Bao now manages around RMB 500 billion (80 billion U.S. dollars), which has doubled in size over the past month, according to data compiled by Capital Economics.
“In effect, this is deposit rate liberalization via the back door,” he said.