Transcript Chinese economy, currency and global interdependence: The

Recent Turns in
the Chinese
Economy
Sunanda Sen
Chinese economy and global interdependence:
The Changing Pattern
• Pattern of governance since 1978-79 …
‘Guided Finance’…de-regulation Deng Xiao
Ping … regulated and directed credit from
banks…fixed RMB rate at 8.3 to USD till 2005
…. limits on stock market ( RMB and Dollar
shares) … directed incentives to the FDI ….
• Effective management of global crisis with
$586 bn stimulus package distributed via
banks and government expenditure.
2
Changing Pattern since 2005
• Noticeable shifts.. gradual opening up of
financial markets … de-linking Yuan from dollar
in 2005 .. a managed rate around dollar….. larger
inflows of short term capital, especially with
entry of the Qualified FIIs who can now trade in
the A shares (denominated in RMB) as well, in
addition to the B ( dollar) shares in the stock
market. … temporary devaluation with rising
speculation , covering stocks , real estates ,major
banks selling Wealth Management Products…
shadow banking practices….launch of the
Shanghai Free Trade area in 2014
Major turbulance in China’s financial
market- 2015-16
• Downturn in the stock exchanges: Shanghai
Composite Index : 5120 ( June 11, 2015) 3806
(July 9) 3552 (Aug 21) [Bloomberg]. Wiped out, in
less than a month between July-August , more
than $3 trillion of stock holders’ wealth.
• Dropped further to 2749 on January 26, 2016 B
By February 2016 wavering between 2700 and
2750.
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Shanghai Stock Composite Index
SHSCOM
6000
5000
4000
3000
SHSCOM
2000
1000
0
Role of institutions in China’s recent
financial crisis
• Credit-fuelled growth in the wake of the 2008
global financial crisis with $586bn injection
….SoBs lent directly to SoCs and land
developers leading to expansion of
infrastructure and real estates, with
“investment” bubble in the Chinese economy.
• De-regulation of finance ..uncertainty..Rise of
speculation and ‘shadow banking’
Debt instruments sold through shadow banks – destabilising
effects
• A typical arrangement with shadow banking…. bank sets
up trust company that borrows from individual investors
against sale of securities, in effect, high-yield junk bonds.
The proceeds invested, usually in real estate or in
companies related to real-estate development, such as
construction.
• With a large build-up of bad debt, much related to real
estate,… fall in property prices … trust companies go
broke… banks which invested in these companies ,in
trouble.
• Speculators shift to stock markets by end 2014 with stock
boom..state cooperates by encouraging margins as
borrowings .. ….asset bubble in stocks …collapse of stock
prices… currency rates drop…capital flight….
Private Debt to GDP
China’s Capital Flight in Recent Times
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Speculators bet heavily against the yuan as well as stock prices
January2016, PBoC directing state banks to buy offshore Yuan in Hong
Kong to support Yuan by countering the short sellers
With yuan suddenly scarce in Hong Kong, annualized cost of borrowing
overnight hit 66.82 percent on Jan. 12— dropped to 8 percent Jan13
Use of circuit breakers in stock market by China Securities Regulatory
Commission (CSRC) since January to suspend trading in stock markets
Periodically government shored up financial and stock markets through
backdoor money market injections Jan 2nd week poured $20bn into the
money markets - but not much has worked.
Gradual, managed depreciation makes the yuan a one-way bet for
investors who see the currency weaken even as the central bank
intervenes to prop it up.
Policy insiders are now calling for a quick and sharp yuan depreciation,
backed by tighter capital controls to curb speculation and the flight of
money out of the country.
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http://www.reuters.com/article/us-china-markets-yuan-policymakersidUSKBN0UL24020160107
The cost of the PBOC's intervention has been
high. China's foreign exchange reserves fell by
more than half a trillion dollars last year as the
central bank bought yuan to support the
exchange rate, with reserves dropping by a
record $107.9 billion in December alone.
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http://www.reuters.com/article/us-china-markets-yuanpolicymakers-idUSKBN0UL24020160107
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China’s Real Effective Exchange Rates
RER 2010=100
140
120
rer
100
80
China
60
India
40
20
0
2009 2010 2011 2012 2013 Q4 14 Q1 15 Q2 15 Q3 15
source
https://www.bis.org/statistics/eer/tables_i.pdf
13
80
60
11-2015
09-2015
07-2015
05-2015
03-2015
01-2015
11-2014
09-2014
07-2014
05-2014
03-2014
01-2014
11-2013
09-2013
07-2013
05-2013
03-2013
01-2013
11-2012
09-2012
07-2012
05-2012
03-2012
01-2012
11-2011
09-2011
07-2011
05-2011
03-2011
01-2011
11-2010
index
REER China and other countries
Real Effective Exchange Rates
140
120
100
China
India
Euro Area
40
USA
20
0
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China and the world economy
• Tendencies for Yuan rate to slide down affects capital flows more than
trade ( via REER) causing capital outflows and drop in SHSCOM
• Stock market in China also affected by its preceding boom which did not
last.
• China demonstrates a new pattern of relation between the state and
market… With China’s “new normal” growth targeted at 7% or less a rebalancing act. Reflects a Polyanisque “ double movement” to help
distribution and quell rising discontent and protests within the country.
• An apparent contradiction between those holding portfolio of large
savings [ 50% of GDP with households providing 35%] and aiming to
export capital with strong RMB and easy capital controls vis a vis state
wanting rebalancing . Reforms originating from the National Peoples’
Congress (NPC) reflect changing composition of the ruling party.
• End result of concern to Rest of World .
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Thank you