Econ­omy still strong de­spite yuan’s fall

China Daily (Hong Kong) - - VIEWS -

The yuan’s con­tin­ued de­pre­ci­a­tion against the US dol­lar since Septem­ber has aroused con­cerns about pos­si­ble cap­i­tal flight from China, es­pe­cially be­cause the coun­try’s for­eign in­vest­ment in the non-fi­nan­cial sec­tor surged by more than 53 per­cent year-on-year to reach $145.96 bil­lion in the first three quar­ters of this year. The fig­ure for the whole of last year was about $121.4 bil­lion.

In re­sponse, the Chi­nese gov­ern­ment, as con­firmed by of­fi­cials of the Peo­ple’s Bank of China, the Na­tional De­vel­op­ment and Re­form Com­mis­sion and other gov­ern­ment de­part­ments, will more tightly scru­ti­nize over­seas in­vest­ments while im­ple­ment­ing the “Go Out” strat­egy.

Ob­servers and in­vestors, how­ever, need not worry, nor should they fall vic­tim to spec­u­la­tions. The truth is that the yuan is still sta­ble in the global mon­e­tary mar­ket and will con­tinue to be so. The re­cent de­pre­ci­a­tion is a nat­u­ral mar­ket re­sponse to a stronger US dol­lar af­ter Don­ald Trump’s elec­tion as the next US pres­i­dent and the pos­si­bil­ity of the US Fed­eral Re­serve in­creas­ing in­ter­est rates.

The Chi­nese cur­rency’s ex­change rate is no longer pegged to only the US dol­lar thanks to the in­creas­ing glob­al­iza­tion of trade. The China For­eign Ex­change Trade Sys­tem in­dex, which now serves as a ma­jor in­di­ca­tor of the value of the yuan, has stayed above 94 in the sec­ond half of this year. The US dol­lar’s ra­tio to the CFETS weight is just above 26 per­cent, a fig­ure not big enough to sway the yuan’s ex­change rate. View­ing the yuan’s value against a bas­ket of cur­ren­cies in­stead of a sin­gle cur­rency would there­fore be more ac­cu­rate.

Ad­mit­tedly, China’s for­eign re­serve de­clined from nearly $4 tril­lion in 2014 to about $3.12 tril­lion by the end of Oc­to­ber, fu­el­ing con­cerns about po­ten­tial cap­i­tal out­flows. How­ever, nearly half of the de­crease of around $870 bil­lion was re­lated to the coun­try’s net over­seas as­sets held by its non­govern­men­tal en­ter­prises, which in­creased by about $424.2 bil­lion by the end of the sec­ond quar­ter.

That said, the re­cent fluc­tu­a­tions in China’s for­eign ex­change re­serves do not nec­es­sar­ily her­ald large-scale and dis­or­derly money out­flows, which are not on record. They are a re­sult of the in­creas­ing at­tempts by Chi­nese en­ter­prises and in­di­vid­u­als to build up their over­seas port­fo­lios.

Chi­nese en­ter­prises’ over­seas merg­ers and ac­qui­si­tions amounted to about $111.9 bil­lion last year, and the fig­ure for the first three quar­ters of this year is at least $170 bil­lion. This is not all. Dur­ing the first 10 months, China re­ceived for­eign di­rect in­vest­ments of about $103.9 bil­lion, even reg­is­ter­ing a slight year-on-year in­crease of $200 mil­lion. The record in­vest­ment level speaks vol­umes of the health of the Chi­nese econ­omy, es­pe­cially given the slug­gish global cap­i­tal flows.

That China re­mains an at­trac­tive des­ti­na­tion for for­eign in­vest­ments and multi­na­tional com­pa­nies has a lot to do with its huge mar­ket and on­go­ing eco­nomic re­form. The world’s sec­ond-largest econ­omy still en­joys sta­ble growth and ris­ing con­sump­tion. It is also mak­ing more ef­forts to over­haul its man­u­fac­tur­ing and ser­vice sec­tors, where large po­ten­tials of ar­ti­fi­cial in­tel­li­gence and green en­ergy re­main un­tapped.

The suc­cess of free trade zones such as the China ( Shang­hai ) Pi­lot Free Trade Zone, on the other hand, adds weight to the Chi­nese gov­ern­ment’s de­ter­mi­na­tion to stream­line ad­min­is­tra­tion to cre­ate an in­vestor-friendly environment.

It would be wrong to un­der­es­ti­mate China’s eco­nomic re­silience. With the prospects of the Wash­ing­ton-led Trans-Pa­cific Part­ner­ship Agree­ment grow­ing dim­mer and the Re­gional Com­pre­hen­sive Eco­nomic Part­ner­ship cham­pi­oned by Beijing mov­ing on the right course, China is ex­pected to play a big­ger role in re­gional eco­nomic integration.

The au­thor is a se­nior re­searcher at Sun­ing In­sti­tute of Fi­nance af­fil­i­ated to Sun­ing Ap­pli­ance Co.

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