Ja­pan urges China to go slow on yuan re­form

Kuwait Times - - BUSINESS -

TOKYO: Ja­pan has ex­pressed con­cern to China about the pace of cap­i­tal out­flows from the coun­try and has sug­gested Beijing moves very slowly in re­form­ing its cur­rency sys­tem to avoid re­peat­ing Ja­pan’s past mis­takes.

Af­ter a sum­mer of mar­ket tur­moil, China now ap­pears to be at a crit­i­cal junc­ture as cap­i­tal out­flows reach hun­dreds of bil­lions of dol­lars and Beijing draws down heav­ily on its, al­beit large, cur­rency re­serves to off­set the im­pact of the money mov­ing off­shore.

The stocks slump of more than 40 per­cent in a mat­ter of a few months and the shock devaluation of the yuan acted as a re­minder of how quickly Beijing could lose con­trol of its mar­kets if it moves too quickly to open up to mar­ket forces, Ja­panese of­fi­cials say.

“The pace of cap­i­tal out­flows is alarm­ing,”said a se­nior of­fi­cial with knowl­edge of Ja­pan’s cur­rency diplo­macy. “If China’s fi­nan­cial sys­tem is desta­bilised, the ef­fect on Ja­pan and the rest of Asia would be enor­mous.” Pub­licly, Ja­panese of­fi­cials have urged China to pro­ceed with re­form and ex­pressed con­fi­dence that Beijing has the tools and ex­per­tise to man­age. But pri­vately, they have adopted a dif­fer­ent tone, cau­tion­ing Beijing against mov­ing too quickly to free up the yuan when large cap­i­tal out­flows could make the cur­rency a tar­get for spec­u­la­tors.

Ja­pan has con­veyed its con­cerns to Chi­nese of­fi­cials at var­i­ous meet­ings this year, in­clud­ing at the G20 fi­nan­cial lead­ers’ meet­ing in Tur­key in Septem­ber.

China took a big step to­wards in­ter­na­tion­al­is­ing its cur­rency on Fri­day, when IMF staff and the institution’s head Christine Lagarde en­dorsed the in­clu­sion of the yuan in the fund’s bench­mark for­eign ex­change bas­ket, known as Spe­cial Draw­ing Rights (SDR). An­a­lysts es­ti­mate in­clu­sion could lead to de­mand for the yuan worth more than $500 bil­lion.

“It should be the other way around,” said a Ja­panese of­fi­cial, who de­clined to be iden­ti­fied be­cause of the sen­si­tiv­ity of the mat­ter. “Re­forms come first, then you de­bate whether the yuan can join the SDR.” China is try­ing to en­gi­neer a shift in the econ­omy away from man­u­fac­tur­ing and to­wards consumption and ser­vices while promis­ing to fully lib­er­alise the yuan by 2020 - a goal some Ja­panese of­fi­cials feel is to am­bi­tious.

Ja­pan’s cau­tious tone is at odds with the more ro­bust calls from Wash­ing­ton - un­der­lined last week with com­ments from US Trea­sury Sec­re­tary Jack Lew urg­ing Beijing to press ahead with its re­form plans. But Ja­pan’s views carry weight with Beijing, which has long taken a close in­ter­est in how Ja­pan emerged in the past three decades as a global eco­nomic power.

It views Ja­pan’s han­dling of cap­i­tal flows and the yen as key fac­tors that led to its as­set bub­ble blow-up in the early 1990s that led to nearly two decades of de­fla­tion Ja­pan is still strug­gling to erad­i­cate.

For decades, China’s main con­cern was the amount of for­eign cur­rency com­ing into the econ­omy as it built a huge ex­port en­gine. But since China sur­prised world mar­kets by de­valu­ing its cur­rency around 2 per­cent in Au­gust, net cap­i­tal out­flows have reached $200 bil­lion, while Beijing ap­peared to have spent $229 bil­lion in for­eign ex­change in­ter­ven­tion to prop up the yuan in the third quar­ter, a US Trea­sury Depart­ment re­port showed last month.


Ja­panese pol­i­cy­mak­ers are not suggest­ing there is an im­me­di­ate risk of a fi­nan­cial cri­sis, but they say China’s heavy in­ter­ven­tion in mar­kets to off­set the cap­i­tal out­flows shows Beijing is wor­ried.

If China lib­er­alises its cur­rency too quickly and be­fore it fixes other prob­lems in the econ­omy, such as high debt, Beijing may strug­gle to con­tain cap­i­tal out­flows and that may take a toll on its $3.5 tril­lion in cur­rency re­serves, Ja­panese of­fi­cials say. “Mar­ket lib­er­al­i­sa­tion sounds nice. But it could cause var­i­ous prob­lems,” said Eisuke Sakak­ibara, who as a se­nior Ja­panese fi­nance min­istry of­fi­cial wres­tled to con­tain volatile yen swings with heavy in­ter­ven­tion in the late 1990s.

“When an econ­omy moves from fast­growth to stable growth, you’re bound to have some mar­ket tur­moil. The same thing could hap­pen in China, so the worst thing to do is to move too quickly to a free-float­ing cur­rency regime.” China said the devaluation of the yuan re­flected mar­ket forces, but the move jolted global mar­kets on fears it meant the econ­omy was in worse shape than pre­vi­ously thought. China is Ja­pan’s big­gest trad­ing part­ner and its mar­kets have be­come sus­cep­ti­ble to big swings caused by Chi­nese pol­icy de­ci­sions. Any reper­cus­sions to Asia also af­fect many Ja­panese firms and banks op­er­at­ing in the re­gion.

Such im­pact was high­lighted when China’s yuan devaluation sent Ja­panese and global stock prices tum­bling, as in­vestors ini­tially strug­gled to understand Beijing’s mo­tives.

“There was lot of sec­ond guess­ing over China’s pol­icy in­ten­tion and that was be­cause the com­mu­ni­ca­tion was poor,” said a Chin­abased Ja­panese gov­ern­ment of­fi­cial.


Both Prime Min­is­ter Shinzo Abe and Fi­nance Min­is­ter Taro Aso have called on China to ad­dress struc­tural prob­lems in the econ­omy, such as bad loans and ex­cess in­dus­trial ca­pac­ity, and to pro­vide trans­parency of pol­i­cy­mak­ing.

If China fails to tackle th­ese prob­lems, the risk is that it will not be just China that will feel the im­pact. “The big­gest risk for Ja­pan is a hard­land­ing in China,” said Naoyuki Shi­no­hara, a for­mer IMF deputy man­ag­ing di­rec­tor who re­tains close con­tacts with in­cum­bent Ja­panese pol­i­cy­mak­ers. “China’s real ‘black swan’ is its bad­loan prob­lems.” —Reuters

Newspapers in English

Newspapers from Kuwait

© PressReader. All rights reserved.