Beijing must recommit on reforms
One economic reality is increasingly clear. The mainland Chinese economy is sputtering, perhaps more than the official numbers show, and Beijing is struggling to find a solution.
While mainland China may well have hoped to focus on the end of the Second World War and Japan’s wartime record, the Chinese central bank’s “one off” major devaluation of the yuan, also known as the renminbi, this week now has large parts of Asia worried about the prospects of a currency war.
The record 1.9 percent devaluation on Tuesday sent the yuan to its weakest level since April 2013. The move could potentially aid mainland China’s exporters. And in turn, central banks in Southeast and East Asia may well come under pressure to further lower the value of their currencies to help domestic companies to remain competitive with lower- priced mainland Chinese goods.
The move by China’s central bank followed disappointing trade data and a decision by the International Monetary Fund to delay any decision as to whether the yuan would be added to a so-called Special Drawing Rights “basket of currencies,” that is comprised of dollars, euros, pounds and yen.
Yet, “How low can China go?” is only the latest question being raised about Beijing’s commitment to its 2013 pledge to “give a decisive role to markets” in its economy. Talk persists about a possible mainland Chinese stimulus program and “quantitative easing with Chinese characteristics” to spur the nation’s slowing, but still growing, economy. Such questions are understandable as Beijing still struggles with its ongoing interventions in its equity markets.
A month after the Shanghai and Shenzhen stock markets plummeted, wiping out trillions of dollars in value, tremendous volatility remains a core theme for today’s China’s. What is clear is that no matter how large is Beijing’s wallet to finance purchases and how strong the government’s ability to devalue its currency or to order brokerages to do its bidding, more state money and less will power for reform are not the long-term solutions to mainland China’s ongoing woes.
Direct and indirect government involvement to help shore up stock prices and placate the mainland Chinese small-scale shareholders who dominate the marketplace has included allowing some shares not to trade, the suspension of new IPOs, financial support for brokerages and the establishment of a market-stabilization fund to help inject funds into the market. To further try to reduce volatility, Beijing recently banned same-day margin lending, as well as banned some accounts under the control of U.S. hedge fund Citadel and even China’s state-owned Citic Securities from trading for three months.
Even in a “command economy” with trillions of dollars in reserves, it would be a mistake for mainland China’s leadership to think the central government’s ability to “command” domestic behavior can replace the fundamental need for changes and continued reform.
So, what can Beijing do win back confidence in its economy? With the “little bric” of excessive bureaucracy, poorly conceived or enforced regulation, increased interventionism and persistent corruption taking their toll, here are two broad steps that mainland China should take.
First, Beijing must recommit to the opening of its financial markets and to a deepening of capital market reforms. This is well in line with the one-time pledge to give a decisive role to markets, and in also in line with President Xi Jinping’s “Chinese Dream” and goal of a “moderately well off society” by 2020.
Last year, China’s State Council announced it would move forward on a number of financial reforms. These included making progress toward direct bond issuances by local governments, removing some of the limits on using financial derivatives, and streamlining the approval process for IPOs as well as increasing quotas for both inward and outward foreign investment.
Some progress has already been made with innovations including the introduction last November of Shanghai-Hong Kong Stock Connect. While subject to quotas, this link between the Shanghai Stock Exchange and the Hong Kong Stock Exchange has increased twoway market access and should be built on.
Second, Beijing must allow more of its businesses and entrepreneurs to succeed and to fail on their own. With every market intervention, investors may well be left wondering whether any business will ultimately succeed based on its fundamental merits vs. government involvement, including the ability of the central bank to intervene forcefully in currency markets.
Already, it is clear that the nation’s stock markets are now reliant on official support, and shareholders eager to sell are being prevented from doing so, for now. With a lack of transparency continuing about the level and duration of government support measures, volatility persists.
While the recent focus has been understandably on the nation’s equity markets, mainland China’s credit markets also need to be allowed to continue to mature — onshore and offshore. This will include permitting Chinese companies, including state-owned enterprises, to default on corporate bond payments.
As with the United States’ own bailouts and market interventions during the Global Financial Crisis, decisions done in the heat of mo- ment will be debated and secondguessed down the road. This will be true for Beijing’s actions.
That is no reason though for mainland China to avoid concentrating on the broader economic reforms that others in the AsiaPacific region have slowly come to embrace. This will include continuing to take steps to build an enabling environment for the private sector — one marked by strengthened rule of law, greater transparency and accountability, and best practices in corporate governance. Such a commitment would in the long run be to the benefit of all of China’s businesses and can help drive long-time growth and job creation.
Beijing certainly has the power to intervene in its own markets. The nation also has the power to go lower, further devaluing its own currency — to the detriment of many of its Asian neighbors. More important, however, will be the will power to refrain from such interventionism in favor of pursuing the fundamental changes and continued reform that will help ensure more sustainable growth and greater comfort with mainland China’s long-term economic rise. Curtis S. Chin, a former U.S. Ambassador to and member of the Board of Directors of the Asian Development Bank, is managing director of advisory firm RiverPeak Group, LLC. Find him on Twitter at @CurtisSChin.