Bei­jing must recom­mit on re­forms

The China Post - - COMMENTARY -

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.

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