© Julian Evans-Pritchard
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I believe one of the biggest challenges is that it is a very ambitious plan and it is going to be very difficult to do all these things at once. We are already seeing signs of problems in terms of volatility, which we have seen in the markets, problems with Chinese policy makers on the currency side and their ability to manage their currency policy, which is related to the capital account allowing capital flows to move more easily without having fully allowed free-floating exchange rate.
Hence, these reforms need to come in the right order, and I believe that China needs to move to a more flexible exchange rate policy and only then move faster on the capital account height. However, broadly speaking, I think that so far there have been signs that policy makers are actually on the right track in terms of the goals they want to achieve, even though the progress that we see on the ground has been quite slow, particularly on the state sector of foreign sides. Nevertheless, this reform plan has been quite minimal. We do not see wide-spread private taxations that we would like to see in terms of their big impact on improving productivity and credit allocation, because it is indeed credit allocation that is holding back Chinese economy to a great degree. A lot of the credit has been funded in the state-owned enterprises that are not using them very efficiently, which results in increased debt risks.
In the latest light of the Chinese export turmoil, with the falling Shanghai composite, alongside the depreciation of Yuan, one of the ideas at the Davos meeting from the Bank of Japan governor Haruhiko Kuroda was tighter capital controls in China as a possible solution. Are these to be considered desperate measures?
In my opinion, certainly they are already doing it at some degree: they are tightening capital controls a bit; however, they are reluctant to do it too much because it runs counter to their long term goals, obviously. Nevertheless, I assume that it would be possibly the last-ditch measure; thus, if we do see them tighten capital controls, it could potentially be quite harmful in terms of confidence of foreign investors in China's economy and delay their plan for Renminbi internationalisation. Still, I believe they will try to avoid tightening capital controls if they can, while the ongoing pressure is mainly to just intervene in currency markets.
Wang Baoan, the head of China's National Bureau of Statistics, is under investigation for "serious violations of party discipline." Published GDP figures are doubted by many analysts, investors, and even other country's officials, who think the government is inflating them to save face. As such, it was mentioned that the actual estimate is between 4.3% and 5.2%. Can we speak about "man-made" data? What is your thought on the Chinese GDP matter?
We also think that the official figures probably overstate growth to quite a large extent, particularly over the last year or so. If we compare our own estimates of growth, which are based on a lot of indicators such as passenger traffic, electricity output, etc., we will see they show a very sharp growth slowdown last year and it is possible that the economy is now growing to 4.3%. Therefore, I consider that to be a serious issue, and certainly, the fact that there are lots of different estimates for how the economy is performing creates added uncertainty for investors and it makes more difficult for the rest of the world to work out how Chinese economy is actually performing. I do not know if that has anything to do with the corruption investigation, since the new head of CNBS was in that position for a few months only. I suspect that the investigation might have something to do with his previous job, but nonetheless, it is very interesting that our own measures have diverged from the official figures since 2012, which is just when the government official growth target started to come under threat. Hence, I think it is the fact that they have the target in place which put some political pressure on them, while the errors accumulate on the outside, creating the divergence between our own measures and the official figures.
What will be the main drivers of Renminbi in the first part of 2016?
I think, at the moment we will not see a lot of bearish sentiment on the Renminbi or a lot of speculative downward pressure on the currency. I suspect that one of the main drivers will be PBOC, as they are going to be intervening quite heavily in the next quarter. The stability in the Renminbi that we have seen over the past week or two was an attempt to reduce some of the bearish sentiment and a signal to the market that the PBOC is not aiming to devalue the currency, as they will not allow significant depreciation.
However, to my mind China is going to continue experience outflows, which will continue to put downwards pressure on the Renminbi. Besides, we are also seeing other Central Banks such as Bank of Japan and, potentially, the ECB easing further which means more downwards pressure on both the Yen and the Euro. Given the fact that they now seem to be trying to keep target a trade-weighted basket rather than the US dollar, this means they would have to allow further depreciation against the Greenback because of falls in other currencies. In other words, we will see some further depreciation of the Renminbi against the US Dollar, while the PBOC will keep intervening to prevent the currency falling too sharply even despite all the outflows that we are seeing at the moment.