Irresponsible or amateurish? PBOC blunder dents investor confidence
Last week’s blunder by People’s Bank of China publishing outdated statement caused wild market swings and lies between “unprofessional and opaque”
It has been an incredibly hectic year for the People’s Bank of China as it constantly juggles different jobs, from fine-tuning monetary policy and liberalising the capital account to occasionally aiding other departments to arrest a stock market crash and installing curbs to stem capital outflows.
But one thing seems to have been left out from its task list: enhancing communication and transparency with international markets and investors.
Last week, the Chinese central bank published an undated speech by governor Zhou Xiaochuan, who said the Shenzhen-Hong Kong stock connect would launch within this year, contrary to widespread belief the trading link would be delayed till 2016.
Markets rallied in the morning hours on Wednesday on the news. The Hang Seng Index jumped 3 per cent. The tech-heavy ChiNext, an immediate beneficiary of a possible trading link, shot up 4.4 per cent.
During the noon break, the PBOC quietly modified the webpage, inserting a date that showed the speech was given almost six months ago. One week has gone by and the PBOC released no statement explaining what had happened.
“It does nothing, nothing at all to improve confidence, or to increase trust and faith in the central bank just when they are looking to become the guardian of what could be a reserve currency,” said Michael Every, Asia Pacific head of financial markets at Rabobank.
“It’s anywhere between unprofessional and opaque. Maybe they knew what they were doing, it’s deliberate, it’s a scheme and we don’t understand what it was. Maybe its just amateurism and they didn’t understand what they were doing. No one knows,” he said.
The event served as nothing but a reminder of what happened two months ago – an unexpected change in the yuan’s fixing regime that resulted in a 2 per cent devaluation of a currency that had been viewed as a one-way up bet for the last few years.
The PBOC on that day explained that the move was not aimed at a competitive depreciation, but at further liberalising the capital account, in a rare case where the central bank published policy statements on the same day in both Chinese and English.
On most occasions, such as interest rate decisions, the central bank didn’t release an English statement until days after the action was taken.
Still, global investors didn’t seem to buy the regulator’s side of the story. The offshore yuan, or CNH, at one point sank by as much as 6 per cent to 6.59 against the US dollar.
The situation wasn’t contained until two weeks later when Premier Li Keqiang appeared in public and assured that the devaluation was a one-off event.
“The People’s Bank manages its communications really badly. There’s a failure to appreciate what global investors want, timely accurate information explaining exactly what its thinking is,” said Mark Williams, chief Asia economist at Capital Economics.
“There is a conflict. The People’s Bank wants to become a responsible central bank but it is staffed by people who have made their careers as Chinese officials. You don’t become a successful senior official in the government by talking openly to outsiders about what you are trying to achieve. It’s quite the opposite,” he said.
That said, global investors also have to appreciate the fact that the PBOC is not, and never will be a Western-style central bank.
The PBOC has a more complex mandate than its western peers, tackling inflation, credit problems, ensuring financial stability, and on top of that spearheading capital account reforms.
“It is not independent of the government. It has so many different goals. So it’s unrealistic to think that the people’s bank will become as open and transparent as global investors would like as long as it has such a wide variety of responsibilities,” said Williams, who noted improvements in certain areas in the PBOC’s communication, such as releasing a “Q &A” each time after an interest rate decision, which never happened before.
Making clear its policy meeting schedules so the public wouldn’t be surprised by the timing of fresh rate or other policy decisions, Williams added, could be a good step forward.
Still, there are others satisfied with the PBOC’s communication approach, and it is investors themselves at fault for failing to catch the authority’s message.
“Whilst it is true that the market misunderstood the PBOC’s intention when it changed the fixing regime, the misunderstanding was due to the market not listening to what the PBOC was saying, not the other way round,” said Andy Seaman, chief investment officer at Stratton Street, which manages a Renminbi Bond Fund that gained 10 per cent in annualised return for the past eight years.
“In our view the PBOC has communicated their intentions extremely well and have no need to change their approach. It might be better if fund managers and investors paid more attention to what is said by central banks. We do listen, and our funds are amongst the best performing in the world, so perhaps there is a lesson there somewhere,” Seaman said.