Opinion: China deserves credit for playing its economic hand deftly
Global fund managers appear to be overly pessimistic on Beijing’s ability to manage its various financial and economic objectives
Risk associated with China’s attempts to rein in credit may have leapt to first place among global fund managers’ surveyed recently by Bank of America Merrill Lynch, but so far the sky is not falling and, overall, Beijing is making a decent fist of managing its various economic and financial objectives.
There are “intensifying risks in China’s extremely extended credit cycle”, London-based EurizonSLJ Capital wrote on May 16, but at least Beijing both recognises there is a problem and is seeking to address it. “China will at some point experience a saturation of credit and a tipping point,” believes EurizonSLJ Capital. But the jury is out on “whether the prospective contraction will be sharp and deep … or relatively modest”.
With China’s economy having grown 6.9 per cent in the first quarter and Finance Minister Xiao Jie confident the country will meet its 6.5 per cent gross domestic product growth target for this year, regulators, such as Guo Shuqing at the China Banking Regulatory Commission, have space to address the problem of excess credit creation.
The fact that China is having success in other areas can only improve the chances that risks associated with reining in credit expansion can be mitigated.
On the currency front, China has benefited from events elsewhere. A greenback, which has recently been in the doldrums, has been a boon for Beijing, allowing China to keep the yuan stable versus the US dollar, while the yuan has nevertheless slipped in value against a basket of currencies, helping China’s exporters stay competitive.
For example, using China’s central parity rates for the value of the euro against the yuan, the latter had weakened to 7.6586 per euro at the end of last week from 7.2772 on January 3, good news for Chinese firms selling into the euro zone, while the yuan only firmed to 6.8786 against the dollar from 6.9498 over the same period.
No wonder Washington seems content. US Treasury Secretary Stephen Mnuchin even told Congress last Thursday how, in past months when the dollar had been rising, Beijing’s use of China’s foreign currency reserves to lean against yuan weakness, was “actually good for American workers”.
On the trade front, the commitment from Beijing and Washington to improve access for US financial firms in the Chinese market and to increase trade in beef and chicken between the two countries, has only cemented the view that April’s meeting between China’s President Xi Jinping and US President Donald Trump was productive.
Cynics might wonder if the groundwork for this progress on trade actually began under President Barack Obama, in an expectation that the rewards would be enjoyed by Obama’s preferred successor Hillary Clinton, but, however matters developed, China-US economic and trade relations seem currently reasonably harmonious.
In Asia itself, last week’s meeting, in Guiyang, saw China and the Association of Southeast Asian Nations reiterate the objective of “realising their twin goals of two-way trade and investment of US$1 trillion and US$150 billion respectively by 2020” and also agreeing a framework for a code of conduct in the South China Sea.
Economic, as well as political, ties between China and South Korea could also now potentially improve following the election of President Moon Jae-in given the tone of Xi’s comments on Friday when meeting Moon’s envoy.
Meanwhile, on May 6, China and Japan agreed to increase economic and financial cooperation. Tokyo may even decide to join the China-led Asian Infrastructure Investment Bank.
There is also China’s “Belt and Road Initiative” to consider.
It is hard to dismiss the fact that 68 nations and international organisations have already signed cooperation accords with China as part of the plan, and that more than 270 projects or agreements were signed off at this month’s forum on Beijing’s trade initiative.
“If you want to get rich, first build roads,” as the Chinese saying goes.
In a similar figurative vein, last week’s commitment by the People’s Bank of China and the Hong Kong Monetary Authority to launch “Bond Connect”, to facilitate two-way bond investment, should ultimately encourage increased foreign investment in China’s capital markets.
While there is no getting away from the fact that the ratio of credit to GDP in China had jumped to 260 per cent at the end of 2016 from 141 per cent in 2009, Beijing is attempting to tighten financial conditions while simultaneously fostering a broader economic climate that alleviates the risks associated with tauter credit.
On balance, China is so far playing a tricky hand quite deftly. Beijing deserves some credit for that.