Home' Trinidad and Tobago Guardian : January 17th 2016 Contents JANUARY 17 • 2016 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCE | SBG15
What if we could just be China for a day?
New York Times columnist Thomas Friedman
mused in 2010. We could actually, you know,
authorise the right solutions.
Five years later, few are so ready
to sing the praises of China s
technocrats. Global markets
have fallen by 7.1 per cent since
January 1, their worst start to
the year since at least 1970. A
large part of the problem is China s manage-
ment of its economy.
For more than a decade, China has been
the engine of global growth, but its blistering
pace of economic expansion has slowed. The
stock market has been in turmoil, again.
Although share prices in China matter little
to the real economy, seesawing stocks feed
fears among investors that the Communist
Party does not have the wisdom to manage
the move from Mao to market. The rest of
the world looks at the debts and growing labor
unrest inside China, and it shudders.
Nowhere are those worries more apparent---
or more consequential---than in the handling
of its currency, the yuan.
China s economy is not on the verge of col-
lapse. Next week the government will announce
last year s rate of economic growth. It is likely
to be close to 7.0 per cent. That figure may
be an overestimate, but it is not entirely
divorced from reality.
Nevertheless, demand is slowing, inflation
is uncomfortably low and debts are rising. The
bullish case for China depends partly upon
the belief that the government can always lean
against the slowdown by stimulating con-
sumption and investment with looser monetary
policy, as in any normal economy.
China is not normal, however. It is caught
in a dangerous no-man s-land between the
market and state control.
The yuan is the prime example of what a
perilous place this is. After a series of mini-
steps toward liberalisation, China has a semi-
fixed currency and semi-porous capital con-
trols. Partly because a stronger dollar has been
dragging up the yuan, the People s Bank of
China has tried to abandon its loose peg against
the greenback since August, but it is still tar-
geting a basket of currencies. A gradual loos-
ening of capital controls means that savers
have plenty of ways to get their money out.
A weakening economy, a quasi-fixed
exchange rate and more porous capital controls
are a volatile combination. Looser monetary
policy would boost demand, but it also would
weaken the currency, and that prospect already
is prompting savers to shovel their money off-
In the last six months of 2015, capital left
China at an annualised rate of about US$1
trillion. The persistent gap between the official
value of the yuan and its price in offshore
markets suggests that investors expect the
government to allow the currency to fall even
further in future. Despite a record trade surplus
of US$595 billion in 2015, there are good reasons
for it to do so, at least against the dollar, which
still is being propelled upward by tighter mon-
etary policy in America.
The problem is that the expectation of
depreciation risks becoming a self-fulfilling
loss of confidence. That is a risk even for a
country with foreign-exchange reserves of
more than US$3 trillion.
A sharply weaker currency also is a threat
to China s companies, which have taken on
US$10 trillion of debt in the past eight years,
roughly a tenth of it in dollars. Either those
companies will fail or China s state-owned
banks will allow them to limp on. Neither is
good for growth.
The government has reacted by trying to
rig markets. The People s Bank has squeezed
the fledgling offshore market in Hong Kong
by buying up yuan so zealously that on January
12 the overnight interest rate spiked at 67 per
cent. Likewise, in the stock market it has
instructed the "national team" of state funds
to stick to the policy of buying and holding
Such measures do nothing to resolve a fun-
damental tension, however. On the one hand
the state understands that the lack of financial
options for Chinese savers is unpopular, waste-
ful and bad for the economy. On the other it
is threatened by the disruptions that liberal-
For President Xi Jinping, now in his fourth
year in charge, that dilemma seems to crop
up time and again. He needs middle-class
support, but feels threatened by the capacity
of the middle class to make trouble. He wants
state-owned enterprises to become more effi-
cient, but also for them to give jobs to the
soldiers he is booting out of the People s Lib-
eration Army. He wants to "cage power" by
strengthening the rule of law and by invoking
the constitution, yet he is overseeing a vicious
clampdown on dissent and free speech.
It is easy to say so now, but China should
have cleaned up its financial system and freed
its exchange rate when money was still flowing
in. Now that the economy is slowing, debt
has piled up and the dollar is strong, it has
no painless way out.
A sharp devaluation would catch speculators
off balance, but it also would cause mayhem
in China and export its deflationary pressures.
The poison would spread across Asia and into
rich countries---and, because interest rates are
low and many governments are indebted, the
world is ill-equipped to cope.
Better would be for China to strengthen
capital controls temporarily and, at the same
time, to stop stage-managing the yuan s value.
That would be a loss of face for China, because
the International Monetary Fund only recently
marked the yuan s progress toward convert-
ibility by including it in the basket of currencies
that make up its Special Drawing Rights. How-
ever, it would let the country prepare its finan-
cial institutions for currency volatility, not
least by starting to scrub their balance sheets,
before flinging their doors open to destabilising
flows. Xi could embrace more complete con-
vertibility later, when they were less vulner-
One reason the People s Bank is rushing
toward convertibility, despite the risks, is that
it feels that it must seize the chance while it
has Xi s blessing. Better to retreat temporarily
on one front, however, than to trigger a global
panic. That might also lead to some clearer
thinking. There is a contradiction between
liberalisation and party control, between giving
markets their say and silencing them when
their message is unwelcome. When the time
is right, China s leaders must choose the mar-
kets. The Economist
Russia s Economy Ministry has changed its 2016 forecast
to predict an economic contraction rather than slight
growth and has lowered its average oil price assumption
to US$40 per barrel, a draft document showed on Fri-
The ministry s base scenario sees gross domestic product
shrinking by 0.8 percent in 2016, while a conservative
one predicts a 1.0 per cent decline, according to the doc-
ument seen by Reuters.
Two senior Russian governmental officials involved in
budget discussions confirmed the authenticity of the doc-
ument, drafted last month.
Russia is being forced to revise its economic assumptions
as a result of a further slide in the oil price; now below
US$30 per barrel and well below the US$50 per barrel
that had been assumed for government planning.
The Economy Ministry now expects an oil price of
US$40 per barrel in both its scenarios, base and conser-
The rouble rate is forecast averaging 68.2 per US dollar
in the base scenario, and 72.6 in the conservative one.
Under the Economy Ministry s existing official forecast,
in the base scenario GDP is predicted to grow by 0.7 per
cent in 2016 with the oil price averaging US$50 per barrel
and the rouble averaging 63.3 against the dollar.
Natalia Orlova, chief economist with Alfa Bank, said
the new forecast looked more realistic.
"We could see a further decline in oil prices in the first
two quarters but then the situation could start to normalise,
raising the chances that oil at US$40 per barrel will be
the average price for this year," she said.
If oil averaged US$40, Orlova said she estimated GDP
would fall this year by 1.1 per cent. GDP is estimated to
have shrunk by 3.7 per cent in 2015, Economy Minister
Alexei Ulyukayev said last month.
The Economy Ministry declined to comment on the
draft forecasts but said that new official forecasts are
expected to be presented this month. Reuters
The yuan and the markets
Russian Economy Ministry: Economy shrinking in 2016
An electronic board display stock prices at a brokerage house in Beijing, Thursday, January 14,
2016. Asian stock markets sank across the board Thursday as pessimistic sentiment following
sustained weakness in oil prices and a dive on Wall Street prevailed over data showing
economies on the mend. AP
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