China markets: Looking for clues
Investors crave transparency amid doubts over financial management
China’s market regulator had a chance to explain itself last Friday at the end of a week that had seen self-inflicted turmoil on the country’s stock exchanges rock international markets for the second time since July.
Amid complaints that global markets — which had their worst start to the year for two decades — needed more guidance on China’s intentions, there were also rumours that Xiao Gang, chairman of the China Securities Regulatory Commission, could lose his job.
Rather than address either subject, however, the CSRC instead used the weekly press conference to discuss its role in a Communist party initiative to promote development of the agricultural sector and poverty alleviation.
To global investors, who increasingly take their daily trading cue from China’s economic data and market moves, the response to the turmoil looked farcical. To Chinese investors, it passed for governance as usual in the world’s second-largest economy.
The market turmoil, exacerbated by a shift in the Chinese central bank’s management of the renminbi, begs the question of whether the opaque party-state is fit for purpose when it comes to managing one of the world’s most pivotal financial markets and delivering the level of transparency expected by the international community. It has also raised doubts about whether the team assembled by President Xi Jinping, who has consolidated power more rapidly than any Chinese ruler since Deng Xiaoping in the 1980s, is capable of executing the country’s much larger reform programme — of which market regulation and currency policy are just two parts.
“For all their faults, Xi’s predecessors consistently gave domestic and foreign investors confidence that over time, there would be more space for markets and the private sector,” argues Arthur Kroeber at Gavekal Dragonomics, a Beijing-based consultancy. “Xi has failed to live up to this history … At the most basic level, we have no idea whether he understands what modern markets require, or how he proposes to reconcile their demands with the Leninist-Confucianist paternalism he is imposing on the rest of society.”
Even analysts at state-owned banks were left scratching their heads. “Because of China’s lack of policy communication over the path towards the new-float regime … exchange rate ‘flexibility’ has become a major source of uncertainty, rather than a cushion against external shocks,” CICC analysts Xiangrong Yu and Hong Liang wrote last week. “The renminbi’s fluctuations could raise risk premiums over the global market, leading to sizeable asset reallocation and complicating the US decision to hike interest rates.”
Xi tightens his grip
The day before the CSRC briefing, a disastrous new “circuit breaker” championed by Mr Xiao had stopped trading for the day after just 29 minutes. But state television did not mention either the crash or the day’s other big news — the global jitters stemming from the renminbi’s rapid depreciation against the US dollar.
Instead China Central Television’s main evening bulletin led with Mr Xi chairing a meeting on the development of a “Yangtze river economic zone” and visiting the People’s Liberation Army’s 13th Group Army in Chongqing. There he lauded tales of Red Army soldiers’ heroism and sacrifices under their revolutionary hero, Mao Zedong. “It vividly shows what it means to follow the party with an iron heart,” he said.
Such discipline, according to Mr Xi, also involves knowing when to keep your mouth shut. In November, the party issued guidelines barring its 88m members from “improper discussion”.
Newspaper editors, professors and police chiefs have since been sacked for not toeing Mr Xi’s line on issues as diverse as the party’s handling of ethnic unrest in the region of Xinjiang and pro-democracy protests in Hong Kong.
“To address these sorts of challenges you want a society that’s debating, discussing and charting a path towards resolution,” says Rodney Jones at Wigram Capital, an economic advisory company.
“You want engagement. But no one in China can discuss [the country’s challenges] apart from a selected few.”
Vacancy for economics tsar
Unlike his predecessors, Mr Xi does not have a standout financial or economic tsar with clear authority. The man with the richest financial and economic experience at the top of the party hierarchy, Wang Qishan, has been diverted to lead the president’s signature anti-corruption campaign.
“Party rule has always been the number one priority — we all know that — but under Xi Jinping the distance between the political agenda and the economic one has widened,” says Andrew Polk, Beijing-based economist for the Conference Board. “I think that’s reflected in the fact there isn’t an economic heavyweight.”
Responsibility for the economics brief nominally falls to Premier Li Keqiang. But in terms of economic experience he pales in comparison to the likes of Zhu Rongji, who drove through landmark reforms as vice-premier and premier in the 1990s.
Mr Li’s predecessor, Wen Jiabao, was similarly inexperienced but at least had Mr Wang serving under him as a vice-premier.
By contrast, the most senior of China’s four current vice-premiers is Zhang Gaoli, known for his “borrow-and-build now, repay later” approach to economic development while party boss in the port city of Tianjin.
One of Mr Xi’s top aides, Liu He, is often cited as being one of the country’s most powerful economic officials. However, he only sits on the Central Committee — the fourth-highest party organ — while his official government title is vice-minister at the National Development and Reform Commission, the former state planning agency. This makes Mr Liu more of an influential adviser to the president than a power broker in his own right.
The impression of a vacuum at the top in terms of economic leadership was reinforced by the degree to which the central bank’s new currency policy seemed to exacerbate the selling pressure on the country’s stock market.
In the summer, the CSRC and the People’s Bank of China managed to spark, respectively, a market crisis in July and currency confusion in August; last week the two institutions contributed to a market and currency panic on the same day, January 7.
In other economies, markets can at least look to independent and powerful central banks for direction in times of crisis.
But the PBoC and its governor, Zhou Xiaochuan, have nothing like the independence and power of their international counterparts and have been humbled over the past week. The PBoC reports to Mr Li’s state council.
Mr Zhou, who turns 68 later this month and has been in charge of the PBoC since 2002, secured one of the biggest prizes of his career in November, when the International Monetary Fund recognised the renminbi as an official reserve currency under its special drawing rights (SDR) regime.
If its path to SDR inclusion was bumpy the renminbi has had an even rougher ride since. In August, the PBoC announced a “one-off” 2 per cent devaluation in a move aimed at making the currency more market driven — a key condition for SDR status.
Many international investors interpreted the move as the first shot in a new “currency war” and it took two days for the central bank to brief the media to calm the situation. By then the damage had been done, with global markets tanking and selling pressure on the renminbi intensifying.
Over the rest of 2015, the central bank used hundreds of billions of dollars from the country’s foreign exchange reserves to slow the renminbi’s depreciation. But within weeks of winning SDR approval and with the cost of supporting the currency unsustainable, the PBoC signalled that investors should instead focus on the currency’s performance against a basket of 13 currencies.
Before that message had been fully absorbed, the central bank stepped back and watched as the renminbi fell 1.5 per cent against the dollar in the first week of trading in January — a sharp fall for the carefully managed currency that again scared Chinese and international investors alike.
Need to do better
Joe Zhang, a veteran financial executive, argues that the PBoC, for years a proponent of renminbi strength against the dollar, didn’t appreciate how its adjustment would be interpreted abroad.
“The global reaction to China’s tinkering of the currency in August was dramatic and that caught Beijing by surprise,” he says. “They thought a 2 per cent adjustment wasn’t a big deal.
They hadn’t anticipated the reaction.”
That could, in turn, curb the drive for reform. While Hao Hong, chief China strategist at Bank of Communications International, thinks that Chinese policymakers need to proceed slowly with capital-account reform given the risk of capital flight, he also believes that they erred by missing the opportunity to do it earlier, when depreciation and outflow pressures were much weaker.
“It’s a matter of timing,” Mr Hong says. “When the renminbi is substantially overvalued [and] the property market is substantially overvalued, people want to get out of here … If you reform now, it will give people the impression that you are losing control.”
By the end of last week, the PBoC sounded as tone-deaf as the CSRC. It initially blamed “speculative forces” for the renminbi’s recent falls against the dollar and rounded out the week with a long review of the “fruitful results” it had achieved “under the leadership of the party and the state council”.
Some party and government officials recognise that China now has a public relations problem when it comes to financial policy and are working to remedy the deficiency.
In a rare background briefing for foreign media last month, one senior government official admitted that “there is a need to do a better communication job with the rest of the world [because] what we do really affects the rest of the world”.
But progress is slow.
“Some people within the central bank say, ‘Listen, we need to get better at communication but it’s really hard based on the way we make policy’,” says Mr Polk at the Conference Board.
"Then you have other people in the PBoC who say we don’t necessarily need any more transparency.
So the message is all over the place even in terms of whether or not there should be better messaging.”
Additional reporting by Wan Li and Christian Shepherd