BackChina: delusions and denials
China's domestic growth drivers are comatose, if not dead. It has no choice but to export its deflation via a cheaper currency
Premium
When one has been predicting events correctly long before others in the trade do, one revels in a sense of being the lone warrior—a hero in one’s own mind. Then, over time, everyone else comes around to your view. Your view is now a crowded room. There is no individuality. What do you do now? You simply have to bide your time and wait for events to play out.
This is not an easy dilemma for many to handle. Commentators who have been right about China are now going through this problem. Some of them anticipated the meltdown in China that is now underway. But, because consensus opinion has veered around to their point of view now, they are now trying to turn around and say China will be alright if more structural reforms and rebalancing happens.
But, those who got China right and early were precisely those who did not allow themselves to be seduced by the false promises of reform, restructuring and rebalancing. China has been saying all these things for more than 15 years. Nothing has happened. On the contrary, the path of least resistance for China has been to prime the pump and to keep the pretence of economic growth going. No growth, no legitimacy for the Communist Party of China. Hence, China is more likely to commit policy mistakes in the months ahead than get them right. Therefore, predictions of the worst being over for China are premature by a mile.
According to a China Daily report, new loans (CNY 11.7 trillion) issued by the financial sector in China reached a historic high in 2015. It is neither a sign of reform nor rebalancing. It may take some effort but you may succeed in not laughing when you try to reconcile the information with what the Party Politburo in China supposedly decided in its meeting on 14 December: “The Communist Party’s Politburo vowed on 14 December to prevent systemic financial risks in 2016, according to a statement on the State Council’s website after a meeting chaired by President Xi Jinping. China listed deleveraging as the government’s major task during the year, along with cutting industrial capacity and lowering corporate costs, Xinhua News Agency reported on 21 December, citing a statement released after an economic planning meeting attended by the nation’s leaders," noted a 22 December Bloomberg article.
Such laughably conflicting aims and actions fool no one except those who choose to be fooled. After China was admitted to the IMF’s SDR (special drawing rights) basket in November, the fond and naïve hope of many was that China would be a responsible stakeholder. They have forgotten some simple but powerful episodes. In 2008, the country put up a beautiful child in front of the international audience while the Olympic song was sung by another child who had a melodious voice but not a pretty face. Just this weekend, a Taiwanese teenage pop singer performing for a South Korean girl band was forced to issue a grovelling apology for waving a Taiwanese flag during a performance.
Therefore, its recent actions on trying to stabilize the exchange rate should fool no one. First, it is a sign that China is not letting market forces work. Second, after its seemingly clumsy but deliberate decisions to weaken the currency in August and again in December-January, its government is taking a breather. China’s domestic growth drivers are comatose, if not dead. A huge debt burden is weighing down on public sector enterprises and on local governments. Excess capacity and deficient domestic demand are the norms. Deflation in producer prices is now a permanent reality.
Given this state of affairs in the domestic economy, China has no choice but to export its deflation to the rest of the world via a cheaper currency. Indeed, its domestic economic fundamentals warrant a much weaker currency and China would be happy to nudge things along in that direction. Whether it is a currency crisis or not is moot. The reality is that the rest of the world has to contend with a much weaker yuan in the coming years.
Many compare the China of 2015 to the Japan of 1989, both with their burst bubbles, aspirations and promises. That comparison is wrong on many counts. When the Japanese real estate bubble burst, Japan’s debt to GDP (gross domestic product) ratio might have been similar to that of China’s today, but Japan was already a lot richer than China is today. Its per capita GDP in constant 2005 dollars was around $29,600 whereas that of China’s is around $3,800. Japan was a net creditor nation to the world whereas China, outside of the central bank foreign exchange reserves, is a net debtor nation. Therefore, China has the characteristics of a growth-deficient, debt-laden emerging economy than an international creditor country like Japan. Consequently, its currency would follow the trajectory of other emerging economies that had seen their domestic growth dry up.
A substantially weaker yuan is in China’s interest and it will doggedly pursue that goal. It won’t be in the interest of the rest of the world, however. The rest of the world has a choice—either to recognize reality and respond or bury itself in platitudes as it is doing on other matters.
V. Anantha Nageswaran is an independent financial markets consultant based in Singapore.
Comments are welcome at baretalk@livemint.com. To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
