Why using a digital currency is a no-brainer for China – Sara Hsu

 

Sara Hsu

While most of the world is still investigating and trying ways to use a digital currency for their countries, this is more than obvious for China, says fintech expert Sara Hsu in the Raconteur. China is already close to being cashless and many places no longer accept notes and coins.

The Raconteur:

Why has China launched the digital yuan while other major economies are still carrying out consultations and trials?

“To cater to its population’s needs as people use cash less and less,” says Dr Sara Hsu, associate professor of supply chain management at the University of Tennessee, Knoxville, and the author of China’s Fintech Explosion.

Hsu points out that because of the widespread use of Alipay and WeChatPay, which link people’s bank accounts to a digital wallet, China is already close to being cashless and many places no longer accept notes and coins.

“In addition, China has been opposed to decentralised digital currencies, such as Bitcoin [which was banned last year], and this is its answer to crypto,” she adds…

China has said that the e-CNY will offer “controllable anonymity”, but what does that mean in practice? “The authorities can see which digital wallet the digital yuan is in and digital wallets are tied to individuals,” says Hsu.

Authorities will be able to trace transactions and carry out compliance checks including anti-money laundering and know your customer. The user can choose to be anonymous to counterparties, which some have argued will be a disadvantage for online platforms. …

Challenging the dollar’s reserve currency status has also been mooted as a reason for the e-CNY. China is the world’s biggest producer of rare earth metals, which are increasingly in demand for rechargeable batteries and electronics, among other things. Could China move to “de-dollarise” the trade in rare earths? “It is possible,” says Hsu, “but, the digital yuan is like cash so that would likely take second place to normal account transfers.”

Hsu says it’s also not clear how the digital yuan could be tracked cross-border or whether it will be able to collect the identification information of overseas citizens.

More in the Raconteur.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers’ request form.

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How China uses the digital yuan to go international - Shirley Ze Yu

Shirley Ze Yu

China's central government is embracing the digital currency, expands its usage domestically and might use it to internationalize its yuan, explains financial expert Shirley Ze Yu at CNA. 

Shirley Ze Yu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers' request form.

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The West has not yet started to fight the coronavirus - Jim Rogers

Jim Rogers

Super investor Jim Rogers discusses the monetarian measures by Western central banks, while in China their colleagues have not lowered interest rates to fight the effects of the coronavirus. In Europe and the US they have not even started to fight the virus and we have to see how that works out, he tells at CGTN. 

CGTN:

More central banks have cut benchmark interest rates to cushion economies from an outbreak fallout, including the U.S. Federal Reserve which cut rates to near zero on March 15. But China's People's Bank of China (PBOC) held rates steady.
Jim Rogers, renowned international investor who praised the Chinese central bank for doing a better job than the western central banks, said that the "interest rate going to zero is not going to cure the virus and the economy."
As the U.S. and Europe are now hit hard by the virus, "we are going to have to wait until they put a lot of quarantines and tight measures to slow down the virus, whether it will take weeks or months, and then maybe they can start to loose up and do business again," Rogers said.

More at CGTN.

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China's banking system: walking on a tightrope - Sara Hsu

Sara Hsu

China's financial authorities try to manage shadow banking, corporate leveraging and now also a heated trade war. Financial analyst Sara Hsu explains how the country's banks are walking a scary tightrope, at the EastAsiaForum.

Sara Hsu:

Because of the banking sector’s close ties to the government, financial stability can and will be tightly controlled. Banks will likely be forced to lend to entities that would otherwise not receive extensive funding, such as local governments. Funds will be granted where the government desires at the expense of some of the riskier loans. We saw this happen time and again in the wake of the global financial crisis, as local governments followed orders to build infrastructure by creating bridges to nowhere and ghost cities. 

This time around, waste may be less blatant but is unlikely to be eliminated. In the end, the central government will probably step in once again to convert the non-performing loans to municipal bonds or sweep them off banks’ balance sheets to asset management companies. 

The trade war has exacerbated China’s dilemma of stimulating the economy to avoid slowing growth and tightening the economy to reduce financial risks. Although stability is likely to be maintained, the government walks an increasingly fine line to do so. If tensions worsen between the United States and China, it is possible that China may be forced to choose stability over growth — a choice that would shake the global economy by stunting global demand.

More at the EastAsiaForum.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers' request form.

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How the central bank dresses up its figures - Victor Shih

Victor Shih

China's central bank PBOC is dressing up its figures. Financial analyst Victor Shih, author of Factions and Finance in China: Elite Conflict and Inflation, has for Bloomberg a look at the methods the bank is using.

Bloomberg:

Including asset-backed securities in its measure is a way for the central bank to "dress up" the aggregate financing number to show financial resources are still on the rise, said Victor Shih, a professor at the University of California in San Diego who studies China’s politics and finance. 

The sudden growth of asset-backed securities may suggest that the authorities are allowing funds and trust companies to use interbank leveraging to finance purchases of asset-backed securities, which will once again jump-start off-balance-sheet credit growth, he said. "Since 2011, marginal financing has come mainly from off-balance-sheet shadow financing," he said. "Regulations in the past year have made the growth of shadow finance problematic. Thus, the increase in on-balance sheet lending was not enough to make up for the shrinkage of shadow financing."

More at Bloomberg.

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Why the central bank might start printing money again - Victor Shih

Victor Shih

We have seen this before, says financial analyst Victor Shih about the efforts by the financial authorities in China to reduce debts. In 2014 they tried the same, and in 2015, 2016 the PBOC, China's central bank, started to print money again. When economic growth comes under a certain level, that will happen again, he tells Bloomberg.

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Conservative resistance against liberalization of the yuan - Victor Shih

Victor Shih

Retiring central banker Zhou Xiaochuan called this week for the liberalization of China's currency, the Yuan. But conservative forces might find this step from the People's Bank of China (PBOC) a step too far, says financial expert Victor Shih to Bloomberg.

Bloomberg:

While it’s widely expected that Zhou will retire, there are no guarantees as China’s political appointments are often unpredictable. The PBOC chief bucked expectations he would leave back when he was 65. Instead he was promoted, taking on the title of vice chairman of the Chinese People’s Political Consultative Conference, where the retirement age typically is 70. Zhou turns 70 in January. 

“It seems there is a concerted push from within the PBOC to liberalize the capital account and exchange rate a bit while the yuan is relatively strong,” said Victor Shih, a professor at the University of California in San Diego who studies China’s politics and finance. “The conservative views of the higher leadership may stand in the way of significant progress.”

More in Bloomberg.

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Risk and opportunities of the bitcoin - Mark Schaub

Chinese authorities have started to regulate the usage of the bitcoin. That is not necessarily a bad thing, writes Shanghai-based lawyer Mark Schaub at the website of his law firm. "Regulation should be seen as an opportunity, too. More stringent rules translate to lower investment risk and increased legitimacy."

Mark Schaub:

The opportunities with Bitcoin remain ample, as is demonstrated by its sustained growth. (Some of the most optimistic commentators have stated the value will rise above 6,000 USD.[18]) This is occurring alongside the continuous creation of new and derived cryptocurrencies, as was recently demonstrated by Bitcoin’s hard fork, which created ‘Bitcoin Cash’. Moreover, developers are continuing to find novel uses for blockchain technology as a whole. 

Regulation should be seen as an opportunity, too. More stringent rules translate to lower investment risk and increased legitimacy. Investors in cryptocurrencies, particularly ICO tokens, will likely be afforded some level of legal protection on their investment in certain jurisdictions. Start-ups, too, stand to gain from regulation as a means to build trust amongst an increasingly skeptical pool of investors. Indeed, the perceived legitimacy of the blockchain system as a whole seems to be on the rise, earning clout with institutions as large as the Bank of England, which signed up to participate in the Hyperledger project in March.[19] 

Regulation should also be seen as a way to stabilize the extreme volatility of the currency by making it harder for speculators to instantaneously purchase and liquidate Bitcoin on a whim. This will also open the door to more risk-averse investors. 

On top of these, there are opportunities specific to China, which looks poised to continue its role as a global hub for Bitcoin. Between Hong Kong and the mainland, it hosts some of the world’s most established Bitcoin exchanges[20] as well as significant infrastructure for Bitcoin mining, which generates 70% of the world’s Bitcoins.[21] Moreover, the trend of China-based cryptocurrency startups is only going to increase, as the government continues to incentivise a burgeoning ‘Silicon Valley in China’.[22] Recommendations have also been made by PBOC officials to foster a ‘regulatory sandbox’ for blockchain innovation. That is, an ICO-inclusive market with minimal intervention bounded by some basic regulations such as Singapore-style KYC rules.[23]

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Cryptocurrencies continue to bring a variety of risks to investors. The sheer variety of potential uses for blockchain technology is a double-edged sword. Increasingly, businesses are turning to blockchain as a panacea to a variety of database issues, or as a part of a marketing strategy to appear more modern. In reality, blockchain technology is a system with high energy costs and a narrow scope of uses.[24] Lacking the need for a single database with multiple writers and no trusted intermediary, many companies are better off employing a traditional relational database. Investors should beware of start-ups touting the use of blockchain where, in fact, it adds cost and does not increase efficiency. 

Furthermore, companies looking to maintain environmentally-friendly policies should also be aware of the significant energy costs of maintaining a blockchain system, as well as increasing public awareness of it. 

The volatility of Bitcoin and other, smaller cryptocurrencies continues to be a risk. Even with regulation, the digital nature of cryptocurrencies means they will also be more liquid than physical currencies or ‘real’ assets. 

Also, the new rules concerning Bitcoin stand to limit its uses. One focus of regulation, particularly in the Unites States, appears to be cryptocurrency products that seek to incorporate elements of traditional financial assets. These include the DAO token, which aimed to be a cryptocurrency venture capital fund, as well as the attempt by Winklevoss Capital to list an Exchange Traded Fund on the NYSE that tracked the price of Bitcoin, which was blocked by the SEC. Investors should be wary of these. 

Considering risks unique to China, some commentators have suggested that the newly-created ‘Bitcoin Cash’ is an attempt to create a Chinese version of Bitcoin. The larger block sizes of Bitcoin Cash pose a significant advantage to industrial-scale mining operations. Indeed, Jihan Wu, the creator of Bitcoin Cash is also the manufacturer of the ‘AntMiner’ mining device. At any rate, a pivot by the Chinese market to Bitcoin Cash may result in the loss of a significant driving factor for the growth of Bitcoin. 

Moreover, Bitcoin in China remains largely unregulated, at least for the time being. The nearly-catastrophic move by Huobi and OKCoin to invest idle client funds into wealth management products should be closely considered as an example of the potential losses to be incurred in the Chinese Bitcoin market. 

Regulation in China has started, however, and will continue. This poses risks for investors. For instance, Bitcoin was once seen as a potential “golden ticket” to bypass China’s increasingly harsh capital controls on getting money out of the country.[25] Following the PBOC investigation earlier this year, using Bitcoin as a means of repatriating funds will be throttled, at best. Users and investors in China must consider the very high possibility of the PBOC imposing further regulations on cryptocurrencies, both expected and otherwise. Financial laws in China are strict, and penalties are harsh. Another factor that may affect Bitcoin investors is further restriction on Bitcoin trading that may be imposed by the Chinese regulators. During the NPC & CPPCC in 2017, Mr. Zhou Xuedong, the Director of Business Administration of PBOC, proposed a bill for establishing a negative list with respect to the business activities that should not be conducted by a Bitcoin trading platform.[26] Furthermore, the Legal Affairs Office of the State Council issued the draft regulation on the penalty of illegal fund-raising activities, stating in its Article 15 that the department dealing with illegal fundraising shall conduct an illegal fundraising administrative investigation when any such acts are found and explicitly mentioning virtual currencies in this draft regulation. As such, there is the risk that issuing or trading in Bitcoins (particularly relevant to the ICO market) may be deemed and sanctioned as illegal fundraising.

More at the China Law Insight.

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Investors unease about China: lack of real reforms - Arthur Kroeber

Arthur Kroeber

Although there is no reason to believe China´s economy is heading for a crash, the lack of real structural reforms still makes investors worried, writes economist Arthur Kroeber for the Brookings Institute and author of China's Economy: What Everyone Needs to Know? While the state sector was supposed to shrink, it continues to grow.

Arthur Kroeber:

The crucial reforms all relate to increasing the role of markets, and decreasing the role of the state in economic activity. China has an unusually large state sector: OECD researchers have estimated that the value of state-owned enterprise assets is around 145 percent of GDP, more than double the figure for the next most state-dominated economy, India.[1] This large state sector functioned well for most of the last two decades, since the main tasks were to mobilize as many resources as possible and build the infrastructure of a modern economy—tasks for which state firms, which are not bound by short-term profit constraints, are well suited. 

Now, however, the infrastructure is mostly built and the main task is to make the most efficient use of resources, maximize productivity, and satisfy ever-shifting consumer demand. For this job, markets must take a leading role, and the government must wean itself off the habit of using state-owned firms to achieve its economic ends. And the big worry is that, despite the promises in the November 2013 Third Plenum reform agenda, Beijing does not seem all that willing to let markets have their way. 

The concerns stem from the government’s recent interventions in the equity and currency markets. Last June, when a short-lived stock market bubble popped, the authorities forced various state-controlled firms and agencies to buy up shares to stop the rout. This stabilized the market for a while, but left people wondering what would happen when these agencies started selling down the shares they had been forced to buy. To enable these holdings to be sold without disrupting the market, the authorities instituted a “circuit breaker” which automatically suspended stock-exchange trading when prices fell by 5 percent in one day. Instead of calming the market, this induced panic selling, as traders rushed to dump their shares before the circuit breaker shut off trading. The government canceled the circuit breaker, and the market remains haunted by the risk of state-controlled shareholders dumping their shares en masse. 

Similarly, Beijing got into trouble in August when it announced a new exchange-rate mechanism that would make the value of the renminbi more market determined. But because it paired this move with a small, unexpected devaluation, many traders assumed the real goal was to devalue the renminbi, and started pushing the currency down. So the People’s Bank of China (PBOC) intervened massively in the foreign exchange markets, spending down its foreign-currency reserves to prop up the value of the renminbi. This stabilized the currency, but brought into question the government’s commitment to a truly market-driven exchange rate. 

Then, in December, PBOC made another change, by starting to manage the renminbi against a trade-weighted basket of 13 currencies, rather than against the dollar as in the past. Because the dollar has been strong lately, this in effect meant that PBOC was letting the renminbi devalue against the dollar. Again, PBOC argued that its intention was not to devalue, but simply to establish a more flexible exchange rate. And again, it undermined the credibility of this intention by intervening to prevent the currency from falling against the dollar. 

One could argue that these episodes were merely potholes on the road to a greater reliance on markets. This may be so, but investors both inside and outside China are not convinced. The heavy-handed management of the equity and currency markets gives the impression that Beijing is not willing to tolerate market outcomes that conflict with the government’s idea of what prices should be. This runs against the government’s stated commitment in the Third Plenum decision to let market forces “play a decisive role in resource allocation.” 

Another source of unease is the slow progress on state enterprise reform.  Momentum seemed strong in 2014, when provinces were encouraged to publish “mixed ownership” plans to diversify the shareholding of their firms. This raised hopes that private investors would be brought in to improve the management of inefficient state companies. Yet to date only a handful of mixed-ownership deals have been completed, and many of them involve the transfer of shares to state-owned investment companies, with no private-sector participation. Plans to subject the big centrally controlled state enterprises to greater financial discipline by putting them under holding companies modeled on Singapore’s Temasek have been incessantly discussed, but not put into action. Meanwhile the number of state firms continues to grow, rising from a low of 110,000 in 2008 to around 160,000 in 2014.

More on the website of the Brookings Institute.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

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Will the Tobin tax work in China? - Victor Shih

Victor Shih

China is preparing a Tobin tax, a tax on capital transactions. At this stage for a zero percentage, but the writing is on the wall. It´s effect on China´s currency depends very much on how the government is going to use this tool, says finance professor Victor Shih in Bloomberg.

Bloomberg:

PBOC Deputy Governor Yi Gang raised the possibility of implementing the punitive measure late last year in an article written for China Finance magazine. 

"If the PBOC makes it very clear that the Tobin tax will only apply to a narrow range of high frequency capital account transactions, it may not be contrary to the spirit of a freely usable currency," said Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance. If the tax is slapped on a wide rage of transactions, it will hurt the yuan’s international appeal. "In general, any such restrictions only deter investors from holding yuan assets," he said.

More in Bloomberg.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

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Fiscal deficit divides lawmakers - Victor Shih

China´s lawmakers arrive in Beijing for their annual meeting and finance is high on their agenda´s. And opinions are divided, says political analyst Victor Shih to Bloomberg, for example when it comes to the fiscal deficit.

Bloomberg:

A fiscal deficit target for the year will also be set. Vice Finance Minister Zhu Guangyao has said it will be raised from the 2.3 percent target in 2015, while central bank officials say China can run a deficit of 4 percent of gross domestic product. 

The emerging debate on the appropriate level of the fiscal deficit will make the meeting interesting, says Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance. 

"The PBOC argues that the effectiveness of monetary easing is reaching a limit and that fiscal policies are needed to maintain growth," says Shih. "The Ministry of Finance, meanwhile, argues that the central government’s balance is a bastion for overall confidence."

More at Bloomberg.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

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China´s central bank is safe for another year - Arthur Kroeber

Arthur Kroeber

How deep are the pockets of the People´s Bank of China (PBOC) to keep on funding its financial system? According to economist Arthur Kroeber they are safe for another year, and can use the time to clean up the current mess. Learning how to communicate with the markets is one talent that needs urgent development, he tells Bloomberg.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

Are you looking for more financial experts at the China Speakers Bureau? Do check out this list. 

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Central bank moves in to ease turmoil - Victor Shih

Victor Shih

The governor of China´s central bank, the People´s Bank of China, Zhou Xiaochuan tried to ease the expected turmoil on the financial markets ahead of their opening after Lunar New Year. Zhou tries to save the few reforms he was able to achieve, says financial expert Victor Shih to Bloomberg.

Bloomberg:

Zhou dismissed speculation that China plans to tighten capital controls and said there’s no need to worry about a short-term decline in foreign-exchange reserves. The country has ample holdings for payments and to defend stability, he said. 

"He’s desperately trying to make sure that all of his work in the past few years on capital liberalization does not go to waste," said Victor Shih, a professor at the University of California at San Diego who studies China’s politics and finance. "He’s trying hard to instill investor confidence in the renminbi so that the Chinese government does not have to resort to the extreme measure of unwinding all of the progress on offshore renminbi in the past few years."

More in Bloomberg.

Victor Shih is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´request form.

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Slowly China´s central bank will let the Renminbi float - Sara Hsu

Sara Hsu

Nothing is moving fast, but slowly China´s central bank PBOC will loosing its traditionally iron grip on its currency, writes financial analyst Sara Hsu in the Diplomat. Linking the Renminbi to a basket of currencies in stead of only the US dollar failed in the past, but might work out now.

Sara Hsu:

China’s efforts to peg the RMB to a basket of currencies, with less emphasis on the dollar, have failed in the past, particularly in the face of the global financial crisis. A tighter peg to the U.S. dollar helped China’s economy to maintain monetary stability as real economic indicators slid. Now that the global crisis appears to be somewhat contained, the time may be ripe for China to remove its strict adherence to the dollar. Moreover, inclusion of the RMB in the IMF basket of reserve currencies was a watershed event for China that leaves Beijing on the hook for picking up the pace of capital account and exchange rate liberalization. While some analysts believe that the RMB will not be freely floated anytime soon, adherence to a more equally weighted basket of currencies is a possibility, especially given China’s call to remove the dollar from its central role in the wake of the global financial crisis. China’s gradual opening of its capital account through the issuance of panda bonds, reduced restrictions on participation by foreign central banks, sovereign wealth funds and multinational firms in the interbank market, and implementation and expansion of the Shanghai-Hong Kong FTZ and Stock Connect will necessitate freer currency flows. Eventually, China will need to allow the RMB to better reflect market forces. 

We do not know for sure whether the People’s Bank of China will really break away from the dollar at this time, but there are gains to be made in doing so. Maintaining a somewhat rigid peg to the dollar has required the central bank to heavily intervene in the currency markets and to maintain high levels of dollar reserves. This is a costly process that is generally considered undesirable. Now that the RMB has SDR currency status, China may have more latitude in valuing its currency. A decline in reliance on export production also reduces the need for China to peg the RMB to the currency of its largest trading partner. So will they or won’t they? It seems likely that China will reduce its grip on the dollar and it makes sense that it would do so in the short to medium run. This will certainly mark a change in China’s development trajectory, as its currency has closely tracked the dollar for two decades.

More in the Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´request form.

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The official reason for the devaluation is correct - Sara Hsu

Sara Hsu

There are two schools of thought on China´s recent devaluation of the Yuan. A group of analysts, like Victor Shih and Tom Doctoroff, believes the central government is in panic and tries to jump-start economic growth. Others like Arthur Kroeber and Nicholas Lardy join the official explanation, telling us the move is market-driven, and good for its international standing. Financial analyst Sara Hsu joins the last group, in the Diplomat.

Sara Hsu:

China devalued its currency on Tuesday, reportedly in order to make the RMB more responsive to market forces, although this gave rise to suspicion among global analysts, who fear that the devaluation is a sign of a deteriorating balance of payments. The RMB fell 1.9 percent against the dollar, the largest one-day decline in a decade. Worse, the following day, the RMB was weakened by 1.6 percent from the previous day’s midpoint. Asia Pacific stock markets and emerging market currencies declined as a result, on speculation that the change was made in order to prop up China’s slumping economy. Yet despite the negative market response, the official line still makes the most sense. 

The response among international analysts included projections that China was manipulating its exchange rate in order to boost exports, which have lagged for several months given lower levels of growth. Some analysts viewed the devaluation as part of a devaluation trend taking place in the rest of Asia. Pundits speculated that the devaluations would strongly and adversely impact luxury goods and tourism, as well as commodity imports. As a result of the latter, Brent crude prices fell on the news of the devaluation. Overall, the sentiment was risk-retreating as many analysts believed that Chinese technocrats were covering up economic data that was worse than has been reported. A somewhat more neutral interpretation of China’s move includes the belief that China is attempting to delink from the dollar, as the anticipated end of quantitative easing in the U.S. has meant a stronger dollar and consequently a stronger RMB. The move is therefore seen as both corrective in terms of bringing some competitiveness back to the RMB and preemptive since the dollar will continue to strengthen. 

The most positive interpretation is provided by the official line. According to a central bank spokesman, China’s real effective exchange rate was relatively high and not in line with market expectations, so that the shift in central parity better reflects the market rate. The RMB’s central parity is now based on market makers’ quotes and the previous day’s closing price. This was supposedly a one-time correction and will not continue over an extended period of time. The move is attributed to China’s ongoing process of exchange rate liberalization. 

The stated reason for the exchange rate devaluation makes the most sense. In support of the official line is the fact that an RMB devaluation of less than 2 percent will not do a great deal for either exports or imports. The devaluation is unlikely to strongly impact China’s growth, which would require a far larger devaluation and a reversal of structural reforms to truly boost exports. 

The devaluation was applauded by the IMF, which took the official statement, supporting increased liberalization of the exchange rate, at face value. Therefore, while the short-run impact was to adversely impact regional financial markets, the long-run result may be the long-awaited liberalization of the RMB. Still, even though the central bank would like to converge the state-managed onshore and market-based offshore RMB rates, ironically the offshore rate took a dive on Tuesday, widening the gap between the onshore and offshore rates to its greatest level since September 2014. This only underscores the fact that markets act according to their own whims, something Beijing will have to face as the exchange rate liberalization process moves further down the road.

More in the Diplomat.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´ request form.

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Why the devaluation of the yuan is a good idea - Arthur Kroeber

Arthur Kroeber

Many analysts tumbled over each other to dismiss China´s record devaluation of its currency. But financial analyst Arthur Kroeber disagrees, and says it is a necessary move to financial reforms in the middle and long term, CityWire writes.

CityWire:

Although the moves to devalue the renminbi could spark fresh concerns about competitive currency wars, GaveKal economist Arthur Kroeber is sanguine about the move. 

'Ignore silly headlines about “currency wars”. We hold firm to the view that the currency move has nothing to do with cyclical economic management and everything to do with creating a more flexible exchange rate mechanism that will enable the renminbi’s admission into the IMF’s special drawing rights basket. 'A more flexible exchange rate is also a necessary step to push ahead the market-oriented reform agenda outlined by president Xi Jinping nearly two years ago—an agenda that in recent months has seemed in danger of stalling.' 

He added: 'In the medium to long term, it will be good for both China and the world for the renminbi to trade more freely. China accounts for 18% of global manufacturing exports, vies with the US for leadership in outbound direct investment, and is an increasingly important source of portfolio capital. Under these conditions it is senseless for China to cling to a currency whose value is determined by government fiat. 

'From a domestic point of view, the exchange rate is one of the very few remaining controlled prices in the world’s second-largest economy. If the government is really serious about giving market forces “a decisive role” in resource allocation, as it pledged in its November 2013 reform roadmap, then the exchange rate has to be freed up.'

More in CityWire.

Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch or fill in our speakers´ request form.

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