How can China deal with its financial dilemma? – Victor Shih

Devaluation of the Renminbi, limiting export or more straining of capital flight are some options China’s government has to deal with its financial dilemma caused by the trade war, but – warns financial expert Victor Shih – all might also cause setbacks, he tells Reuters.

Reuters:

Meanwhile, the famed trade surplus the export powerhouse ran with the rest of the world has been shrinking.

Victor Shih, an associate professor of political economy at the University of California, San Diego, says currency devaluation could be an attractive option for China to offset the impact of the trade war.

But he warned the tactic had limits, as it “could create a panic on the renminbi which becomes difficult to control”…

Shih estimates that even a modest 20 percent reduction in exports to the United States could cause the monthly trade surplus to drop by $8 billion to $10 billion, nearly a third of the average. In addition, a reduction in foreign direct investment, which brought $136 billion into China last year, would also reduce forex inflows substantially, he added…

Shih said existing capital controls were very stringent.

“Even the billionaire class faces tight restrictions in terms of where they can invest money,” he said. “However, there are still ways, and it is likely that corruption is returning, which will undermine Chinese capital control measures.”

More at Reuters.

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

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Devaluation yuan pondered amid trade war exchanges - Victor Shih

Victor Shih

China's financial institutions ponder on the pros and cons of a currency devaluation as the effects of the trade war with the US start to kick in. While devaluation is on the agenda, it would be a tricky road, says financial analyst Victor Shih, author of Factions and Finance in China: Elite Conflict and Inflation, at CapitalWatch.

CapitalWatch:

Meanwhile, the famed trade surplus the export powerhouse ran with the rest of the world has been shrinking. 

Victor Shih, an associate professor of political economy at the University of California, San Diego, says currency devaluation could be an attractive option for China to offset the impact of the trade war. But he warned the tactic had limits, as it "could create a panic on the renminbi which becomes difficult to control."... 

U.S. President Donald Trump has announced tariffs on about half of China's roughly $500 billion of annual exports to the United States in a tit-for-tat trade war, and has threatened to broaden those penalties. 

Analysts say the trade spat could lead to heavier pressure on the yuan if China's trade surplus shrinks and gloomy economic prospects deter multinational investments in the country. 

Shih estimates that even a modest 20 percent reduction in exports to the United States could cause the monthly trade surplus to drop by $8 billion to $10 billion, nearly a third of the average. In addition, a reduction in foreign direct investment, which brought $136 billion into China last year, would also reduce forex inflows substantially, he added... 

The most recent data from the State Administration of Foreign Exchange (SAFE) shows that China had total foreign liabilities of $5.3 trillion at the end of the second quarter, of which $1.13 trillion was portfolio investments - equity and debt securities that foreign investors could attempt to offload in the event of market panic. 

Broader SAFE data showed China's total external debt, excluding Hong Kong and Macau, at $1.84 trillion at the end of the first quarter, an increase of $455 billion from the end of 2016. 

Although not all of those exposures are at risk of fleeing China's shores, analysts say they put the size of China's $3 trillion in foreign exchange reserves into perspective. Shih said existing capital controls were very stringent. 

"Even the billionaire class faces tight restrictions in terms of where they can invest money," he said. "However, there are still ways, and it is likely that corruption is returning, which will undermine Chinese capital control measures."

More at CapitalWatch. 

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.

Are you looking for more experts on the ongoing trade war? Do check out this list.  

Currency devaluation: a tricky way to fight the trade war - Victor Shih

Victor Shih

Devaluating the Chinese Yuan can be an attractive, but also dangerous way for China to deal with the effect of the ongoing trade war, says financial and political analyst Victor Shih, author of Factions and Finance in China: Elite Conflict and Inflation to Reuters. " It is likely that corruption is returning, which will undermine Chinese capital control measures."

Reuters:

Victor Shih, an associate professor of political economy at the University of California, San Diego, says currency devaluation could be an attractive option for China to offset the impact of the trade war. 

But he warned the tactic had limits, as it "could create a panic on the renminbi which becomes difficult to control"... 

Shih estimates that even a modest 20 percent reduction in exports to the United States could cause the monthly trade surplus to drop by $8 billion to $10 billion, nearly a third of the average. In addition, a reduction in foreign direct investment, which brought $136 billion into China last year, would also reduce forex inflows substantially, he added. 

In China's stock and bond markets, where sentiment is far more fragile, foreign inflows could easily reverse. For example, during the first three trading days this week, foreign investors sold a net $14 billion of mainland stocks under the cross-border Connect scheme, reversing weeks of net purchases. 

The most recent data from the State Administration of Foreign Exchange (SAFE) shows that China had total foreign liabilities of $5.3 trillion at the end of the second quarter, of which $1.13 trillion was portfolio investments - equity and debt securities that foreign investors could attempt to offload in the event of market panic. 

Broader SAFE data showed China's total external debt, excluding Hong Kong and Macau, at $1.84 trillion at the end of the first quarter, an increase of $455 billion from the end of 2016. 

Although not all of those exposures are at risk of fleeing China's shores, analysts say they put the size of China's $3 trillion in foreign exchange reserves into perspective. Shih said existing capital controls were very stringent. 

"Even the billionaire class faces tight restrictions in terms of where they can invest money," he said. "However, there are still ways, and it is likely that corruption is returning, which will undermine Chinese capital control measures."

More at Reuters. 

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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No reason to expect financial volatility now - Arthur Kroeber

Arthur Kroeber

Leading economist Arthur Kroeber does not see reason for financial volatility in the short run, he tells at Bloomberg. The Chinese government will not try another devaluation, like they mistakenly did in August, and the funding of banks is very solid, at least for the next two to three years.

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 stories by Arthur Kroeber? Do check out this list. 

Success financial transition still unclear - Arthur Kroeber

Arthur Kroeber

The badly handled crisis at the stock markets and the unfortunate devaluation of China´s currency are still casting shadows on the country´s financial future, says economist Arthur Kroeber at CNBC. At this stage it is very unclear whether the central government has the capability to handle needed financial reforms.

CNBC:

In addition to the increase in debt, China's missteps this year in the stock market intervention and shock currency devaluation raise questions on the leaders' ability to steer the economy towards growth. 

"They have all the ingredients to execute a successful transition," said Arthur Kroeber, head of research at Gavekal Dragonomics. "The question is whoever is making decisions, does he know what he is doing? Leadership wants to execute this in a highly centralized way and we just don't know if that can be done."

More at CNBC.

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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There is no good time for a devaluation - Arthur Kroeber

Arthur Kroeber

Dust might have settled down on the recent surprise devaluation of the Yuan by the time President Xi Jinping will meet his counterpart in the US, says financial analyst Arthur Kroeber in Bloomberg. Relations with the IMF have been defining the moment for this long-expected move.
Bloomberg:

China has been seeking reserve status as part of a campaign to play a larger role in the postwar global economic order designed and dominated by the U.S. Membership of the reserve-currency club would be a crowning achievement after three decades of breakneck growth that saw the Chinese economy take its place as the world’s second-largest after the U.S. 

The devaluation may ensure there’s enough time for the emotions to ebb before the Xi-Obama summit, said Arthur Kroeber, Beijing-based managing director at GaveKal Dragonomics, an independent global economic research firm. 

“There is no good time to do these things; moreover, it seems clear in retrospect the PBOC did not anticipate the very negative market reaction,” he said. “Waiting until after the summit would have been far too late to build credibility with the IMF.”

More in 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.

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Some misunderstandings at China´s financial markets - Shaun Rein

Shaun Rein

Panic and fear rule China´s stock markets, says business analyst Shaun Rein at Money Control, but it is mainly small retailers who rule the current market, others have safely left. And for the Yuan: that was already overvalued for a long time, he says.

Money Control:

A: I think the market still is being driven by fear and rumour. Everyday retail investors are starting to trade based on what the guy next of them is doing or what they think that the government is going to do. What is key is that a lot of the wealthier investors have exited the market in the last three or four weeks and so a lot of the times right now, it is the everyday retail investors who are in their well mid-income level that have kept their cash in. So, when you see the market volatility, it is going to just get more because a lot of these guys are going to go in and out. 

Sonia: You are saying it is the institutional investors, the high networth individuals (HNIs) that have exited the Chinese market and not the retail investors yet? 

A: The high networth individuals, people where 10 million rmb which is about USD 1.8 million in assets invested in the market, when we interviewed them, a large portion of them had sold everything or sold large portions of their stock three or four weeks ago once the government intervened. That was their way to sort of take their wins over the last year without losing any more because it tended to be more the smaller players who started investing in April-May and they actually didn’t make as much money as the guys who are richer who probably were invested over year ago. 

Latha: What is the view on the currency, left to itself, might it fall very sharply unless the PBOC intervened in favour of the currency? 

A: I have always been arguing for many years now that the renminbi is actually overvalued and actually there could be depreciation if you are going to go to a free convertability and unpeg everything. The real reason is that a lot of Chinese want to be able to take their money offshore. They want to be able to invest in India or invest in the United States and they can’t right now because of the currency restriction. 

So, I think the renminbi is overvalued about 6-10 percent. I don’t expect it to go up like this, drop like that and then next few months the government is going to intervene. They want to sort of have more of a stabilised rate but I don’t think that they were devaluing the currency to boost up the exports, I think it was partially that but I think a bigger part which moved towards more market reforms because they really want the rmb to become a reserve currency. If you see the International Monetary Fund (IMF) and a lot of the other governmental, non-governmental type organisations approved and applauded what China did with its currency last week. However, I don’t see a major slide any time soon.

More at Money Control.

Shaun Rein 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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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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Yuan devaluation is market-driven – Ben Cavender

Ben Cavender

Some see the devaluation of the yuan as a panic measure by the Chinese government to reignite growth, but market analyst Ben Cavender tells the Guardian why the depreciation is mainly market driven, making the yuan freer from the US dollar peg.

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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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