Reforms of China’s FX policy continue

February 8, 2017, by Hubert Fromlet, Kalmar

History helps sometimes – even when it comes to the future; in this case when looking at exchange rate policy (FX policy) since a dozen of years ago. In 2005, exchange rate policy was changed a bit when the PBC announced that the RMB was to move into a cautiously managed floating system with initially very small daily fluctuation ranges.

These ranges were, however, gradually widened and reached in spring 2014 as much as +/- 2 percent; but since August 2015, temporary depreciation moves have been possible even outside the 2-percent band of the day. Technically, the PBC announces in the morning of every working day at 9.15 its “central parity rate” against other currencies (mainly the USD) for onshore trading, influenced by the rates from the closing session the day before and current market conditions. Furthermore, offshore trading takes place – uncontrolled – in Hong Kong, using so-called CNH/USD rates, normally but not always traded very close to onshore-USD/CNY rates

Also after the fluctuation-band reform in 2014 the PBC continued to benchmark a basket of currencies – but still without publishing the composition of the basket (which, however, obviously remained dominated by the U.S.dollar). Another major change forward was the innovative, daily publication of the weighted currency basket announced in December 2015. In 2017, the RMB basket was extended by another 11 currencies – now up to as much as 24 different currencies, meaning some decreasing influence of, for example, the American currency and monetary policy.

It may happen in the future that the RMB index is stable and the U.S. dollar at the same time moving within the index, reflecting the (somewhat) declining role of the American currency in the Chinese currency basket. New, trade-weighted shares will be prepared annually. But the exact, policy-driven fluctuation or intervention bands – if there are any – remain logically unknown. All in all, FX policy remains controlled, also day by day.

In 2017, the currency basket of the PBC (2014-12-31=100) – or rather of the Chinese Foreign Exchange Trade System (CFETS, a sub-entity of the People’s Bank of China) – looks as follows (the eight highest weights in percent):

Composition of the official Chinese currency basket (2017):

USD 22.40 (down from 26.40)

Euro 16.34 (down from 21.39)

JPY 11.53 (down from 14.68)

KRW 10.77 (n/a)

AUD 4.40 (down from 6.27)

HKD 4.28 (down from 6.55)

MYR 3.75 (down from 4.67)

GBP 3.16 (down from 3.86)

It seems to be the case that the PBC and other Chinese decision makers these days rather define “exchange rate stability” referring to the RMB index (or BIS index) than to the U.S.dollar alone. This may be disliked by certain American interests – but it should be up to China itself to decide on such a policy issue (which is normal in most other independent countries in such a context).

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board


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Chinese GDP – still (too) easy to forecast

January 20, 2017, by Hubert Fromlet, Kalmar

China’s GDP increased by 6.8 percent in the fourth quarter of 2016 compared to one year earlier and by 6.7 percent in 2016 as a whole compared to 2015. These results are more or less exactly in line with my own and average market expectations – and not bad if close to reality. This we don’t know very well. But we do know that China’s political leadership nowadays preferably wants to focus on the quality of economic growth and not on the numbers per se; in this context, one can see a continuous increasing production share of the service sector, now almost 52 percent of GDP. Many analysts, however, still do not know how to apply this distinction of growth quality – and obviously not on this publication day either. It should also be noted that the National Bureau of Statistics (NBS) speaks about “a complicated domestic and international environment”, i.e. in China, too.

Compared to the GDP accounting of the National Bureau of Statistics of China (NBS) itself one year ago, I hardly see major qualitative improvements. This may be the wrong conclusion when considering all the positive comments on this issue that are made by the Chinese and certain foreigners. Still, however, more progress seems to be necessary as regards GDP calculations from the production side. GDP calculations from the expenditure side – which we are mostly used to in our part of the world – are still insufficient as well, only being published annually and only in nominal prices; and quarterly GDP numbers are only calculated from the production side in volume terms (surf on IMF SDDS, China about the different calculation types – hopefully updated).

It should be kept in mind that the above-mentioned forecasting accuracy is not the result of special forecasting skills. It is caused because of the still existing phenomenon that GDP outcomes in China should – more or less – meet or have to meet official objectives and forecasts. Consequently, paying attention to what officials say about the GDP future usually serves as a good guidance.

One may even conclude that more and stronger statistical fluctuations of Chinese GDP growth potentially may contribute to better credibility of Chinese statistics. One specific problem remains all the same: There is a risk that statistical improvements at some point – when they finally happen – will not be acknowledged on time even if it seems to be justified.

Finally, it should be reminded that president Xi Jinping a couple of weeks ago told economic decision makers of the Communist Party that he is ready to abandon the current growth objective of 6 ½ percent if reaching this growth number should add too much to debt and stability problems. Thus, we have got another GDP-growth issue to observe in the future: the development of economic and financial risks (as much as possible). It makes sense!


Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board


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LNU’s China Panel No 22 – December 28, 2016

December 28, 2016, by Hubert Fromlet, Kalmar

Temperature Indicator rises – but no real progress


Between November 22 and December 16, we made our regular fall/winter survey on business conditions in China. More than 15 prominent China experts participated, coming from Europe, North America and Asia.

¤  Our so-called growth-temperature indicator for the Chinese economy rose this time from 4.0 in spring this year to 5.2 (on a scale from 10 = very good, to 1 = very bad). Despite this improvement, 5.2 is reflecting one of the weakest numbers since the survey started in 2004.

¤  For 2017, our panel sees GDP growth at 6.1 percent which is slightly below consensus and official forecasts at around 6 ½ percent. Even 6.1 percent would probably be still acceptable for China’s political leadership – but not lower than this. Only 29 percent think that planned reforms from the Third Plenum in 2013 are on track.

¤  More than 90 percent of the participants believe that there is still a dangerous price bubble on the Chinese real estate market – but not really on the stock market (23 percent).

¤  The three major short-term concerns for the next few years are (ranked):
debt/non-performing loans, bursting housing bubble, persisting overcapacity in industry.

¤  General confidence in the Chinese economy in the forthcoming five years is located at 2.6 (scale 5 to 1, 5=very good). This is slightly weaker than in February 2016 (3.0), reflecting somewhat increasing doubts about China’s economic future more recently.



Read the full article here. chinapanelsurveydecember2016.pdf

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board


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