Reforms of China’s FX policy continue

February 8th, 2017

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 20th, 2017

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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Giving Asia Its Due in Global Financial Regulation *

January 10th, 2017

With US inward turn, China should get a bigger role to bolster system

Global cooperation on financial regulation has become increasingly important and valuable over the last decade, but its effectiveness cannot be taken for granted. Following November’s U.S. presidential election, Asia, and particularly China, needs to take a more central role to ensure the viability of the global system.

Compared with other modes of international economic cooperation, the global financial regulatory system is in a nascent stage of development. It is made up of a network of diverse organizations and groupings, many of them without legally binding authority, with the Financial Stability Board acting as a coordinating hub.

This system has grown in importance, particularly since the global financial crisis, and its impact has been overwhelmingly positive. The Basel Committee on Banking Supervision, for example, has helped to limit cross-border competitive distortions resulting from incompatible prudential rules and has been increasingly forceful in monitoring national compliance with its agreed standards. The widespread adoption of the International Financial Reporting Standards Foundation’s accounting principles has greatly enhanced the international comparability of listed companies’ profit statements, even if not yet on a universal basis. The Global Legal Entity Identifier Foundation has opened the way toward universal interoperable financial data formats by issuing codes to transaction participants that function in a way comparable to the internet protocol addresses that underlie the World Wide Web.

Such arrangements are even more valuable as the global financial system becomes increasingly multipolar and interconnected, enhancing the need for joint work by public financial authorities on a commonly agreed basis.

Aside from the above organizations, key participants in the regulatory system include treaty-based organizations such as the Bank for International Settlements, which hosts the Financial Stability Board, the International Monetary Fund, the World Bank, and the Organization for Economic Co-operation and Development and its Financial Action Task Force. These are complemented by independent groups such as the International Organization of Securities Commissions, the International Association of Insurance Supervisors and the International Forum of Independent Audit Regulators. The roots of the treaty-based institutions can be traced to the second quarter of the 20th century, but none of the other entities in this global network are more than 45 years old.

The global financial regulatory system has long been lopsided and in need of change as the emergence of new financial powerhouses, particularly in Asia, has challenged the dominance of North American and European states.

Significant improvement has flowed from the 2008 shift to tackling financial and economic issues at Group of 20 leaders’ summits from Group of Seven nation summits. The membership ranks of the Basel Committee and the Financial Stability Board, for example, have been expanded to include major emerging economies and financial centers.

But blatant imbalances remain. On a recent count, all but one of the 27 most senior leadership positions in this system were held by nationals from North Atlantic countries. Almost all entities in the network are similarly headquartered in the North Atlantic region, the only exception being the soon-to-be-established permanent secretariat of the International Forum of Independent Audit Regulators in Tokyo.

Challenges ahead

The system’s institutional fragility is about to be tested by the incoming administration of U.S. President-elect Donald Trump. His “America first” stance will surely create multiple challenges for all international cooperation frameworks, and financial regulation will be no exception.

The response to this test should include an accelerated rebalancing and reform of the global regulatory system to ensure its viability in the new environment. Asia, and specifically China, should claim a much more central position in the system than is currently the case and other nations should facilitate this evolution.

Specifically, China should propose highly qualified officials, of which it has an increasing number, for positions of leadership in global financial regulatory bodies and engage more proactively in their various workstreams. As with action against climate change, and given Europe’s current internal difficulties, China is fast becoming the indispensable anchor for sustainable joint efforts at the global level and should invest accordingly in its representation in global discussions.

In this context, Europe should streamline its presence in the system, as a logical consequence of its own ongoing reform and thus leave room for greater Asian and Chinese leadership. Specifically, Europe’s banking union implies that the representation of individual euro-area countries in bodies in charge of financial stability has become anachronistic and should be replaced by euro-area or EU-level participation. The Basel Committee is a case in point. Now that banking supervisory policy has been comprehensively pooled within the euro area, the separate membership of Belgium, France, Germany, Italy, Luxembourg, the Netherlands and Spain should be phased out.

The relevant bodies should then demonstrate their continued relevance by further improving the system’s effectiveness, even if the new U.S. administration does not initially join some of the resulting initiatives. For example, the Bank for International Settlements, IMF and others should further harmonize formats for financial statistics and data collection. Global regulatory standards should be forcefully developed in new areas in which their need is increasingly evident, such as derivatives. And steps should be considered toward establishing a global level of supervision for limited but critical segments of the financial system, starting with those with no likely fiscal or quasi-fiscal impact in a crisis, such as credit rating agencies or audit firms.

The events of the past decade have amply demonstrated the need for strong global regulatory and supervisory arrangements to keep the inherent risks of cross-border financial integration in check. The prospect of a more unilateralist America should force a rapid realignment in China, other Asian countries and Europe, so that the existing, beneficial financial regulatory system is not left to unravel.

Nicolas Veron
Senior fellow at Bruegel, an economic think tank in Brussels, and a visiting fellow at the Peterson Institute for International Economics in Washington.

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* Both the author and Nikkei Asian Review gave us the permission to re-print the article. Thanks to them. The article was initially published on December 26, 2016.