China Research

Trump does not like China’s exchange rate policy. Furthermore, he criticizes Germany for using the “grossly undervalued “euro to undermine the export interests of the United States. Trump really thinks that the euro is a kind of implicit German mark. This latter conclusion is wrong, too. Germany alone would certainly prefer higher interest rates these days and, thus, also accept a probably stronger currency within the eurosystem. By the way, the euro was not a German invention but was created after a strong French initiative.

I don’t know what led Trump to the findings mentioned above more than his deeply anchored protectionism. Sure, the Chinese currency has been weakening on trend since early 2014. However, does this really reflect an ongoing severe manipulation of the yuan (also called renminbi , RMB)? China has indeed a managed floating exchange rate system – although I would even say a strongly managed exchange rate system. We also know that Chinese (provincial) leaders are deeply concerned about declining international competitiveness in a number of areas and about insufficient foreign market growth. This makes it logical that the Chinese currently are not working ambitiously for a stronger currency. But is China really dumping its currency? In my view it is rather the case that appreciation expectations of financial markets have gone (somewhat) too far in the past few years.

May be Chinese political leaders like their own current situation and see it also as a kind of fair currency equilibrium for some time in the future. Looking at China’s structural challenges, a steadily ongoing appreciation of the currency would not be quite logical anymore due to all the structural problems. Other countries with floating FX-rate policy are targeting or willingly influencing there exchange rates as well, at least from time to time. Japan may be mentioned in the first place – but Sweden’s central bank is currently also acting in favor of a relatively weak exchange rate.

Furthermore, the Trump administration has still not realized or accepted that China more recently announced that it is concentrating FX policy on a relatively stable RMB vis-à-vis its total currency basket rather than on the U.S.dollar alone. China has more lately been turning away from the buck to some (limited) extent. This is not unfair. China is an independent country that is free in its exchange rate policy as long as it does not violate or jeopardize global stability very visibly – but this is right now obviously not the case.

America is not always first on forex markets though the floating U.S. dollar remains the most important currency on global markets. Trump can only have a major and sustained impact on global FX markets – China included – if markets can relate him to really bad or good policy decisions or announcements. But he cannot just say how Beijing or Frankfurt should behave for improving his “America-First Policy” on global currency markets.

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

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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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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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