China Research

China holds currently its annual big convention, the National People’s Congress (NPC). The NPC is not a major policy or decision forum but it brings together around 3000 people from all over the country to single out the (economic) state of the country, the outlook for the current year and the strategies behind the plans, particularly the GDP-growth target. Sometimes, also important news may be presented but this mandate is usually more directly in the hands of the most powerful Politburo Standing Committee of the Communist Party. The Prime Minister’s press conference at the end of the NPC week, however, deserves special attention as well. Still, the most interesting event during 2017 will most certainly be the 19^th National Congress of the Communist Party of China this coming fall.

On Sunday, March 5, Prime Minister Li Keqiang had his important performance announcing a slight reduction of 2016 year’s GDP-growth target of 6.5-7 % to around 6.5% in 2017 or better if possible (outcome 2016: 6.7%). This is certainly only a minor adjustment and within the limits of accuracy of statistical measurement (which still is not very precise when it comes to Chinese GDP). Anyway, Chinese growth expectations have really come down during the past few years – but China still cares strongly about “employment and the improvement of people’s lives” according to Li Keqiang. This certainly includes the environment. It can be added that Prime Minister Li really did not play down various major risks for the Chinese economy – but positive signals dominated.

There are altogether nine top priorities determining Chinese economic policy during 2017. The details are certainly not new but positively repeating major objectives from the important strategic Third Plenum in 2013. The encouraging conclusion is that reform policy is still on track – and hopefully also after the 19^th National Congress of the Communist Party of China (even if certain goal conflicts do not allow for an optimization of all the 60 reform chapters from 2013). Compromises will be needed.

Read more about the top nine priorities of the government for 2017 in an interesting document edited by the State Council (chairman: the Prime Minister) from March 5, 2017:

http://english.gov.cn/premier/news/2017/03/05/content_281475585531944.htm

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

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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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