Recent Turns in the Chinese Economy Sunanda Sen

Chinese economy and global interdependence: The Changing Pattern ‘Guided Finance Pattern of governance since … ‘Guided Finance’…de-regulation Deng Xiao Ping … regulated and directed credit from banks…fixed RMB rate at 8.3 to USD till 2005 …. limits on stock market ( RMB and Dollar shares) … directed incentives to the FDI …. Effective management of global crisis with $586 bn stimulus package distributed via banks and government expenditure. 2

Changing Pattern since 2005 Noticeable shifts.. gradual opening up of financial markets … de-linking Yuan from dollar in a managed rate around dollar….. larger inflows of short term capital, especially with entry of the Qualified FIIs who can now trade in the A shares (denominated in RMB) as well, in addition to the B ( dollar) shares in the stock market. … temporary devaluation with rising speculation, covering stocks, real estates,major banks selling Wealth Management Products… shadow banking practices….launch of the Shanghai Free Trade area in 2014

Major turbulance in China’s financial market Downturn in the stock exchanges: Shanghai Composite Index : 5120 ( June 11, 2015) 3806 (July 9) 3552 (Aug 21) [Bloomberg]. Wiped out, in less than a month between July-August, more than $3 trillion of stock holders’ wealth. Dropped further to 2749 on January 26, 2016 B By February 2016 wavering between 2700 and

Shanghai Stock Composite Index

Role of institutions in China’s recent financial crisis Credit-fuelled growth in the wake of the 2008 global financial crisis with $586bn injection ….SoBs lent directly to SoCs and land developers leading to expansion of infrastructure and real estates, with “investment” bubble in the Chinese economy. De-regulation of finance..uncertainty..Rise of speculation and ‘shadow banking’

Debt instruments sold through shadow banks – destabilising effects A typical arrangement with shadow banking…. bank sets up trust company that borrows from individual investors against sale of securities, in effect, high-yield junk bonds. The proceeds invested, usually in real estate or in companies related to real-estate development, such as construction. With a large build-up of bad debt, much related to real estate,… fall in property prices … trust companies go broke… banks which invested in these companies,in trouble. Speculators shift to stock markets by end 2014 with stock boom..state cooperates by encouraging margins as borrowings.. ….asset bubble in stocks …collapse of stock prices… currency rates drop…capital flight….

Private Debt to GDP

China’s Capital Flight in Recent Times Speculators bet heavily against the yuan as well as stock prices January2016, PBoC directing state banks to buy offshore Yuan in Hong Kong to support Yuan by countering the short sellers With yuan suddenly scarce in Hong Kong, annualized cost of borrowing overnight hit percent on Jan. 12— dropped to 8 percent Jan13 Use of circuit breakers in stock market by China Securities Regulatory Commission (CSRC) since January to suspend trading in stock markets Periodically government shored up financial and stock markets through backdoor money market injections Jan 2 nd week poured $20bn into the money markets - but not much has worked. Gradual, managed depreciation makes the yuan a one-way bet for investors who see the currency weaken even as the central bank intervenes to prop it up. Policy insiders are now calling for a quick and sharp yuan depreciation, backed by tighter capital controls to curb speculation and the flight of money out of the country. 10

idUSKBN0UL The cost of the PBOC's intervention has been high. China's foreign exchange reserves fell by more than half a trillion dollars last year as the central bank bought yuan to support the exchange rate, with reserves dropping by a record $107.9 billion in December alone.

policymakers-idUSKBN0UL

China’s Real Effective Exchange Rates sourcehttps:// 13

REER China and other countries 14

China and the world economy Tendencies for Yuan rate to slide down affects capital flows more than trade ( via REER) causing capital outflows and drop in SHSCOM Stock market in China also affected by its preceding boom which did not last. China demonstrates a new pattern of relation between the state and market… With China’s “new normal” growth targeted at 7% or less a re- balancing act. Reflects a Polyanisque “ double movement” to help distribution and quell rising discontent and protests within the country. An apparent contradiction between those holding portfolio of large savings [ 50% of GDP with households providing 35%] and aiming to export capital with strong RMB and easy capital controls vis a vis state wanting rebalancing. Reforms originating from the National Peoples’ Congress (NPC) reflect changing composition of the ruling party. End result of concern to Rest of World. 15

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