1. Newsroom
  2. G20 in Shanghai: No Time to Monkey Around
Menu
Analysen 01.03.2016

G20 in Shanghai: No Time to Monkey Around

G20 in Shanghai: No Time to Monkey Around

The Year of the Monkey has yet to be kind to Chinese equity markets as the MSCI China remains 15% below the start of 2016.


Concerns surrounding softer global and domestic economic growth have been exacerbated by a weakening renminbi (RMB), leading many to question China’s ability to maintain its reform agenda.

Amid the backdrop, the People’s Bank of China (PBOC) Governor Zhou Xiaochuan conducted an interview with Caixin Weekly over the Lunar New Year. Normally, central bankers that reiterate policy goals rarely garner significant attention, but the article did the opposite.  Zhou’s interview was the governor’s first public appears since the devaluation of the RMB in August of 2015. Many wondered why the central bank governor was relatively non-existent over a period when the RMB depreciated 3% against the USD, or when the offshore yuan markets traded at a 2% discount to the onshore, as foreigners took the view that the PBOC would tolerate a precipitous drop in the currency.

The reason is likely due to the consistency of Zhou’s message, which is that the PBOC does not believe a significant devaluation in the RMB is necessary, particularly as the central bank looks to value the yuan against a basket of currencies and less so on the US dollar. This statement has remained consistent since the August 2015 devaluation, as well as the RMB’s admittance into International Monetary Fund’s special drawing rights.

Zhou may also be giving markets too much credit. With a trade surplus of $600bn in 2015, the PBOC governor axiomatically believes that the need is modicum for China to further weaken the RMB to significantly boost exports. As other developed economies struggle to weaken their currencies to tackle weak inflation and boost export growth, China’s RMB has appreciated more than 20% against the USD since the middle of 2005, with exports now accounting 13.6% of world exports from 7.4% over that time.

But market worries are justified. China’s foreign exchange reserves have fallen to levels last since seen in 2012, dropping 20% from its peak to offset depreciating pressure. Though the $3.2trn of remaining reserves account for about 30% of GDP, the market questions if the size of foreign exchange reserves belies the ability of the central bank to continue its reform efforts. While other Asian economies have also drawn down reserves, markets responded more favorably as communication of these central banks has been frequent and clear. The extension of market premiums should explain the very public announcement when Liu Shiyu was appointed as Party leader and chairman of the China Securities Regulatory Commission, replacing Xiao Gang.

Going into the Shanghai G20 meetings, expectations remain elevated. Given the nature of being host, Zhou will strive to become more visual, repeating his commitment to further develop a communication practice that is line with developed market peers. Central banks also hope to reach a coordinated response to buttress the global economy, which likely includes discussion regarding stabilizing influential currencies. While a currency agreement similar to the Plaza Accord is unlikely to be reached, a non-binding commitment is possible. But for the investor community, markets should, for the time being, welcome a plan to address the issue facing world markets. Clarity begets confidence, so for Zhou, the last thing he wants to see during the Year of the Monkey, is for the markets to go bananas.

Christopher Chu
Christopher Chu, Assistant Fund Manager - Asia

Expertise

Impact investing - Contributing to a more sustainable future

What are the key features of impact investing?

Read more

Meistgelesene News

Analysen 01.10.2020

COVID-19: Die UBP hält Sie auf dem Laufenden

Seit dem Ausbruch des Coronavirus begleiten und unterstützen wir unsere Kunden während dieser ungewöhnlichen Zeit einer weltweiten Gesundheitskrise. Die Bank informiert Sie regelmässig über die Anpassungen ihrer Massnahmen an die von den Gesundheitsbehörden vorgegebenen Vorsichtsregeln. Ausserdem kommen unsere Experten zu Wort, welche auf die Auswirkungen der Pandemie auf die Weltwirtschaft und die Finanzmärkte eingehen.

Analysen 30.06.2020

Aktualisierter Ausblick 2020

Weltwirtschaft - quo vadis?

Analysen 24.06.2020

Market turmoil brings new opportunities for pragmatic investors

March 2020 was difficult time for many investors, as COVID-19 spread across Europe and the US, leading to sharp sell-offs in fixed-income credit markets. While such market turbulence is not to be welcomed, its occurrence can create opportunities.

Auch lesenswert

Analysen 23.10.2020

Podcast - No election rally for the dollar

Our Global Head of Forex Strategy, Peter Kinsella, shares his thoughts on the forthcoming US presidential election.

Analysen 15.10.2020

The draw of the booming fintech sector

Martin Moeller, Portfolio Manager of our newly launched strategy, shares his view on why global fintech equities are an interesting investment right now.

Analysen 05.10.2020

Webinar – Opportunities in the Gold Mining Sector

On Thursday 1 October 2020, UBP's experts Norman Villamin and Peter Kinsella hosted a webinar with Evy Hambro, Global Head of Thematic and Sector Investing at Blackrock, to discuss what gold investors can expect in the quarters ahead.