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, Assistant Fund Manager - Asia