With the 19th National Congress of the Communist Party of China having just concluded, market watchers are intensely interested in what will happen next with the economy and the Renminbi (RMB). The New Renminbi Reality Forum organised by Bloomberg Live and ANZ Bank provided timely insights from the experts.
While there has been much talk about a stronger economy and policymakers have initiatives underway that could be beneficial in the longer term, there are still short-term uncertainties and concerns about implementation of long-term policy changes.
“This is a story of debt growth,” observed Luke Spajic, executive vice president at PIMCO investment management firm. Debt is still increasing, and pockets of the economy have been forced to bring leverage down. Policies out of Beijing such as asset reform that would result in structural reform or short-term pain aren’t happening, however, so Spajic expects that transformational change is not in the cards.
BlackRock MD Neeraj Seth, on the other hand, noted that the issues of specific industries excess supply still need to be addressed. He thus expects to see a refocus on the reform agenda and realignment of power bases, with structural reforms being made to ensure a proper allocation of capital, stop misallocation, and make companies more efficient.
Vickers Venture Partners vice chairman Jeffery Chi similarly expects changes to happen, with more effective and efficient state-owned enterprises SOEs taking over and combining with less effective ones. The reason, he said, is that the government is keen to see increased efficiencies and policies are in place to encourage SOEs to renew themselves. Chi also noted that “China is moving to sharing the prosperity,” saying also that “Xi Jin Ping is not emphasizing GDP anymore. Chi focuses instead on the producer price index.
Looking more broadly at the policy framework driving these changes, Lee Kuan Yew School of Public Policy dean Kishore Mahbubani said that “one of the big results of the last financial crisis is that China realized it cannot depend on the US market. They’re going to shift toward domestic demand, where the US cannot affect the Chinese economy.” In the short term, this means China will make sure everything is going well. In the long run, you’re going to have a contraction if China emerges as the number one currency and the reserve currency is the US dollar. He thus expects a continuation of the long-term plan to ensure that China does not depend on the US dollar.
The outlook for the RMB
While internationalization in the long term is important, corporates are also quite interested in the short-term outlook for foreign exchange rates.
In the last two years, ICBC Credit Suisse Asset Management International CEO Richard Tang said, currency rates have been quite volatile. And if one goes back to January, said ANZ Bank Head of RMB Trading Patrick Wu, there were many predictions that that dollar-RMB rate would move to about 7.2-7.4 per US dollar. Despite those predictions, the FX rate has stayed below RMB 7.0 per dollar for the year. As Wu noted, in perhaps an understatement, “six-point-something is a surprise.”
Going forward, Wu expects the exchange rate to remain in a relatively stable range of 6.5-7.0 per US dollar. State Street Global Advisors AP Head of Fixed Income Kheng Siang Ng forecast a narrower trading band, saying he expects that ongoing reforms and robust growth will lead to the RMB being on the stronger side of that band.
The major drivers for the exchange rate, Ng opined, are how the Chinese government deals with debt levels and restructures, what the Peoples Bank of China (PBOC) policies are and how they deal with deleveraging, and how economic growth rates turn out. Continued growth of about 6.5% would boost confidence, he observed, while a drop of 1-2 percent in the growth rate would cause concern.
Investment opportunities
If you’re a fixed income investor, Seth said, “this is one of the biggest stories in your career.” Returns are linked with internationalisation of the currency and integration of Chinese capital markets, he said, as well as efficient allocation of capital. “As the market continues to open, it’s almost impossible for any fixed income investor to ignore. There’s value in the higher end of the spectrum.”
Spajic focused on more on real estate, saying that “this is the largest property market on the planet.” China is adding 12-15 million people a year to the urban population, he noted, and housing units need to be linked with roads and schools and other infrastructure. “If they get a regional town wrong, they can always offer incentives, offer opportunities to urbanize. Another 150 million people may need to move to cities.” Even though excess inventory from the past 3-4 years inventory has cleared, however, he said: “it feels like tightening is beginning to bite, and (prices) next year will be softer.”
A focus on innovation
As the cost of labor in China has increased, Seth observed, low-cost labor being replaced by technology. The continuation of foreign direct investment will then shift to having more to do with proximity to the customer, talent and innovation than with labor costs.
The focus on innovation has also led to the recognition that the country needs a deeper investment into basic research, Chi said, and the upgrading of academia. Government initiatives of the last few years including the push towards innovation and encouragement of investment in deeper technology rather than consumer-based innovation will continue.
A focus on change
While much will depend on the actual outcome of policy initiatives, the focus on structural reform and ongoing internationalization of the RMB as well as innovation are themes that corporates will want to continue focusing on as they look at their strategy for the year ahead.