Hong Kong: After a year that likely saw the weakest Chinese growth in a quarter century, 2016 began with a bump for policymakers on Monday as a sell-off in equities showed little sense of confidence that officials have a handle on their challenges.
One of the triggers for the worst start to a year on record for China’s stock market was a drop in the yuan, reflecting continuing demand among domestic investors to squirrel funds out of the country. The outpouring of capital from China in the most recent three months of figures available amounted to greater than the size of the Greek economy, according to data.
While the Communist leadership for years has signaled acceptance of a ‘new normal’ weaker growth rate, market volatility has forced unanticipated intervention, most notably with the mid-2015 suspension of some share trading. Capital outflows and stock sell-offs may pressure the People’s Bank of China (PBOC) again this year as officials try to sustain a stable exchange rate.
The PBOC acted on Tuesday, with an injection of 130 billion yuan ($20 billion) into the banking system using seven-day reverse repurchase agreements. Along with a pledge by the securities regulator to work to improve a new circuit-breaker system for large stock-market fluctuations, the efforts helped spur a morning rebound in equities.
"The economy seems to be stabilising a bit, but not so far from the surface I think the financial stability of the economy is deteriorating," said George Magnus, a London-based senior independent economic adviser to UBS Group.
China’s CSI 300 Index of equities fell 7 per cent on Monday, after data showed manufacturing contracted for a fifth straight month and investors anticipated the end of a ban on share sales by major stakeholders at the end of the week. The plunge set off a circuit-breaker that suspended trading for the rest of the day, and the yuan weakened the most since August. The CSI 300 was up 0.2 per cent.
The swings over the past year highlight challenges President Xi Jinping faces in fulfilling his pledge to give markets a greater say in the economy. The task is made tougher by a shift away from debt-fueled investment spending that’s proved rocky so far.
It will be quite a challenge to keep growth at the 6.5 per cent level — which Xi says is vital for China to double its gross domestic product and income per capita in the decade through 2020 — while at the same time removing excess capacity in heavy industry and deleveraging, said Louis Kuijs, Hong Kong- based head of Asia economics at Oxford Economics.
"The prospects for reform and deleveraging would have been better if growth ambitions had been more modest," he said.
This time different
Just a few years ago, Chinese policy makers faced with unsettled markets and weak data would have slashed borrowing costs and boosted government spending. Attempts to do so over the past 12 months have been complicated by separate measures to overhaul procedures at the central bank and local governments’ ability to raise and spend money.
For example, the PBOC’s decision last month to increasingly limit the use of the required reserve ratio as a tool to preserve financial stability robs the authority of what had been a key growth-boosting mechanism. There is now a lower likelihood of cuts to the RRR as a way to stoke expansion.
The administration’s pledge to cut debt also runs counter to indications that it favors a more "forceful" fiscal response to the economic slowdown. The mixed signals show that it’s proving difficult to strike a balance between pushing through reforms while keeping the economy afloat.
"I think the credibility of the authorities in this respect is fragile at best," said Magnus