I was a lonely and noisy contrarian in those years. In December1998 when, as the head of China research, I was sacked by myemployer, HSBC Securities, for giving an interview to the SouthChina Morning Post (SCMP) on the basis of my published report whichargued that the renminbi was undervalued rather than overvalued,and that the currency would strengthen significantly against the USdollar. I further opined that the Chinese Ministry of Finance'splan to issue a 2 billion dollar "Yankee bond" was a "lose-loseproposition" because China's foreign reserves were already too high(merely 130 billion USD at the time). It was not my radical view that caused my sacking, though my viewdid irritate some inside HSBC and among the bank's clients. No, thereal reason for my sacking was that HSBC, together with GoldmanSachs, was the underwriter of the Yankee bond. Out of work for a few months, I was hired in 1999 as the head ofChina research by UBS, one of my former employers. I repeated mycontrarian view in reports and newspaper op-eds with even greaterconviction. And I almost lost my job again, though for a differentreason. A powerful player at the investment bank's head office,during his visit to Hong Kong, came to my office for a chat. I wasout of the office so he left me a handwritten note to say that Iwas "dead wrong" and that I ought to "heed the house view". I kepthis note, but ignored his warning. ______________________ Don't write off the yuan, by Joe Zhang, Nikkei Asia Review, 28 January 2016, http://asia.nikkei.com/Viewpoints/Viewpoints/Don-t-write-off-the-yuan In the late 1990s, the consensus inside and outside China was thatthe Chinese yuan would collapse. I do not know of a China expertwho did not write articles to that effect. Economists at investmentbanks routinely rolled over their forecasts of a yuan depreciationon a monthly and quarterly basis. I was a lonely and noisy contrarian in those years, first as headof China research at HSBC Securities and then in a comparable postat UBS, insisting in published articles and interviews that thecurrency was more likely to appreciate than to decline. Today, theworld has reached a similar consensus about the likelihood of yuandepreciation. But I feel that the “China watching” industry may bemaking the same mistake. The argument for a yuan depreciation is widely aired, so I will notrepeat it. But there are several key factors that I think observershave chosen to neglect. First, fair exchange rates are notdefined as a magic number; they make up a widerange. In my view, today's yuan is still within that fair range,whichever metric you look at -- for example, its purchasing powerrelative to other currencies. Second, whatever the calculation, the ultimate proof of thefairness of an exchange rate is the country's external tradebalance. On that score, the yuan is doing very well. China's tradesurpluses in recent months have been near record highs. The truthis that China remains an impressive export machine despite someobvious erosion of its competitiveness, and despite theprotectionism of its trading partners. Due to the collapse ofcommodity prices in recent years, China's import bills willcontinue to shrink much faster than the decline of its exports,yielding growing trade surpluses. Indeed, China's trade surplus will likely grow in the next fewyears in either scenario; if the global economy turns around, whichmeans higher commodity prices, China's exports will grow on theback of higher demand from the West for its products. If the globaleconomy stays weak, China's import bills will stay low thanks tolow commodity prices. Third, despite increased anxiety in recent years among Chinesecitizens as well as businessmen, China still boasts remarkablepolitical stability, and the government still commands popularsupport. Importantly, economic freedom is now growing rather thandeclining. That means that capital flight will be limited. It mayeven have run its full course. However, note that the state sectoris still in control of at least two-thirds of theeconomy. Finally, throughout the late 1980s and the 1990s, there was anactive black market for foreign currency exchange in China, and thedollar traded between 10-15yuanon the black market, compared with 5-8 in the official market. Evenwhen I was a manager at the central bank in 1989 I had to buydollars from the black market to help finance my overseaseducation. That illustrates how tight the market was at thetime. In those years, and even much earlier, the People's Bank of Chinahad to ration foreign exchange through quotas and foreign exchangecertificates. Many draconian rules were enforced to maintainexchange rates. Not surprisingly, there was rampant corruption inthe process, and large numbers of officials and businessmen werejailed for violations. No real pressure By comparison, today's situation is vastly different. The rationingsystem is long gone, as is the foreign exchange certificate. Eachyear, millions of Chinese citizens readily obtain foreign exchangefrom official channels to finance overseas travel, education,purchases, and even investments. Therefore, there is no blackmarket for foreign exchange trading. I have to conclude that thereis no real pressure on the yuan. China's foreign reserves of morethan $3 trillion are in any case too high for any pressure tosucceed. China's share of global gross domestic product has grown from 3.5%in 1997 to more than 13.5%. The yuan is slowly but surely beingaccepted by China's trading partners as a medium of exchange. Eventhe International Monetary Fund is accepting it as a reservecurrency. In the past decade, the yuan has appreciatedsignificantly against almost every major currency in the world.Given the weakness of China's economy today, Beijing has incentivesto unwind some of that. Beijing's clumsy maneuver last August, when it depreciated thecurrency without warning and then reversed course, gave the gameaway. But the panic in the global market has caught Chineseofficials by surprise. They now realized that China is not justanother emerging market. It is an anchor of the global economy.That was the message from the global market. Even the devaluationof the Japanese yen by as much as a third in recent years did notcause the global market to react as violently as China's 2% to 3%depreciation. Precisely because of that drama, Beijing is now working hard toreverse market expectations. To prevail will not be too hard.China's performance as a major stabilizing force in the 1998 Asianfinancial crisis and the 2008 subprime crisis has earned Beijing ahigh degree of credibility, and Beijing will not want to squanderthat economic good will. After all, exchange rates are not crucial to China's export growth,which is influenced by many other more important factors, such as“red tape,” and taxes. If Beijing is desperate to stimulate theeconomy, it has many other levers to pull. It is not doing thisyet, and does not seem desperate. A slower economic growth rate isnow seen as an acceptable new normal by Beijing. After all, manyacademics have shown that a weaker currency does not boost exportsas much as was commonly assumed. On the contrary, it erodesconfidence, creates uncertainty, and causes import bills toswell. All these considerations underline Beijing's recent efforts tostabilize the foreign exchange market. It is succeeding and willprevail soon. It is dangerous to make predictions, but I am stilltempted. I think the yuan is likely to be stable, and may evenappreciate against the dollar in the next fewyears. Joe Zhang is chairman of China Smartpay Group andauthor of "Party Man, Company Man: Is China's State CapitalismDoomed?" |
Powered by Discuz! X3.5
© 2001-2026 Discuz! Team.
