A brief update on the Chinese rebalancing

 

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The governor of the People’s Bank of China (PBoC), Zhou Xiaochuan, had some days ago an interesting interview with the financial magazine Caixin. You can find the English transcript here. The initial part of the interview is really worth reading (and not so much the last part, which deals with criptocurrencies and other topics that are not “core issues” for the PBoC at the moment). Right at the beginning Zhou talks about the prospects of an additional (or not) depreciation of the renmimbi and how China has moved from a dollar-peg regime to a basket-currency regime (although such baskets are still very loosely defined). And by the way, he is not very concerned about international reserves going down (around 100USD billion in January), because he thinks this process is mainly driven by Chinese firms trying to reduce their foreign currency denominated liabilities, a process that (obviously) will not be endless. As he says:

As such, it is necessary to distinguish capital outflows from capital flight. It is normal for export-oriented enterprises to choose their foreign exchange conversion strategies and adjust their liability structures after weighing benefits and costs. Such adjustment will not be endless. Such behaviors do influence capital flows and foreign exchange reserves, but they do not necessarily constitute capital flight.

But the most interesting part of the interview is when he talks about investment expenditures. Although he does not address explicitly in these paragraphs the rebalancing process (how to reduce current investment levels and increase at the same time consumption without any disruption), it is clear that some conclusions for the rebalancing issue can be drawn from the following statement [emphasis added]:

China’s saving rate remains quite high and will continue to be translated into high investment. Though part of this investment will be outward investment, its proportion will be very small compared with domestic investment. This will not lead to a moderation of investment gains and a reduction of investment opportunities in China. There is a good basis to keep domestic investment at reasonably high levels.

I have already explained with Félix López in this blog several times our views on the rebalancing issue (here and here, for instance), so there is no need in repeating them in full. But just to be clear: the longer it takes to Beijing to rein in the level of debt, the tougher the rebalancing process will eventually be.

You may be thinking that Governor Zhou’s statement is just one more statement; after all, some recent statements from different Chinese policymakers are so dissonant between them that one should not be surprised if this statement does not fit with the story Beijing is trying to put forward. But in this case, it does. Although Beijing is publicly defending supply-side reforms and consumption-led policies (together with policies aimed to increase the importance of the service sector), its real policy fits perfectly with Governor Zhou’s statement. You can simply check that taking a look at the evolution of total social financing: only in January it increased the staggering amount of (above) 3CNY trillion. The following graph shows the evolution of such a measure as a share of GDP:

Total social financing China

Source: PBoC and own elaboration

Probably you already know my conclusion: the real medium-term problem for China is not the loss in international reserves, as many analysts suggest, but the high levels of investment and the creation of more debt. I do not mean that the external problem is irrelevant: I only mean that every Chinese problem pales in comparison to the challenges the rebalancing dynamics is posing.

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