China’s master plan
China’s growing presence on the global stage has meant that changes in its domestic policies, most recently those related to its currency and stock market, have sent ripples across the world.
The reason is simple: change. China is evolving and the world is not ready for it. Change equals uncertainty, especially when China is not fully open about its intentions. Some argue that Beijing’s lack of transparency stems from the fact that it does not know where it wants to go. We take a different view.
We believe that China’s policymakers know exactly where they want to be in the future. Their ultimate objective, as we see it, is to solidify China’s place in the world through economic and trade linkages. At home, they want to maintain reliable and continued growth, which in turn legitimises the Communist party’s rule.
China’s reforms and initiatives domestically and internationally are inextricably linked and require the proverbial wall surrounding the economy to slowly come down. Such changes include the liberalisation of the currency and the opening up of the capital account; greater international involvement in geopolitical affairs; domestic financial reforms (e.g. local government financing, interest rates, etc.); the “One Belt, One Road” initiative to revive overland and maritime trade routes to Central Asia; and the creation of the Asian Infrastructure Investment Bank which expands China’s global influence.
No doubt the multitude of simultaneous changes are complex, so it comes as no surprise to us that they move forward in fits and starts. For instance, China wishes to allow a more hands-off approach to its currency as part of the opening up of its capital account, which is why the currency-fixing mechanism was changed on 11 August 2015. However, following a surprisingly adverse market reaction, policymakers once again got involved, this time to reduce undue currency volatility. We believe that China will eventually go through with the intended currency reform but most likely at a more apt time.
China’s critics tend to point to events such as these as evidence that policymakers are losing control not only over their financial markets but also over the economy as a whole. This view may be a bit sensationalistic: it is not unusual for policymakers around the world to stall or even reverse initiatives in response to changing circumstances. Unfortunately for China, critics have not been so forgiving.
China is moving at incredible speed, but will slow or accelerate its progress to suit its needs. Much to the chagrin of the rest of the world, the seemingly arbitrary decisions coming from Beijing create uncertainty, but the master plan remains in place with China’s sights set on the end goal.
Peter Sengelmann is senior portfolio manager, Emerging Market & Asian Debt – Local Currency and Local Bonds at NN Investment Partners.