For those who worry about the state of the world economy, China has long been a major reason to lose sleep. Its financial system labours under a mountain of loans, while weaker growth has prompted many Chinese people and companies to move their money overseas in recent years.
China still faces hefty debt and slowing growth. But even some vocal naysayers say the country has found ways to contain its problems, at least for now.
That improving outlook is, in part, reflected in China’s currency. The renminbi has surged in value in recent weeks, helped by growing confidence in the country’s economic prospects and by a political push for stability.
On Monday, Beijing set the currency’s value at its strongest level in nearly a year and a half. While China keeps a firm grip on its value, investor interest in the renminbi helps strengthen it.
Other signs point to China steadying its course after a stock market crash and surprise currency devaluation two years ago shook the financial world and brought the country’s long-term problems to the fore. China’s economic data suggest growth is continuing at a steady, if less heady, pace. Its stock market is rising again.
China has not solved its problems, of course. But investors and economists say its efforts to keep the economy under control have restored some faith in the country’s economic stewardship. In a sign of the government’s own confidence, it eliminated two policies over the weekend that made it more expensive for investors to bet that the renminbi would weaken, measures adopted after money began to leave the country beginning two years ago.
“Maybe China is the black swan and everything we know does not apply to China,” said Zhu Ning, a Tsinghua University economist who published a book last year critical of how the government has managed rising bank debt.
In terms of his earlier worries about China’s debt, he added, “I’m having doubts about what I believed as well.”
The currency, which is one of the main ways the government controls the economy, is a gauge of the country’s health and a source of tension for the United States and other trading partners. As the economy boomed, the renminbi largely strengthened. When growth faltered in recent years, money flooded out of the country, putting pressure on the currency.
The currency’s ups and downs play to the debt concerns.
China relied on a huge wave of lending to power its economy in the aftermath of the global financial crisis nearly a decade ago. While the strategy worked, it pushed China to similar debt levels, relative to the size of its economy, as the United States and other developed countries.
It did so in an extremely short amount of time, ringing alarm bells in Wall Street and elsewhere. As recently as May, Moody’s Investors Service, a rating firm, lowered its credit rating on the country’s debt, saying China’s spending spree would hurt long-term growth. The currency devaluation and market crash in 2015 also lessened confidence in Beijing.
Since then, the authorities have taken a number of steps that appear to be keeping the short-term problems at bay, though doing little for the longer term.
Beijing has strictly limited how much money can be sent abroad and has clamped down on what a growing number of the country’s leaders considered wasteful corporate purchases. The government has even resorted to strategies like face recognition software at automatic teller machines in Macau, a Chinese-controlled territory and gambling mecca that has its own, more readily convertible, currency and that has long had a reputation for money laundering.
The government has also kept lending from sources it trusts, like the country’s state-run banks. The push has been strong enough to maintain growth, even as officials have cracked down on other types of lending that they see as potentially disruptive. The stock market has begun to recover from its rout two years ago as rising real estate prices reassure investors about the health of China’s developers, and resilient economic growth suggests that corporate profits may rise.
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Charlene Chu, a China analyst at Autonomous Research, a global company advising hedge funds and other international money managers, has long worried that China’s debt accumulation was becoming unsustainable. Now, she said, Beijing has the ability to postpone its problems.
“What I appreciate now is there are just no independent actors here,” Chu said. “There is no bank that is going to say in November that, ‘our economic outlook is not good, we’re going to contract our loan book.’ They can muddle on for a while.”
But Ms. Chu and others see Beijing’s efforts as stopgaps: If it does not address its debt, China risks a long period of low growth, as in Japan. Some economic indicators suggest that China’s growth will begin to slow in the second half of this year.
But China’s surging currency suggests investors are not as worried as before. While China keeps a tight grip on the value of its currency, it allows the renminbi to move up or down by a certain amount in its local currency market.
After falling to almost 7 to the dollar at the end of last year, the renminbi has rebounded. On Monday morning, China’s central bank set the currency slightly stronger than 6.5 to the dollar for the first time since May 2016.
“The market has turned around significantly its bearish view” on the Chinese currency, said Zhou Hao, an economist in the Singapore office of Commerzbank.
The currency’s rally is partly political. China is preparing for a twice-a-decade Communist Party Congress to begin in Beijing on Oct. 18. President Xi Jinping has made clear that he wants stability until then in practically every aspect of the country’s life, including the economy.
Other currency moves — particularly the United States dollar — are contributing to the renminbi’s strength. The dollar has weakened as the Federal Reserve has been slow to raise rates because the American economy has grown a little less vigorously than anticipated and as inflation, in particular, has fallen short of expectations.
In Europe, which is finally recovering from the global economic crisis, the euro has staged a powerful rally against the dollar over the past year. So while the renminbi has strengthened against the dollar, it has weakened against the euro. That blunts the impact of a stronger currency in Chinese factories when they export goods, as a strong currency makes them less competitive.
China can win some political gains from its stronger currency. President Trump, who has long criticized China’s economic policies, has accused Beijing of keeping its currency artificially weak — an accusation that had been true in the past but is not today. It could also ease its limit on money outflows if it chooses.
“If the dollar is depreciating, China has a lot of easy policy options,” said Brad W. Setser, a former deputy assistant secretary of the United States Treasury who is now a China specialist at the Council on Foreign Relations.
Mr. Zhu, of Tsinghua University, said he believed that the Chinese government could continue to postpone its problems. But he warned against complacency, saying China’s debt could cause problems if it were not watched carefully.
“When will the bubble burst?” he said. “When nobody believes it’s a bubble.”
Report courtesy nytimes.com
Frontpage September 17, 2019