Wednesday, 28 August 2019


David Lubin YESTERDAY Print this page16 The renminbi seems to be back in business as a Chinese tool of retaliation against US tariffs. A 1.5 per cent fall in the currency early this month in response to proposed new US tariffs was only a start. Since the middle of August the renminbi has weakened further, and is now 4 per cent weaker in dollar terms than at the start of the month. We may well see more of a “weaponised” renminbi, but there are four good reasons why Beijing might be wise to think before shooting. The first has to do with how China seeks to promote its place in the world. China has been at pains to manage the collapse of its relations with the US in a way that allows it to present itself as an alternative pillar of global order, and as a source of stability in the international system, not to mention moral authority. This has deep roots. Anyone investigating the history of Chinese statecraft will quickly come across an enduring distinction in Chinese thought: between wang dao, the kingly or righteous way, and ba dao, the way of the hegemon. Since Chinese thinkers and officials routinely describe US behaviour since the second world war as hegemonic, it behoves Chinese policymakers to do as much as possible to stay on the moral high ground in their behaviour towards Washington. Only in that way would President Xi Jinping be able properly to assert China’s claim to leadership. Indeed, China has a notable record of using exchange rate stability to enhance its reputation as a force for global stability. In the aftermath of the Asian crisis in 1997 and of the Global Financial Crisis in 2008, Chinese exchange rate stability was offered as a way of demonstrating China’s trustworthiness and its commitment to multilateral order. Devaluing the renminbi in a meaningful way now might have a different rationale, but the cost to China’s claim to virtue, and its bid to offer itself as a guardian of global stability, might be considerable. beyondbrics Emerging markets guest forum beyondbrics is a forum on emerging markets for contributors from the worlds of business, finance, politics, academia and the third sector. All views expressed are those of the author(s) and should not be taken as reflecting the views of the Financial Times. That’s particularly true because of the second problem China has in thinking about a weaker renminbi: it may not be all that effective in sustaining Chinese trade. One reason for this is the increasing co-movement with the renminbi of currencies in countries with which China competes. As the renminbi changes against the dollar, so do the Taiwan dollar, the Korean won, the Singapore dollar and the Indian rupee. In addition, the short-run impact of a weaker renminbi is more likely to curb imports than to expand exports, and so its effects might be contractionary. An ineffective devaluation of the renminbi would be particularly useless because of the third risk China needs to consider, namely the risk of retaliation by the US administration. Of this there is already plenty of evidence, of course. The US Treasury’s declaration of China as a “currency manipulator” on August 5 bears little relationship to the actual formal criteria that the Treasury uses to define that term, but equally the US had warned the Chinese back in May that these criteria don’t bind its hand. By abandoning a rules-based approach to the definition of currency manipulation, the US has opened wide the door to further antagonism, and Beijing should have no doubt that Washington will walk through that door if it wants to. The fourth, and possibly most self-destructive, risk that China has to consider is that a weaker renminbi might destabilise China’s capital account, fuelling capital outflows that would leave China’s policymakers feeling very uncomfortable. Indeed, there is already evidence that Chinese residents feel less confident that the renminbi is a reliable store of value, now that there is no longer a sense that the currency is destined to appreciate against the dollar. The best illustration of this comes from the “errors and omissions”, or unaccounted-for outflows, in China’s balance of payments. The past few years have seen these outflows rise a lot, averaging some $200bn per year during the past four calendar years, or almost 2 per cent of GDP; and around $90bn in the first three months of 2019 alone. These are scarily large numbers. The risk here is that Chinese expectations about the renminbi are “adaptive”: the more the exchange rate weakens, the more Chinese residents expect it to weaken, and so the demand for dollars goes up. In principle, the only way to deal with this risk would be for the PBoC to implement a large, one-off devaluation of the renminbi to a level at which dollars are so expensive that no one wants to buy them any more. This would be very dangerous, though: it presupposes that the PBoC could know in advance the “equilibrium” value of the renminbi. It would take an unusually brave central banker to claim such foresight, especially since that equilibrium value could itself be altered by the mere fact of such a dramatic change in policy. No one really knows precisely by what mechanism capital outflows from China have accelerated in recent years, but a very good candidate is tourism. The expenditure of outbound Chinese tourists abroad has risen a lot in recent years, and that increase very closely mirrors the rise in errors and omissions. So the suspicion must be that the increasing flow of Chinese tourists — nearly half of whom last year simply travelled to capital-controls-free Hong Kong and Macau — is just creating opportunities for unrecorded capital flight. This raises a disturbing possibility: that the most effective way for China to devalue the renminbi without the backfire of capital outflows would be simultaneously to stem the outflow of Chinese tourists. China has form in this regard, albeit for differing reasons: this month it suspended a programme that allowed individual tourists from 47 Chinese cities to travel to Taiwan. A more global restriction on Chinese tourism might make a devaluation of the renminbi “safer”, and it would have the collateral benefit of helping to increase China’s current account surplus, the evaporation of which in recent years owes a lot to rising tourism expenditure and which is almost certainly a source of unhappiness in Beijing, where mercantilism remains popular. But a world in which China could impose such draconian measures would be one in which nationalism had reached heights we haven’t yet seen. Let’s hope we don’t go there. David Lubin is head of emerging markets economics at Citi


Henny Sender YESTERDAY Print this page5 Chinese stocks have been among the smarter bets of the past 12 months. The Shanghai Composite index has done better over that period, in local currency terms, than the S&P 500 or the MSCI World indices. More rises are possible, as a greater weighting of Chinese stocks in global benchmarks unlocks billions of dollars of inflows from foreign funds. But the woes of Noah Holdings, a Shanghai-based wealth manager, serve as a reminder to investors of the vulnerabilities within the country’s financial system. Not long ago, Noah was an emblem of China’s burgeoning middle class, aiming to service clients with a net worth of at least Rmb1m ($140,000). It had offices in dozens of Chinese cities, a sales force of about 1,500 relationship managers and in its co-founder Wang Jingbo, a compelling, media-friendly presence. The company peddled everything from stakes in the funds of leading private equity firms including Blackstone and TPG, to the equities of local tech start-ups and interests in venture capital funds. Through its Gopher fund-management arm, its assets under management came to more than $25bn at the end of March this year. Today, though, Noah has become ensnared in a scandal that involved distributing a flawed (and allegedly fraudulent) investment product that may well turn out to be worth nothing. Its New York-listed shares — offered nine years ago by JPMorgan and Bank of America — have tumbled more than half from a peak in May 2018, when its market capitalisation topped $4bn. Problems began when Noah began distributing securities packaged by a Hong Kong-listed firm called Camsing International. The securities were allegedly backed by falsified transactions and accounts receivable with business partners including and, according to Caixin, a respected mainland financial publication. (The controlling shareholder of Camsing was detained last month by Shanghai police over suspected fraudulent activity.) Noah’s executives say they are victims of the scheme and the company is taking legal action to claw back about Rmb3.4bn in principal. No sooner had the news broken than regulators moved to issue toughened guidelines on supply-chain financing. The episode raises questions about the capability and risk management of a company that has received all kinds of accolades from industry publications. It also raises more serious questions about the possibility of contagion. Noah is not a bank, so cannot avail itself of support programmes from the People’s Bank of China. “If things go wrong, nobody is behind Noah,” says one Hong Kong-based financial analyst who believes the chances of any recovery of the money is low. Investors need to bear this in mind. In recent months, many fund managers appear obsessed over trade frictions with the US, rather than focusing on matters such as China’s rising debts, and the possibility of defaults and frauds. Fears over creditworthiness have been overshadowed by geopolitics, even as the country shifts from being a capital exporter to a capital importer, and as potential stress on reserves grows as the renminbi weakens. But many analysts believe wealth management products — a big chunk of a “shadow banking” sector worth about $9.1tn — are a source of systemic risk. When mainland savers lose money on their investments, their first resort is to look for the deep pockets behind the products they have purchased. In the past, that has meant going to the banks that have usually distributed products created by so-called trust companies. Pedestrians walking past the main branch of China Merchants Bank in Shenzhen in recent days, for example, can see signs held up by clients of that bank demanding compensation for losses. But if things go wrong outside the banking system, where do investors go for recompense? And where does the money of households looking to earn something on their savings go when Noah was seen to represent a badge of quality? “The confidence issue affects most asset management firms in China,” says one of Noah’s former executives. “There is a flight to quality. The issue though is really the investment environment. There are so many black swans.” Meanwhile, for Beijing the big question is how to balance concerns over social stability with the need to instil discipline on the firms that sell the products and the buyers of them. “Regulators are aggressively targeting moral hazard,” says Jason Bedford, an analyst at UBS in Hong Kong, speaking generally about the wealth management market. Noah is due to announce its second-quarter earnings on Wednesday. It could, in time, put the scandal behind it. But for now, investors should bear in mind that China’s development remains perilous — even for stocks apparently immune to trade tensions with the US.

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