A top adviser to Chinese president Xi Jinping has conceded that poor communication contributed to global market anxiety over China’s falling currency, as he tried to reassure investors that Beijing is not pursuing competitive devaluation.
“Our system is not structured in a way to communicate seamlessly with the markets,” Fang Xinghai, vice-chairman of China’s securities regulator and a member of a key financial policy committee, told an audience in Davos. “You bet we can learn.”
Mr Fang sought to counter widespread concern that China is responding to a domestic economic slowdown by pushing the renminbi weaker. Fears of sharp depreciation have fuelled unprecedented capital outflows from China in recent months and are also blamed for sparking a global equity sell-off.
Speaking at the World Economic Forum in Davos, Mr Fang insisted China had “no basis” for seeking a weaker currency, while acknowledging that poor communication from authorities had contributed to the market turmoil this year.
Investors have struggled to interpret China’s exchange rate policy since a surprise move in August to let the renminbi weaken. Many western investors saw the move as the opening salvo in a currency war, while other analysts noted that, far from encouraging depreciation, China has been drawing down its foreign exchange in a bid to curb renminbi weakness
Seeking to clarify the country’s policy, Mr Fang, a financial veteran with a doctorate from Stanford University, said concerns about Chinese stock market volatility were overblown given its weak link to the real economy, but accepted currency volatility is more important.
“A depreciation of the currency is not in the interest of China. It’s not good for domestic consumption,” he said.
As European markets struggled to gain stability on Thursday morning, most delegates at Davos took the view that markets were more gloomy than was warranted by the fundamentals of the Chinese or global economy.
In a panel at the gathering, there was wide agreement that China’s economy was more healthy than much of the financial market turmoil this year suggested.
Although the economy was going through a huge transition towards services and consumption, Christine Lagarde, International Monetary Fund managing director, said growth would continue at a robust level because the transitions “are all manageable if the right policies are taken”.
Mr Fang insisted the Chinese economy was already moving towards consumption from investment. “Investment as a share of gross domestic product is shrinking and consumption is increasing … [the move] could have been bigger but it is moving in the right direction.”
He cited growth data released on Tuesday showing that consumption was 52.5 per cent of the economy last year, up from 49 per cent five years ago,
Responding to Mr Fang, Ms Lagarde accepted that China’s currency had been “quite stable” against its trading partners but urged the authorities in Beijing to improve the “clarity of communication”.
The transition to a more consumption based economy “will take a little time, but we believe [China] will deliver. It is a massive undertaking …but I have no doubt it will happen.”
Jack Lew, US Treasury secretary, shared the sanguine mood about China’s economic prospects. “I don’t see the situation today being so dramatically different from what we were seeing at the end of last year.”
He said the acid test would be if China stuck to its reform path and managed its currency without seeking an unjustified trade advantage.
Mr Fang acknowledged that China’s securities regulator had erred in imposing a controversial circuit-breaker mechanism that was widely blamed for amplifying a market sell-off early this month. Regulators subsequently suspended the mechanism less than a week after its introduction.
“The circuit breaker is a standard practice in a lot of western markets, so we thought that perhaps it could work in China as well,” Mr Fang told CNN from Davos.
“But of course you know, in our market, dominated by small investors, coupled with the risk of the depreciation of the currency and downward pressure of a lot of emerging markets, there is a lot of pressure for selling.”
Get alerts on Renminbi when a new story is published