China highs and lows: No example for the Philippines

One economic reality is increasingly clear. The mainland Chinese economy is sputtering, perhaps more than the official numbers show, and Beijing is struggling to find solutions. 

From devaluing the Chinese yuan to ongoing interventions to shore up its stock market, China in its actions, however, should be no example for the Philippines to follow.

Capital market reforms, not interventions, are the more sustainable path to growth, whether in Manila or Beijing.

While China may well have hoped to focus on the anniversary of the end of the Second World War this September 2, the Chinese central bank’s not so “one off” major devaluation of the yuan, also known as the renminbi, on August 11 has had large parts of Asia worried about the prospects of another kind of war breaking out – a currency war as nations lower the value of their own currencies to remain competitive with China.

Vietnam has already taken steps to devalue its currency, the dong.

The Philippines is wise to not further any race to the bottom, even as the peso has reached five year lows to the US dollar. Finance Secretary Cesar Purisima in a statement released by the Departemnt of Finance noted: “We must be mindful of the trade-offs involved in using the exchange rate as a trade tool to boost competitiveness. There are unintended consequences. For one it may trigger competitive devaluations across the region as other currencies adopt similarly interventionist measures to reprice their currencies. (READ: PH warns vs using exchange rate as trade tool)

The surprise move by China’s central bank had followed disappointing trade data and a decision by the International Monetary Fund to delay any decision as to whether the yuan would be added to a so-called Special Drawing Rights “basket of currencies,” that is comprised of dollars, euros, pounds and yen.

Beijing’s commitment

“How low can China go?” Whether currency or stock market valuations, that and other questions are being raised in light of new doubts about Beijing’s commitment to its 2013 pledge to “give a decisive role to markets” in its economy. 

Talk persists about further Chinese stimulus programs and “quantitative easing with Chinese characteristics” to spur the nation’s slowing, but still growing, economy. Such questions are understandable as Beijing still struggles with its ongoing interventions in its equity markets, which have failed to halt major drops in the Shanghai and Shenzhen markets.  

More than a month after China’s equity indices plummeted, wiping out trillions of dollars in value, tremendous volatility remains a core theme for today’s China’s. What is clear is that no matter how large is Beijing’s wallet to finance purchases and how strong the government’s ability to devalue its currency or to order brokerages to do its bidding, more state money for populist programs and less will power for reform are not the long-term solutions to mainland China’s ongoing woes. That too is a lesson for the Philippines.

Direct and indirect government involvement to help shore up stock prices and placate the mainland Chinese small-scale shareholders who dominate the marketplace has included allowing some shares not to trade, the suspension of new IPOs, financial support for brokerages and the establishment of a market-stabilization fund to help inject funds into the market. China has also allowed its main state pension fund to invest in the stock market. 

To further try to reduce volatility, Beijing also put a halt to same-day margin lending, as well as banned some accounts from trading for three months. Arrests are also being made of individuals China suspects of illegal activities in the financial markets.

Yet, even in a “command economy” with trillions of dollars in reserves, it would be a mistake for mainland China’s leadership to think the central government’s ability to “command” domestic behavior can replace the fundamental need for changes and continued reform. 

So, what can Beijing do win back confidence in its economy? With the “little bric” of excessive bureaucracy, poorly conceived or enforced regulation, increased interventionism and persistent corruption taking their toll, here are two broad steps that China should take.

First, Beijing must re-commit to the opening of its financial markets and to a deepening of capital market reforms.  This is well in line with the one-time pledge to give a decisive role to markets, and in also in line with President Xi Jinping’s “Chinese Dream” and goal of a “moderately well off society” by 2020.

Last year, China’s State Council announced it would move forward on a number of financial reforms. These included making progress toward direct bond issuances by local governments, removing some of the limits on using financial derivatives, and streamlining the approval process for IPOs as well as increasing quotas for both inward and outward foreign investment. 

Some progress has already been made with innovations including the introduction last November of Shanghai-Hong Kong Stock Connect.  While subject to quotas, this link between the Shanghai Stock Exchange and the Hong Kong Stock Exchange has increased two-way market access and should be built on.

Second, Beijing must allow more of its businesses and entrepreneurs to succeed and to fail on their own. With every market intervention, investors may well be left wondering whether any business will ultimately succeed based on its fundamental merits vs. government involvement, including the ability of the central bank to intervene forcefully in currency markets.

Power to intervene

Already, it is clear that the nation’s stock markets are now reliant on official support, and shareholders eager to sell are being prevented from doing so, for now. With a lack of transparency continuing about the level and duration of government support measures, volatility persists. 

Beijing certainly has the power to intervene in its own markets. The nation also has the power to go lower, further devaluing its own currency – to the detriment of many of its Southeast Asian neighbors. More important, however, will be the will power to refrain from such interventionism in favor of pursuing the fundamental changes and continued reform that will help ensure more sustainable growth.

As with the United States’ own bailouts and market interventions during the Global Financial Crisis, decisions done in the heat of moment will be debated and second-guessed down the road. This will be true for Beijing’s actions.

That is no reason though for China to avoid concentrating on broader economic reforms. This will include continuing to take steps to build an enabling environment for the private sector – one marked by strengthened rule of law, greater transparency and accountability, and best practices in corporate governance. Such a commitment would in the long run be to the benefit of all of China’s businesses and can help drive long-time growth and job creation.

Such a path to more sustainable growth would be an example for the Philippines to emulate. Better yet, for a more competitive Philippines, the nation’s present and would-be leaders should come together now and show the way. – Rappler.com

 

Curtis S. Chin, a former U.S. Ambassador to and member of the Board of Directors of the Asian Development Bank, is managing director of advisory firm RiverPeak Group, LLC.  File him on Twitter at @CurtisSChin.