China is likely to overcome its present difficulties and emerge as a major stabilising force in the global world economy and global financial markets, global asset manager AllianceBernstein said yesterday.
The key to this outcome is that the Chinese government remains committed to its far-reaching economic and financial reforms, said Hayden Briscoe, Director—Asia Pacific Fixed Income.
“While the policy balancing act in pursuing reforms and keeping the floor under economic growth is a difficult one, the Chinese government has so far succeeded,” said Briscoe. “Given the importance and potential benefits of the reforms, we believe the government will stay focused on the challenge.”
Major reforms are the internationalisation of China’s currency, the renminbi (RMB), and liberalisation of its capital markets. For China, the imperatives for reform are international as well as domestic.
“The global financial crisis, and the difficulty it caused for exporters and importers in accessing US dollar finance, taught China the limitations of conducting its trade in US dollars,” said Briscoe. “As a result of government actions since then, 20% of China’s global trade is now settled in renminbi (RMB). We see potential for that to increase to 50% in the next few years.”
By liberalising its capital markets China could mitigate the political sensitivity of needing to hold much of its nearly US$4 trillion in foreign exchange reserves in US government bonds. The US government has frequently accused China of buying Treasuries to keep its currency “undervalued”.
“One way to mitigate this would be for more of China’s claims on the US to be denominated in RMB, and one way for China to encourage foreigners to borrow in RMB is by liberalising the country’s capital markets,” said Briscoe. The move would eventually lead to China’s bond and equity markets being included in global indices, forcing significant country reallocations in global index-based portfolios.
Domestically, the next significant reform was expected to be the introduction of deposit insurance. “Policymakers hope it will encourage households to engage more with smaller banks as a safe alternative to the dominant five major banks, and help create a more dynamic banking sector which will be crucial to China’s economic rebalancing,” said Briscoe.
