Central bank measures help to return stability to markets
Updated: 2015-08-28 07:57
By Peter Liang(HK Edition)
|
|||||||
People's Bank of China, the nation's central bank, lowered interest rates and cut banks' reserve requirements on Tuesday to fine tune a weakening economy. As widely expected, these monetary measures helped stabilize the stock market which had crashed more than 16 percent in the first two days of the week.
Some stock analysts have criticized the central bank for not taking action soon enough, arguing that if the cuts were made over the weekend, the bloodbath on what has become widely known as "Black Monday" would not have happened.
They are missing the point. In a statement, the central bank explained clearly that its latest move was initiated in response to economic conditions. "China's economy is still facing downward pressures," the statement says. "As such, there is a need to use monetary policy tools ... to help support a stable and healthy development of the economy."
In normal circumstances, the performance of a stock market is a reflection of the underlying economic fundamentals. Strong measures to prop up share prices were introduced earlier to counter the devastating impact of massive "hostile" short selling that had grossly distorted equity prices and severely hurt investors' confidence.
In monitoring the central bank's action, it is important to bear in mind that China is the world's second largest economy with far-reaching global influence. The impact of whatever action it takes will be felt in capital markets around the world.
The lowering of the renminbi's exchange rate against the US dollar earlier this month was seen by some economists to have triggered a currency war. This is simply not true.
The central bank has said that adjusting the range of the renminbi's reference rate in relation to the US dollar was a one-off adjustment. This was to bring the exchange rate of the currency more in line with market expectations under a new rate-setting mechanism. In fact, the currencies of many emerging markets and neighboring countries, including South Korea, Australia, Vietnam, Malaysia and Singapore, were depreciated to various degrees against the US dollar before the yuan adjustment.
There is no indication that these countries are aggressively engaging in competitive depreciation to boost their respective competitiveness. The depreciation of many Asian currencies was largely triggered by the flow of capital from these countries to the US. This was at a time when many commodity-dependent economies are facing a prolonged slump.
The outflow of capital from these economies has intensified in recent months as the slowdown is widely perceived to be deepening. Investors are looking for a safe haven not only in the greenback but also in the Japanese yen and in the euro.
China obviously is not engaging in depreciation in order to boost exports. To do so, it would have to devalue its currency by more than 10 percent.
What is more, the slowdown in export growth was not due to the loss of competitiveness but rather to dwindling demand in major overseas markets, including the US and Europe. Cutting prices is not necessarily effective in boosting demand when consumers in those markets are holding back.
With its currency pegged to the greenback at a fixed rate, Hong Kong is finding itself in a rather difficult situation. Based on the strong economic performance in the first half year, Financial Secretary John Tsang Chun-wah has narrowed his growth rate forecast to the upper range of his earlier projection of between 1 percent and 3 percent. But some economists are taking a much dimmer view. They are projecting a maximum growth rate of 1 percent for 2015.
For now, at least, the threat of a US interest hike seems much less immediate. The global economic slowdown and the slow pace of recovery in the US may have convinced the Federal Reserve to postpone the rate increase to early 2016. An increase in the US interest rate in September, as earlier expected, could further intensify the outflow of capital from emerging markets, triggering a new wave of currency depreciation.
Hong Kong has become particularly sensitive to rate hikes because household debt has increased substantially in the past several years, thanks to escalating home prices. Recent surveys have shown that repayment of mortgage loans accounts for more than 50 percent of the total monthly income of an average family.
Unsurprisingly, consumer spending cannot be counted on to boost economic growth. Whether growth can meet the financial secretary's bullish projection depends on the performance of the mainland economy in coming months.
There are reasons to remain confident on this front. The numerous government measures introduced in the past several months are widely expected to take effect in restoring confidence in the economy and capital markets. This, in turn, can help boost consumer spending, which, together with the projected rise in expenditure on infrastructure, is expected to maintain a steady growth rate despite the slowdown in exports.
The author is a current affairs commentator.
(HK Edition 08/28/2015 page13)