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The internationalisation of China’s currency has stalled
And the forthcoming Communist Party congress is unlikely to kick-start it
Print edition | Finance and economics
Oct 14th 2017
ON OCTOBER 18TH, President Xi Jinping will preside in Beijing over the most important political event in five years. At the Communist Party’s 19th congress much will be made of the triumphs achieved in nearly four decades of reform and opening up. So expect a glossing over of one part of that process where progress has largely stalled: the “internationalisation” of China’s currency, the yuan.
This seems odd. Just a year ago, the yuan became the fifth currency in the basket that forms the IMF’s Special Drawing Right (SDR). This marked, in the words of Zhou Xiaochuan, China’s central-bank governor, in a recent interview with Caijing, a financial magazine, “historic progress”. Symbolically, China’s monetary system had been awarded the IMF’s seal of approval. A further boost to prestige was the announcement in June this year that some Chinese shares would be included in two stockmarket benchmarks from MSCI.
Yet the yuan’s international reach has in fact fallen in the past two years. It has regained its ranking as the world’s fifth most active for international payments, after slipping to sixth in 2016. But its share of this market has slipped from 2.8% in August 2015 to 1.9% now (see chart). Use of the yuan in global bond markets over this period has fallen by half, as companies have instead raised funds within China. In Hong Kong, the largest offshore market, yuan deposits have plunged by 47% from their peak in December 2014. Of the foreign-exchange reserves held by the world’s governments, just 1.1% are in yuan, compared with 64% for the dollar.
The constraints on the internationalisation of the currency are largely self-imposed—and in many cases predated admission to the SDR. A minor devaluation of the yuan in August 2015, intended to make the currency more flexible, was botched. This led to speculation about further falls in the yuan’s value, and forced the central bank to tighten capital controls and spend foreign-exchange reserves to prop it up.
Since January this year, China’s reserves have been growing again. But stringent capital controls remain in place. In his interview Mr Zhou called for a renewed drive to free up China’s financial system, citing a “troika” of targets: increased foreign trade and investment; a more market-based exchange rate; and a relaxation of capital controls. He said there was a “time window” for this. If missed, the cost of reform would be higher in the future.
Few observers, however, take Mr Zhou’s comments as official policy. In office since 2002, he is expected to be replaced next year. He represents one side of a continuing debate. In September two capital-control rules were indeed eased, but foreign traders tended to share the view of Mitul Kotecha of Barclays, that the move was purely cosmetic. In the words of Eswar Prasad, an economist at Cornell University and author of “Gaining Currency”, a book about the yuan, “what the government giveth, the government can taketh away.” Most foreign investors are all too aware of that.
So the currency’s international advance is unlikely to resume soon. More likely is a gradual opening of yuan markets. One avenue is to standardise systems such as the China International Payment System, which processes cross-border payments. Another is to expand the Bond Connect and Stock Connect programmes that link Chinese markets to Hong Kong. A third involves China’s intense diplomatic drive to push its “Belt and Road Initiative”, involving massive investments in infrastructure to boost transport, trade and investment links between China and Central Asia, Europe and Africa.
However, David Woo of Bank of America Merrill Lynch argues that none of this is likely to lead to a big surge in foreign holdings of Chinese financial assets. That will depend on the liberalising measures Mr Zhou is advocating, as indeed does the future shape of the Chinese economy. “There isn’t a single country,” Mr Zhou argued, “that can achieve an open economy with strict foreign-exchange controls.”
But his apparent belief that measures already taken, such as joining the SDR basket, have set the yuan on a remorseless path towards internationalisation has been contradicted by the experience of the past two years. The party’s watchword remains “stability”. And whatever the benefits of capital-account liberalisation, it would bring a measure of unpredictability. In a battle between openness and control, Mr Xi is likely to favour control.
Eurozone Business, Consumer Confidence Surges Despite ECB Signals
Surveys point to better-than-expected economic growth this year
Robotic arms on the assembly line at an electric automobile-battery factory in Kamenz, Germany. Businesses and households across the eurozone were more upbeat about their prospects than at any time in over a decade during September. PHOTO: KRISZTIAN BOCSI/BLOOMBERG NEWS
By
Paul Hannon
Updated Sept. 28, 2017 8:19 a.m. ET
Businesses and households across the eurozone were more upbeat about their prospects than at any time in over a decade during September, an indication that they are undaunted by the prospect of reduced stimulus from the European Central Bank next year.
The European Commission Thursday said its Economic Sentiment Indicator, which aggregates business and consumer confidence, rose to 113.0 from 111.9 in August, to reach its highest level since June 2007. Economists surveyed by The Wall Street Journal had expected a much smaller rise.
The strengthening of confidence suggests the eurozone economy will continue to enjoy a more robust pace of growth in the final months of what has already been a surprisingly strong year. More-confident businesses tend to invest more, while optimistic households spend more freely.
The rise in confidence will also give some comfort to the ECB, which is contemplating a reduction in the stimulus it provides to the eurozone economy from early next year. ECB President Mario Draghi Monday told lawmakers in the European Parliament that he and his colleagues on the governing council will “decide later this year on a recalibration of our instruments.”
That recalibration is expected to begin with a reduction in its monthly purchases of government bonds from January, and is likely to be announced when the governing council next meets on Oct. 26.
Mr. Draghi was repeating guidance he first provided at the ECB’s Sep. 7 meeting, and the commission’s confidence measure suggests businesses and households have taken that in their stride.
The pickup in confidence is consistent with other surveys of businesses that suggest the eurozone economy grew in the third quarter at around the same strong pace as it did in the second. The ECB’s economists expect the economy to grow 2.2% this year, which would be its best showing since 2007.
The commission’s survey recorded a pickup in confidence in Germany ahead of Sunday’s parliamentary elections, as well as in France, Italy and Spain.
There was additional encouragement for the ECB in the survey, which found that consumers expect prices to rise more rapidly over the coming 12 months than they did in August, while businesses also expect to raise their prices more rapidly.
“This indicates that improvements in core inflation could be sooner than expected,” said Bert Colijn, an economist at ING Bank. “That should leave the ECB confident to taper.”
Despite stronger growth and falling unemployment, the eurozone’s annual rate of inflation remains well short of the ECB’s target, which is set at just under 2%.
Figures released Thursday suggest the inflation rate hasn’t moved signicantly toward the target in September. Germany’s statistics office said consumer prices were 1.8% higher than a year earlier, a rate of inflation unchanged from August and below the 1.9% forecast by economists who were polled by the Journal.
In Spain, the rate of inflation slowed to 1.9% in September from 2% in August. Figures for the eurozone as a whole will be released Friday.
—Nina Adam in Frankfurt contributed to this article.
ECB Doesn’t Need to Constantly ‘Push on the Gas’ With QE, Weidmann Says
German central bank president says ECB policies would still be stimulative even if net bond purchases fell to zero
German Bundesbank President Jens Weidmann speaking at the 'G20 Africa Partnership Conference' in Berlin, June 13, 2017. PHOTO:UNDEFINED
By
Tom Fairless
Oct. 13, 2017 10:00 a.m. ET
WASHINGTON—The European Central Bank should start reducing its bond purchases as the eurozone economy picks up, German central-bank president Jens Weidmann argued Friday, two weeks ahead of a key policy meeting where the ECB is expected to lay out its next steps.
“I don’t see the need to continually push on the gas,” Mr. Weidmann said at a news conference in Washington, pointing to a recent upgrade in economic growth forecasts for the 19-nation currency bloc.
He argued that the ECB’s policies will continue to stimulate the eurozone economy even if net bond purchases are cut to zero, because the bank will still hold a large stock of QE bonds on its balance sheet. Central banks across advanced economies are still in “ultra-expansionary” mode despite accelerating growth, he said.
The ECB is currently buying €60 billion per month of mainly government bonds under its quantitative-easing program, which is due to run at least through December. The bank is expected to announce on Oct. 26 what will happen to QE next year.
Top ECB officials have recently urged caution, pointing to still-weak inflation, which has undershot for years. Peter Praet, the ECB’s chief economist, has suggested QE might be extended for a lengthy period, perhaps nine months, but at a much reduced pace.
Mr. Weidmann acknowledged that inflation is likely to rise only gradually over the coming years. But he called for a “relatively swift normalization” of ECB policies once the economic outlook allows it.
“It’s not about hitting the brake but not constantly pushing on the gas,” said Mr. Weidmann, who is a member of the ECB’s governing council.
Japan’s Business Confidence at 10-Year High Ahead of Election
Big manufacturers see profits rising 4.7% in the year ending March 2018
By
Megumi Fujikawa
Updated Oct. 2, 2017 1:01 a.m. ET
TOKYO—Business confidence is riding a 10-year high in Japan as the economy enjoys its longest stretch of growth in more than a decade, a central bank survey showed, less than three weeks before a national election.
Prime Minister Shinzo Abe is highlighting his handling of the economy and his Abenomics economic program in an election campaign he was initially expected to win easily before two opposition parties joined forces last week.
While opinion polls show Mr. Abe’s opponents may be eating into his large lead, the latest Bank of Japan survey of businesses finds that in company board rooms at least, bullish sentiment over Japan’s outlook under its current leadership is strong.
The quarterly tankan survey of companies showed an improvement in business sentiment across a wide range of businesses from small chemical makers to the nation’s giant technology and auto manufacturers.
The business-sentiment index among large manufacturers rose to plus 22 in the July-September quarter from plus 17 previously, its highest reading since September 2007. Results for small manufacturers and large and small nonmanufacturers also matched or outperformed economists’ expectations.
Big manufacturers see their profits growing by 4.7% in the year ending March 2018, contrasting sharply with the 3.3% drop they forecast for the year just three months ago, with recent weakness in the yen and continued strength in tech demand helping to fuel optimism over earnings.
Heavy-machinery maker Komatsu Ltd.’s net profit jumped 134% in the April-June quarter, while Soken Chemical & Engineering Co. said last week that it expects net profit to almost double in the first half of the business year—a reflection of increasing demand for electronics-related materials including liquid-crystal displays.
Analysts say the data will likely give Mr. Abe’s Liberal Democratic Party a tailwind as he heads into the general election on Oct. 22. A new party led by Tokyo Gov. Yuriko Koike is his main challenger following the unexpected decision by the Democratic Party to recommend that its members run under the ticket of Ms. Koike’s party.
“The tankan result gives clearer evidence that the economy is firmly recovering and that people have started to feel it gradually, though not strongly. Ultimately it is supportive of the current administration,” said Takuji Aida, chief Japan economist at Société Générale.
The tankan result comes after gross domestic product data showing that Japan’s economy has expanded for six straight quarters, its longest stretch of growth since 2006.
Mr. Aida said he sees only a low possibility that Ms. Koike’s Party of Hope can take power, given that details of the party’s policies are still unclear and the unity of the nascent party members is weak. Cracks in the solidarity with Democratic Party members also appeared at the weekend when Ms. Koike said she would reject candidates who don’t align with her hawkish views on security and the constitution.
Ms. Koike may be able to deflect attention away from the recent growth in the economy and toward a scheduled sales-tax increase she wants to postpone, said SMBC Friend Securities chief market economist Mari Iwashita. But while that may gain traction among pensioners worried about household finances, it wouldn’t be enough for Mr. Abe’s coalition to lose its majority, she said.
Global Economic Challenges and Opportunities
Speech to the 59th Annual Meeting of the National Association for Business Economics Tao Zhang, Deputy Managing Director, International Monetary Fund Cleveland
September 25, 2017
Good morning. Thank you, Manuel, for your kind introduction. I greatly appreciate the speaking invitation from National Association for Business Economics. And I am very happy to join you today in Cleveland. As you know, I have just come from Washington where Nationals fans are very excited about the World Series. Who knows? They might be meeting the Indians. So, best wishes to both teams.
We are meeting at a moment of serious global concerns: natural disasters, geopolitical tensions, deep political divisions in many countries.
Allow me, then, to bring offer some good news today.
Nearly a decade after the global financial crisis, the global economy is getting better. The most recent IMF forecast, issued in July, projected global growth at 3.5 percent this year and 3.6 percent in 2018, up from 3.2 percent in 2016. The Fund will issue its next World Economic Outlook in a week, and there is every reason to see these trends continuing.
This first chart shows how our forecasts have changed over the past five years. The rebound from the crisis took longer than expected to arrive, but we now are seeing positive momentum.
Here in the United States, our July forecast saw growth accelerating from 1.6 percent last year to 2.1 percent this year and next. By early next year, the United States could be experiencing its second-longest expansion since 1850.
Most importantly, many countries are creating new jobs at a healthy pace. Over the past year in the United States, almost 2.2 million jobs were created. As this second chart shows, the unemployment rate is close to the lows we saw in 2000.
What does this mean for the IMF? As the impact of the global crisis has faded, countries have found their financial footing again.
So, our emergency lending has naturally declined—as the chart on the left side of this next slide demonstrates. This is also a good sign. Our outstanding loans are now one-half of their peak in 2012.
However, at the same time, the world’s poorest countries are seeking higher levels of financial support through our concessional lending facilities. This is reflected in the chart. A major reason for the increase in borrowing is the impact of the sharp fall in commodities prices experienced after 2015.
So clearly, the picture is not all positive. But, all in all, significant healing has taken place over the past several years.
Now there is more to be done. From a historical perspective, global growth of 3 and one-half percent is weak. Achieving stronger growth will require the right combination of policies, especially to reinforce labor and capital markets. Many industries need to operate more efficiently, and competitiveness needs to be strengthened. This will require a range of reforms.
So, I would like to focus my remarks on four broad topics that I believe deserve attention:
· the slowdown in productivity growth;
· income polarization;
· low inflation and low levels of wage growth;
· and the continuing need for global cooperation.
1: The productivity slowdown
Let’s begin with productivity. After the global financial crisis, it became clear that we were witnessing a slowdown in productivity growth across a range of countries. This was unusual both in terms of the extent of the decline, and because it occurred across advanced, emerging market, and low-income countries. This is shown in the next slide.
What makes this slowdown more puzzling is that it comes at a time of significant innovation and technological change.
As I speak, I see many of you are on your tablets and smartphones. This is an area of innovation that perhaps has received more attention than any other. Some may argue that it increases productivity; some may argue the opposite. Certainly, it has made our lives more interesting. Without a doubt, the globally integrated production system that has grown up to supply our gadgets is quite remarkable.
It is not only the IT sector that has advanced. Think of oil and gas. Technological progress in this industry has been remarkable. The cost of producing energy has fallen sharply. This has transformed the energy matrix in several countries (including here in the United States). And yet, this industry also is facing extraordinary competition from the rapid growth of renewable energy resources.
Think also of the rapid transformation of the retail industry, where stores and shopping malls are being rapidly replaced by websites.
Whatever the industry, innovation has reshaped labor and product markets.
However, this disruptive change has taken place without an apparent increase in productivity. This is very different from previous periods of rapid innovation and technological change.
There are competing explanations for this tension, and research has yet to identify the most empirically relevant factors. There are various candidates:
· Some argue there is a measurement error; that the data does not capture large parts of the new economy. There is some evidence that this may explain that the level of GDP and productivity are underestimated. However, the evidence so far does not point to an explanation for the decline in the growth of productivity.
There is also an argument about mismeasurement because of the impact of transfer pricing and other factors associated with globalization.
· Others point to an increasing share of economic activity not included in GDP. This would be non-market activities that were never intended to be part of GDP: household production, the bartering of goods and services, or unpaid services. This goes beyond mismeasurement.
· A third explanation could be that much of the innovation we have witnessed is doing little to make the pie bigger through more productive means of production. Rather, that innovation could be intensifying a trend of redistribution of the growth dividends away from labor and toward capital. The bottom line may be little overall improvement in productivity.
One, or all, of these explanations could contribute to the decline in productivity. But there is no consensus on the relative impact.
2: Income polarization .
This brings me to my next topic: the ongoing dynamic in the advanced economies of polarized income distribution. We have seen this trend, to different degrees, in both Europe and in the United States.
This connects back to the productivity issue. The point here is that is has become more difficult to raise living standards in several advanced economies.
But there’s more going on than just the decline in productivity and weak income growth. In inflation-adjusted terms, more than one half of U.S. households have lower incomes today than they did in 2000. There are also distributional forces at work.
In this slide, the left-hand chart shows the declining share of households in the U.S. that earn between one-half and twice the median income—this is the center of the income distribution that we may think as the “middle class”. This group has experienced a persistent and pronounced decline.
Around two-thirds of those are moving out of this “middle” have fallen into the “bottom” of the income distribution—the group that earns less than one half of the median wage. This is shown in the right-hand chart, where the share of the U.S. population earning less than 50% of median income is clearly on the rise.
It is no wonder that some economists speak of a hollowing out of the middle class in the advanced economies.
Recent IMF research on the United States suggests that a significant component of income polarization can be linked to technological change. And it is specifically related to the automation and off-shoring of semi-skilled tasks. In many cases, these were the jobs that provided middle-class incomes.
We have also found that the growing concentration of income and wealth has reduced aggregate consumption—by about 3 and a half percent over the past 15 years. This represents an important headwind to aggregate demand.
I know all of us are aware of the social and political ramifications that have accompanied these shifts in the level and distribution of household income. We are seeing increased dissatisfaction among electorates and a sharp swing of sentiment against globalization.
That said, there are policies that can help address the problem of income inequality. These include:
· well-targeted social assistance programs;
· improved access to education and retraining;
· the expansion of the Earned Income Tax Credit, combined with a higher minimum wage;
· support for working parents to meet child-care costs; and
· paid family leave.
Our purpose in making these recommendations is to address the severe social impact of income polarization. We all need to provide the opportunities that enable people to take advantage of innovation and entrepreneurship.
3: Low inflation and low levels of wage growth.
The third topic I want to highlight is the generally low level of global inflation and wage growth, especially in the advanced economies. As the next slide shows, core inflation in Europe is somewhat below the ECB’s goal of below-but-close-to 2 percent. In Japan, headline and core inflation are close to zero. And here in the U.S., despite earlier progress in getting inflation to rise toward the Fed’s 2 percent goal, we have seen a reversal over the past several months. Core and headline inflation are both now at 1.4 percent.
Linked to this subdued inflation is the relatively low level of nominal wage growth.
In our assessment, the United States, Germany, and Japan are now close to full employment. But even as labor markets have strengthened, there does not seem to be a strong push for nominal wages to rise – as can be seen from this chart. There certainly is little evidence of wage pressure.
Important structural forces are contributing to this low wage growth. Again, one is the decline in productivity growth. We also are witnessing reduced labor market dynamism. One example of declining labor dynamism is that job-to-job moves have declined by about 40 percent since the late 1980s.
This is important because the largest wage increases go to those who switch jobs. In this chart, we see the gap between the average economy-wide wage increase and the pace of wage increases for those individuals who are changing jobs. Less dynamism means less job switching, which arithmetically translates into lower average wage growth.
There may be other secular forces at play. One is demographic change, as seen in the aging of many advanced economies. Another is the increasing consolidation of companies into ever-larger combinations, which strengthens employers’ bargaining power and compresses wages.
Differentiating the various drivers is a tough task. But, regardless of the cause, we know that stronger nominal wage growth will be needed to put inflation back on track toward central banks’ targets.
4: Global Cooperation
Finally, as a representative of the IMF, the last topic that I would like to raise will not come as no surprise. I have already touched on it. There is a concern that a more integrated and globalized world economy is no longer generating the jobs and higher living standards that once were promised. We are seeing this across the advanced and emerging market economies, as this final slide shows.
But the reaction to these concerns should not be to try to slow the pace of technological change or global integration. We cannot overlook the important, positive changes that these forces have produced. Witness, for example, the impressive reduction of poverty across the developing world over the past generation.
We must avoid policies that create unexpected, negative spillovers; that increase tensions between countries; or that erode the broad support for economic integration that still exists in the international community. Interrupting the free flow of goods and investments is not a solution. It will only make matters worse by disrupting trade relations and supply chains.
We should pursue a more positive course. This means continuing to maximize the benefits of globalization and technology, but also making the international system work better for all its citizens. It means promoting a multilateral system that adjusts to an increasingly connected global economy, ensuring a level-playing field that avoids protectionist measures and distortive policies, and by mitigating the impact of global transitions as much as possible.
In conclusion, the process of international economic integration will continue to move forward. This is inevitable. But the negative side effects must be acknowledged—and addressed. Part of this task falls to individual countries. But the international community also has a role to play by working together to deal with the cross-border issues. By strengthening the multilateral system, we can safeguard the global economy and ensure strong, stable, and inclusive growth.
Thank you very much for allowing me to speak this morning. I would be very happy to take your questions.
IMF Communications Department
