IMF tells it like it is on China’s liberalisation delays

Chinese authorities are once again voicing their desire to get back on track with the reform agenda. But Bond Connect aside, there is not much evidence the powers that be are delivering on that promise — as the International Monetary Fund (IMF) rightly makes clear in its China country report.

  • By Paolo Danese
  • 15 Aug 2017
Email a colleague
Request a PDF

A little patience with the Chinese regulators should probably be warranted.

After all, their last landmark attempt at currency framework reform, introduced almost exactly two years ago, backfired spectacularly. That reform by the People's Bank of China aimed to introduce greater flexibility to the daily fixing mechanism of the renminbi against the dollar but ended up ushering in some 18 months of violent currency swings and a sharp drop in the value of the RMB, which lost 6.7% against the greenback in 2016.

Faced with depreciation and capital outflows, Beijing took a giant leap backwards — re-introducing capital controls and intervening heavily in the onshore and, brazenly, offshore markets to keep the exchange rate where it wanted.

This year, however, is proving good to the Chinese authorities. The economy is chugging along, growth is solid, and the currency is up 4% against the dollar in the year so far. And most of that has happened without the need for more of the draconian measures seen last year.

On the back of that, the authorities have once again made clear their commitment to reforming the currency policy and progressing towards the ultimate goal of basic capital account convertibility. But, as the IMF points out in its China country report published on Tuesday, there has been little in the way of concrete steps.

The launch of Bond Connect in July is, no doubt, the obvious counterpoint to that argument. The launch of the scheme, after all, made the $10tr onshore bond market available to global investors in one swift move.

Yet, the connect had been in the works for at least three years, making its launch more about the delivery of past promises and less as a shining example of renewed commitment to reform.

The IMF takes China to task on its failures, and rightly so. The paper notes that by at least two academic measures of capital account openness, China, the second largest economy in the world, trails not only most advanced economies but many emerging markets too.

The cross-border capital flows that China did see recently were of the wrong kind, and reflected unbridled capital flight as Mainland citizens fled what they saw as a sinking ship.

Those flows have stopped thanks to two reasons. A solid economic performance this year is one, but chiefly because China has locked down the exits.

Even more worryingly, the IMF points to the whole sad affair of window guidance measures.

Bankers squirm every time a journalist brings up the topic. The concept is basically that when the authorities decide certain transfers of funds — typically outbound — are unwelcome, they simply pick up the phone and tell local and foreign banks in China to stop doing whatever it is they are doing.

While effective (no one wants to make Chinese regulators angry), the practice is nothing but opaque, and impossible to picture in any open economy.

Such window guidance has never been followed by rules making the restrictions official. That way, the regulators get what they want without having to lose face which, as anyone familiar with Chinese culture is aware, is a major no-no.

It is refreshing to see the IMF take a stand, albeit somewhat buried within a 100-page academic paper.

"CFMs [capital flow measures, aka window guidance measures] should be enforced in a way that does not result in a breach of China’s obligations to the IMF to not restrict current international payments and transfers," the paper’s author said.

While the worst is likely over, much damage has been done, particularly to the RMB internationalisation agenda, with the global usage of the renminbi a clear victim of the heightened controls on cross-border transactions.

The authorities have recently mooted the possibility of expanding the trading band of the renminbi against foreign currencies from 2% to 3%. It's a start, but markets will be expecting much more to re-establish confidence.

With China’s Party Congress around the corner, however, even the IMF's preaching may well remain wishful thinking.

  • By Paolo Danese
  • 15 Aug 2017

Panda Bonds Top Arrangers

Rank Arranger Share % by Volume
1 Bank of China (BOC) 30.14
2 CITIC Securities 23.05
3 China CITIC Bank Corp 10.64
4 Industrial and Commercial Bank of China (ICBC) 8.27
4 Everbright Securities 8.27

Bookrunners of Asia-Pac (ex-Japan) ECM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 CITIC Securities 9,696.66 60 5.89%
2 Goldman Sachs 8,701.82 39 5.28%
3 China International Capital Corp Ltd 8,023.48 41 4.87%
4 Citi 6,940.43 47 4.21%
5 UBS 6,666.10 50 4.05%

Bookrunners of Asia Pacific (ex-Japan) G3 DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 26,166.02 173 8.49%
2 Citi 22,796.95 143 7.40%
3 JPMorgan 19,330.18 109 6.27%
4 Bank of America Merrill Lynch 15,321.53 83 4.97%
5 Standard Chartered Bank 13,526.78 102 4.39%

Asian polls & awards

  • GlobalCapital Sustainable and Responsible Capital Markets Awards 2017: the Winners

    France, Tennet, NWB and Berlin Hyp are among the green and social bond issuers acclaimed in GlobalCapital's Sustainable and Responsible Capital Markets Awards 2017, which were announced on Tuesday in Amsterdam.

  • Sustainable and Responsible Capital Markets Awards: the Nominations

    GlobalCapital is happy to announce the nominations for its Sustainable and Responsible Capital Markets Awards 2017.

  • RMB internationalisation: 10 questions for the market, part 2

    Every year, our sister publication Asiamoney carries out an Offshore RMB Poll. As part of that process, the magazine asks the market for its thoughts on important renminbi topics. In this third year, we received around 2,300 valid responses, up 3% on a year ago. The ten questions included a new one on the inclusion of onshore RMB assets in global indices. Here we present the answers to the final five questions.

  • RMB internationalisation: 10 questions for the market, part 1

    Every year, our sister publication Asiamoney carries out an Offshore RMB Poll. As part of that process, the magazine asks the market for its thoughts on important renminbi topics. In this third year, we received around 2,300 valid responses, up 3% on a year ago. The ten questions included a new one on the inclusion of onshore RMB assets in global indices. Here we present the answers to the first five questions.

  • Made in China: The best banks and deals of 2016

    You know who won, now find out why. GlobalCapital Asia and Asiamoney present the extended results of our 2016 China Deals and Investment Bank of the Year awards, recognising achievement both on and offshore.