Monetary mess

Anxiety and pessimism about the Chinese economy both on the mainland and in Hong Kong are growing. Outside observers and investors question the credibility of the Beijing government’s economic data, and its stabilization and stimuli actions are discredited by markets. Instead of reacting to the announcement that gross domestic product 6.9 percent in 2015 grew, the worst rate in 25 years, markets assumed the economy actually did worse. The freefall in share prices continued regardless of a series of stabilization actions.

The market is more focused on whether the Beijing authorities can maintain their hold over their currency. The yuan has fast weakened in Hong Kong and other offshore markets since the beginning of the year, and speculative capital is quickly ebbing out of the Chinese capital market. There is a limit to China’s endeavors to defend its currency.

Investors are dumping the Chinese currency and leaving the market after George Soros, speaking at the World Economic Forum in Switzerland in mid-January, bluntly said China’s “hard-landing is practically unavoidable.” The heavyweight Wall Street investor pronounced: “I’m not expecting it, I’m observing it.” His comment fed fears that China’s financial meltdown could build up to a 2008-like global financial crisis. Some global hedge funds have been short-selling yuan and other Asian currencies. About $300 billion in short-term funds have been pulled out of Asia every quarter since 2014.

The serious bets say Beijing will lose its defense of its currency. Some doubt China’s numbers for their foreign exchange reserves and believe the reserves are shrinking as many Asian countries proved to have much smaller reserves than what they reported during the Asian financial crisis of 1997-1998.

But much of the skepticism stems from a misconception. Beijing follows the Special Data Dissemination Standard recommended by the International Monetary Fund in compiling its foreign exchange data.

The foreign exchange reserves are immediately cashable assets. Since the Asian crisis, the IMF announces only highly liquid foreign exchange reserves of each country according to its dissemination guideline. It therefore is unfair to question the validity of China’s foreign exchange data. Even with the flight of hot money, China would safely maintain its reserves at the $3 trillion level, doubling the recommendable threshold. An unreasonable amount of pessimism and skepticism could derive from Western society’s deeply-rooted suspicions about China and its ability to tell the truth.

The Bank of Korea will have to brace for a renewed flood of liquidity unleashed by countries in order to prop up their economies. Even after the U.S. Federal Reserve tapered off its quantitative easing program and began lifting interest rates from near zero percent in December, other developed economies are not ready to depart from their ultra-loose monetary policies. Japan has renewed its bond-purchase program to stimulate an economy stubbornly mired in a deflationary cycle and with a beggar-thy-neighbor disregard for the impact on its policies on neighboring economies.

Japan has gone to the extreme in its monetary policy since Prime Minister Shinzo Abe took office in 2013. On top of an expansive program of buying bonds worth 80 trillion yen ($697.2 billion) a year, the central bank decided to push the base interest rate into negative territory by cutting it to -0.01 percentage point from the 0.0-0.01 percentage point range. A negative interest rate means depositors will have to pay banks interest to park their money. The policy is meant to encourage both consumers and companies to spend and invest their savings elsewhere. It remains unclear whether this drastic measure will have any effect and will shake the economy out of its moribund state.

The European Central Bank already warned that it was mulling another round of quantitative easing in February and China is also pumping money into the market to protect its currency from a rapid devaluation. The developments could interrupt the U.S. Fed’s tightening schedule as it won’t be easy to implement another hike during the first half of this year. The currency war is on.

Korea is in a bind. It has more or less given up on monetary policy even as economic growth has slowed to a snail’s pace and exports are sagging fast. Seoul is hesitant to open its coffers even as other countries are busy unloading theirs. The local market is swept up in currents from overseas. Although we cannot afford to be as daring as other developed economies, we should at least turn more proactive in monetary policy.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Feb. 5, Page 29

*The author is head of investment strategy at NH Investment & Securities.

by Kang Hyun-chul