President Xi’s Summit Non-Performance Spotlight
Chinese President Xi’s visit to Washington beginning September 24 has been on the calendar since US President Obama’s invitation last year, and may have passed with limited fanfare before the extraordinary currency and stock-market events the past two months coinciding with an economic growth and debt squeeze. For China and general emerging market observers the June Strategic and Economic Dialogue went largely unnoticed outside cybercrime issue escalation and bilateral investment agreement consideration. Exchange rate undervaluation had been removed as a sticking point by US Treasury Department and IMF pronouncements that market forces were in play, and controversy over the new Asia International Infrastructure Bank, which Washington chose not to join, was partially defused by Beijing’s commitment to cooperate with the Bretton Woods institutions. The script for a cordial quiet exchange of views has since been tossed not only with the threat of sanctions a for alleged computer network hacking, but with unprecedented post-2008 crisis doubts over banking and securities market health and GDP growth and renimbi direction President Xi and his team must urgently clarify.
The leadership has already tried to preempt devaluation worry and reiterate reform commitment with official assurances. Premier Li in a speech said no further Yuan weakening was imminent, and at their recent retreat top economic policy-makers detailed their agenda for “mixed ownership” in the massive state enterprise sector. However in the offshore market the currency has continued to decline toward 7/dollar, and Beijing has reportedly tried to intervene there to reverse the trend. Additional formal depreciation before the Washington summit and through October’s IMF annual meeting in Peru would upset these events, especially as inclusion in the Fund’s SDR basket remains on the table. However global investor surveys now regularly cite Chinese currency risk in light of the record $600 billion in capital outflows the past year depleting international reserves to $3.5 trillion. Recession, defined as growth in the 5 percent plus range, is another worry reflected in the latest industrial and consumer figures, and the announced moves to introduce minority private ownership and fresh management at big government firms fall short of the competitive push needed to restore course.
Banking and shadow banking have been the subject of bland communiqués in the past but headline troubles raise their importance at the upcoming Xi-Obama sessions, just as the 2008 subprime debacle was addressed then in public bilateral channels. The four giant state commercial banks continue to report earnings drops and non-performing loan increases, particularly in the real estate and local government sectors. The bad credit ratio is just over 1 percent according to local accounting standards, but international estimates believe the damage could be halfway between there and the rate experienced after the 1990s regional financial crisis at 15-20 percent. Smaller private banks, without sovereign backing, began experiencing liquidity difficulties last year when a crackdown began on high-yield informal trusts and wealth management products they promoted. These structures have since been adapted in other forms with the potential to wreak havoc, and underground and new online lenders previously escaping the net have started to come under regulatory scrutiny and appeal to the government for rescue.
With the authorities’ hundreds of billions of dollars in intervention and trading suspension in hundreds of listed companies, the Shanghai stock exchange is no longer accessible as a normal emerging market. US retail and institutional investors have dumped their holdings but large sums remain trapped. Hedge funds like Chicago’s Citadel are under investigation for short-selling during the immediate crash. That practice has been banned during the 30 percent correction since June, which commenced just as index provider MSCI decided not to increase China’s core universe 25 percent weighting. With its actions and the absence of a timetable for lifting interference, both the mainland and Hong Kong will face calls for reductions and even suspensions from the benchmark gauge. President Xi may not have originally contemplated the test, but he will be measured in Washington for the first time globally by a strict and widely-followed financial system stability yardstick.
Originally published by Asia Times Online
