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China’s caution


16 June 2017, London

June Cover

China’s economy has been accelerating – defying expectations that had been damped by worries of a ‘hard landing’ and geopolitical uncertainty. Expansionary government policy has helped the better growth picture. The economy is taking in its stride higher US interest rates, confirmed by the Federal Reserve tightening on 14 June. Less evidently, China has been redeploying foreign investments to seek higher yields by focusing on equities, report David Marsh and Bhavin Patel. China’s delicate equilibrium constrains the authorities to proceed cautiously with its reform, liberalisation and openness agenda – with results that will affect the bond and equity markets, writes Nan Bai of ChinaAMC.

Qi Bin and Chao Chen of China Investment Corporation comment on how China is boosting its technical know-how through foreign acquisitions, with the country benefiting from institutions’ low liquidity requirements and a long-term investment horizon. Regulatory coordination to curb shadow banking activities will be key, according to Le Xia of BBVA. John Adams reflects on the proposals for investing in soft infrastructure and strengthening institutions in his review of the International Monetary Fund’s book, Modernizing China.

Central banks in Asia are preparing for capital outflows and exchange rate pressures by increasing their reserves. This month’s edition of our regular analysis of central bank balance sheets in collaboration with Narodowy Bank Polski documents monetary developments in China, India, South Korea and Thailand. In particular they have been preparing for Fed rate hikes, even though labour market data have been giving a mixed picture, as Darrell Delamaide reports. Unconventional monetary measures have produced complex results that sometimes countermand central banks’ mandates. Sayuri Shirai’s book, Mission Incomplete, reviewed by John Plender, outlines Japanese experience.

Other highlights of the June 2017 edition:

  • Ben Robinson explores the increasing attention being paid to green finance by Global Public Investors, including central banks, sovereign funds and public pension funds, as they shift away from traditional assets to more risky ones. Robinson also writes on how sterling’s sharp fall last year benefited Britain’s net foreign investment position.
  • Ruth Euling of De La Rue voices caution about the assumed growth of a cashless societies.
  • Lord (Meghnad) Desai outlines the reasons why Jeremy Corbyn, the Labour party leader, performed better than expected in the 8 June UK general election.
  • Adam Glapiński, president of Narodowy Bank Polski, draws attention to the scepticism of smaller non-euro EU members towards deeper integration.
  • Philippe Dauba-Pantanacce sets out the possible scenarios arising from France’s legislative elections for Present Emmanuel Macron to preside over genuine reform.
  • The Advisers Network was asked about how Macron and his nascent party was likely to perform in these elections. He received a favourable score, with 46% of respondents expecting him to form a political majority.
  • The network is poorer after the death of Sir Paul Judge. We remember him as a successful internationalist, academic benefactor and man of ideas. Obituarist David Marsh recalls his ribald stewardship of Meghnad Desai’s 75th birthday dinner in 2015.

The Bulletin is available to OMFIF members, and to non-members on a subscription basis. To subscribe please contact membership@omfif.org.