June 2017: China’s caution

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. OMFIF’s fourth annual Global Public Investor focuses on investments by central banks, sovereign funds and public pension funds, documenting their shift away from traditional assets to more risky ones as they seek higher returns. Ben Robinson explores one such area of increasing interest: green finance. This year’s edition provides details of developments in fintech and digital currencies, but Ruth Euling of De La Rue voices caution about assumed growth of a cashless society across the world.

June’s general election, which resulted in a hung parliament, has shaken the UK and may disrupt negotiations on Britain’s departure from the European Union. Meghnad Desai outlines the reasons why Jeremy Corbyn, the Labour leader, performed much better than expected. Ben Robinson explains how sterling’s sharp fall last year benefited Britain’s net foreign investment position. In France, President Emmanuel Macron has achieved further success in the first round of the parliamentary elections on 11 June, and looks set to achieve an absolute majority in the national assembly for his new political party. Philippe Dauba-Pantanacce sets out possible scenarios for Macron to preside over genuine reform. In the monthly poll of the OMFIF Advisers Network, Macron received a favourable score, with 46% of respondents expecting him to form a political majority. France and Germany are reinforcing plans for co-operation, partly as a result of the UK withdrawal. Despite this, Adam Glapiński, president of Narodowy Bank Polski, draws attention to the scepticism of smaller non-euro EU members towards deeper integration. The Advisers Network is poorer after the death of Sir Paul Judge last month. 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.

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