February 2016: China in transition

China is weathering a series of tremors as the world’s second-largest economy traverses three separate transitions. These uncomfortable – possibly insurmountable – tasks provide the kernel of the February Bulletin, illustrated on the cover by Finance Minister Lou Jiwei, Premier Li Keqiang and Zhou Xiaochuan, governor of the People’s Bank of China. Shift No. 1 is the well-documented move away from an investment-led, export-orientated command economy towards one that is far more market-driven and guided by internal consumption – an evolution inevitably accompanied by a growth slowdown. The second concerns the currency: as a result of the renminbi’s entry into the International Monetary Fund’s special drawing right, China has to open its capital markets and operate an international money, even though it is still a developing country facing titanic internal challenges. The third switch is potentially the most difficult: the Communist party’s struggle for modernisation to maintain its hold over a populace that is becoming increasingly wealthy, internationally mobile and politically and socially astute. These trends are dissected by Jonathan Fenby, Ben Robinson, John Adams, Ben Shenglin, Marcello Minenna, Edoardo Reviglio and Willem Middelkoop. The renminbi’s contortions – and the efforts by the PBoC to resist a substantial devaluation, reflected in falling Chinese foreign exchange reserves, down $420bn in six months to $3.2tn at end-January – have overshadowed New Year financial markets worldwide. For the time being, at least, the Chinese authorities, mindful of the sensitivities of the country’s political-economic balancing act, are resisting any widespread shift to competitive devaluation.

In this context, the most significant news over the past month has been the relative weakness of the dollar against the euro, in spite of the general 2016 expectation of US monetary tightening and European easing. This partial about-turn reflects the widening perception that the US Federal Reserve will mitigate its planned interest rate increases in the face of global economic uncertainties.  Arguments over easing by the European Central Bank on 10 March are finely balanced. The Bank of Japan’s surprise promulgation of negative interest rates on 29 January makes action more likely, but hawks on the ECB council are fighting a rearguard action, highlighting failure so far in boosting inflation and the sapping effect on budgetary reforms of rising volumes of ECB-held government debt. Darrell Delamaide displays sanguinity in predicting that the US can avoid a recession, partly because the Fed has now turned more dovish on interest rates, while John Kornblum believes that Germany, and particularly Chancellor Angela Merkel, will overcome its tests on migration and the euro. Rubén Calderón extols underlying stability in capital flows between the US and Europe. Frédéric Samama explains the virtues of green bonds. Brian Reading, Denis MacShane and Jacques Lafitte unravel the intrigues surrounding the forthcoming UK EU membership referendum. The outlook for emerging markets is murky, too. But, amid general gloom over Brazil, David Smith spots signs of hope in Argentina. We end with two book reviews, by William Keegan and George Hoguet, praising a scholarly work on British prime ministers and the memoirs of former Fed Chairman Ben Bernanke – providing intellectual guidance that may be needed as 2016 progresses.

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