Friday, Aug 28, 2015
For weeks now — much longer if your pension portfolio is heavily weighted in foreign equities, or just weighed by the global fallout — China’s stock market has been up and down like a proverbial toilet seat. And the ripples from its circling of the drain have been felt in every major market — from Shanghai to Chicago, London to Mumbai.
Last week, those traders that were working the dog days of August were wishing they had booked it off. Instead, a heavy dose of $5.8 trillion (Dh21.33 trillion) in losses last Monday had them munching antacids and wondering just when the blood on the trading floors would stop.
If there is one man who might have a clue to the answer to that question, it is Zhou Xiaochuan, the 67-year-old governor of the People’s Bank of China (PBOC).
Now here, I have to admit, I have little personal knowledge of central bank governors, but I did work once with an editor whose grandfather was the governor of the Bank of England and, as such, had his signature on every bank note issued then across the British Empire ... But back to Zhou.
In the Who’s Who of central bank governors, Zhou is the heaviest hitter — and likely the one I need to speak to about that pension portfolio of mine being clobbered last week.
Since taking over the ruling Communist Party in November 2012, Chinese President Xi Jinping has given himself direct control over both the short-term financial policies and broader economic planning of the world’s second-largest economy. Long gone are the days when China was Marxist-Communist. Now, it is pure gung-ho market capitalism. Xi exercises power through two secretive “leading groups”, one a reform panel of his own creation and the other a financial committee recently led by premiers. Xi has been at the helm as China has almost matched the US in producing more goods worth more money than any other nation and sending them around the world.
And Xi chose stability over a shake-up and allowed Zhou to stay on past his retirement age as governor of PBOC. To his credit, Zhou has overseen a more than five-fold expansion in the Chinese economy since assuming leadership of the central bank in 2002 and he is by far the most tenured member of China’s inner economic circle.
He is highly intelligent, comes from an impeccable political background of parents who were early revolutionaries in Mao Zedong and is an engineering specialist in automation and robotic systems. But managing the PBOC and holding sway over China’s now spluttering economy requires more than a deft knowledge of automation. In the space of a few days, China’s central bank has changed policy twice and the message was largely unintelligible both times. Over two weeks, thanks partly to confusion over monetary policy, China’s stock market has suffered its biggest drop in almost 20 years.
Ten days ago, with the stock market already down from its peak, Zhou oversaw a technical manoeuvre involving so-called “reverse-repurchase” agreements. Now I have no idea what that is — nor did most other people, those that did figure a cut in interest rates was coming. Then when they concluded it was not, stocks plunged.
To make bad matters worse, Zhou had the PBOC cut the benchmark interest rate and also ease its reserve requirements. That is the first time both have happened at once since 2008 when the whole world was trying to do something — anything — to turn around the global financial crisis.
Zhou’s message was that the central bank was going from mild adjustment to a surprisingly dramatic one — with a stock-market crash in between.
A report from the International Monetary Fund early this month, however, really set the cat among the pigeons, noting that China was heading for slow growth, deflation and poor trading figures. Official Beijing data on the weekend after that showed exports slumped 8.3 per cent last month from a year earlier — enough to send a jolt through analysts.
Whether the weak trade numbers were a trigger or not, what followed was a momentous event for global markets. China on August 11 shifted to a more flexible exchange rate and said it would allow the market a bigger role in setting the yuan’s value.
The surprise move triggered the currency’s biggest loss in two decades and sent stock markets from Taiwan to Germany into a tailspin. Debate is still raging as to whether the move was a market reform or bid to boost exports, or both.
What is more, Zhou probably is not done yet.
Even after cutting interest rates for the fifth time since November and telling banks they can hoard less cash, he remains under pressure to do more to support the economy amid the biggest slide in stocks since 1996.
Me? All I know is that it’s all more confusion than Confucian.
— With inputs from agencies
By Mick OReilly Senior Associate Editor
Gulf News 2015. All rights reserved.
