China’s currency regime reform nails hard-landing risk coffin

BEIJING: China's weekend reform of its currency regime nails shut the coffin on the last remains of doubt about whether the world's second biggest economy has successfully steered a course past a hard economic landing.

Investors were questioning whether the worst sequential slowdown in China's economy since the 2008-09 global financial crisis could enter a sixth quarter after data on Friday revealed the weakest three months of annual growth in three years and a run rate below the official 7.5% 2012 target.

Shifting the yuan trading rules is about the strongest signal Beijing could give that growth downside has diminished and potential pitfalls are manageable. Few reforms are as replete with risk as tinkering with the currency because faith in its soundness directly correlates to economic stability.

“For everybody who thought China was heading for a hard landing, it's over. This move says they are comfortable with the direction the economy is moving in,” Paul Markowski, president of New York-based MES Advisers and a long-time investment adviser to China's monetary authorities, told Reuters.

International investors are certainly in need of something to calm concerns about the health of the global economy after asset markets worldwide were rattled on Friday by a combination of below-par Chinese growth data and renewed fears of contagion risks in the debt-plagued eurozone.

Timing, politics and diplomacy are all in focus after Saturday's milestone step towards turning the yuan into a global currency that doubled the size of its trading band against the US dollar to 1%.

But the economics of the move, predicted by a Reuters poll four weeks ago, are the most crucial for the 200 million or so jobs in China's vast factory sector that analysts estimate directly depend on foreign trade.

Reform says Beijing is comfortable with the yuan's value and that exporters have sufficient strength to cope with the government relaxing its grip. As the financial crisis deepened in 2008, China squeezed tightly on the yuan to shield the economy as international trade ground to a halt.

It implies confidence that rebounding March indicators in the first-quarter gross domestic product (GDP) data such as a jump in steel production, vehicle output, machinery and cement production and a recovery in sales of household electronic appliances suggest that the floor in economic activity has broad foundations.

So does a huge bounce in new bank lending in March 25% ahead of economists' forecasts at 1.01 trillion yuan that signals monetary easing since the autumn, creating an estimated 800 billion yuan of new credit, is being put to work.

Bear in mind that the last time growth was this low, in the second quarter of 2009, Beijing was busy rolling out 4 trillion yuan of stimulus to support the ailing economy and encouraging local authorities to go on a borrowing binge.

The lessons from that episode though have been hard learned, requiring a two-year policy tightening campaign to fight the inflationary effects of the stimulus and creating a 10.7 trillion yuan legacy of local government debt to be cleaned up.

This time Beijing is taking a different route to stability.

“This is all about creating macroeconomic flexibility in an economy that, by the end of the decade, is likely to be on a growth trajectory down towards 5% and where that flexibility is going to be needed even more,” Markowski said. - Reuters