IMF tells it like it is on China’s liberalisation delays

Chinese authorities are once again voicing their desire to get back on track with the reform agenda. But Bond Connect aside, there is not much evidence the powers that be are delivering on that promise — as the International Monetary Fund (IMF) rightly makes clear in its China country report.

  • By Paolo Danese
  • 15 Aug 2017
Email a colleague
Request a PDF

A little patience with the Chinese regulators should probably be warranted.

After all, their last landmark attempt at currency framework reform, introduced almost exactly two years ago, backfired spectacularly. That reform by the People's Bank of China aimed to introduce greater flexibility to the daily fixing mechanism of the renminbi against the dollar but ended up ushering in some 18 months of violent currency swings and a sharp drop in the value of the RMB, which lost 6.7% against the greenback in 2016.

Faced with depreciation and capital outflows, Beijing took a giant leap backwards — re-introducing capital controls and intervening heavily in the onshore and, brazenly, offshore markets to keep the exchange rate where it wanted.

This year, however, is proving good to the Chinese authorities. The economy is chugging along, growth is solid, and the currency is up 4% against the dollar in the year so far. And most of that has happened without the need for more of the draconian measures seen last year.

On the back of that, the authorities have once again made clear their commitment to reforming the currency policy and progressing towards the ultimate goal of basic capital account convertibility. But, as the IMF points out in its China country report published on Tuesday, there has been little in the way of concrete steps.

The launch of Bond Connect in July is, no doubt, the obvious counterpoint to that argument. The launch of the scheme, after all, made the $10tr onshore bond market available to global investors in one swift move.

Yet, the connect had been in the works for at least three years, making its launch more about the delivery of past promises and less as a shining example of renewed commitment to reform.

The IMF takes China to task on its failures, and rightly so. The paper notes that by at least two academic measures of capital account openness, China, the second largest economy in the world, trails not only most advanced economies but many emerging markets too.

The cross-border capital flows that China did see recently were of the wrong kind, and reflected unbridled capital flight as Mainland citizens fled what they saw as a sinking ship.

Those flows have stopped thanks to two reasons. A solid economic performance this year is one, but chiefly because China has locked down the exits.

Even more worryingly, the IMF points to the whole sad affair of window guidance measures.

Bankers squirm every time a journalist brings up the topic. The concept is basically that when the authorities decide certain transfers of funds — typically outbound — are unwelcome, they simply pick up the phone and tell local and foreign banks in China to stop doing whatever it is they are doing.

While effective (no one wants to make Chinese regulators angry), the practice is nothing but opaque, and impossible to picture in any open economy.

Such window guidance has never been followed by rules making the restrictions official. That way, the regulators get what they want without having to lose face which, as anyone familiar with Chinese culture is aware, is a major no-no.

It is refreshing to see the IMF take a stand, albeit somewhat buried within a 100-page academic paper.

"CFMs [capital flow measures, aka window guidance measures] should be enforced in a way that does not result in a breach of China’s obligations to the IMF to not restrict current international payments and transfers," the paper’s author said.

While the worst is likely over, much damage has been done, particularly to the RMB internationalisation agenda, with the global usage of the renminbi a clear victim of the heightened controls on cross-border transactions.

The authorities have recently mooted the possibility of expanding the trading band of the renminbi against foreign currencies from 2% to 3%. It's a start, but markets will be expecting much more to re-establish confidence.

With China’s Party Congress around the corner, however, even the IMF's preaching may well remain wishful thinking.

  • By Paolo Danese
  • 15 Aug 2017

Panda Bonds Top Arrangers

Rank Arranger Share % by Volume
1 Bank of China (BOC) 28.62
2 CITIC Securities 21.06
3 China CITIC Bank Corp 9.72
4 China Merchants Bank Co 9.18
5 Industrial and Commercial Bank of China (ICBC) 7.56

Bookrunners of Asia-Pac (ex-Japan) ECM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 2,041.17 5 13.96%
2 CITIC Securities 1,203.52 4 8.23%
3 Citi 1,085.69 6 7.43%
4 Huatai Securities Co Ltd 1,006.47 5 6.88%
5 Morgan Stanley 816.96 5 5.59%

Bookrunners of Asia Pacific (ex-Japan) G3 DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 3,253.25 9 3.96%
2 Citi 2,757.53 17 3.36%
3 JPMorgan 2,708.87 7 3.30%
4 HSBC 2,677.89 23 3.26%
5 Morgan Stanley 2,299.31 10 2.80%

Asian polls & awards

  • Regional Capital Markets Awards Part IV: Investment Bank

    In the last instalment of our 2017 awards, we present the full write-ups of the winners of Best Asian Investment Bank and Best Investment Bank.

  • Regional Capital Markets Awards Part III: Bonds

    In the third instalment of our 2017 awards, we present the full write-ups of the winners of the Best Local Currency Bond, Best High Yield Bond, Best Financial Bond, Best SSA Bond, Best Investment Grade Bond, Best Project Finance Deal, Best Bond, Best G3 and Local Currency Bond House, and Best High Yield Bond House.

  • Regional Capital Markets Awards Part II: Equities

    In the second instalment of our 2017 awards, we present the full write-ups of the winners for Best Follow-On/Accelerated Bookbuild, Best Equity-Linked Deal, Best IPO, Best ECM Deal and Best ECM House.

  • Regional Capital Markets Awards Part I: Loans

    In the first instalment of our 2017 awards, we present the full write-ups of the winners for Best Investment Grade Syndicated Loan, Best High Yield Syndicated Loan, Best Leveraged/Acquisition Finance, Best Loan and Best Loans House.

  • GlobalCapital Asia regional capital markets awards 2017: the winners

    Over the last two months, GlobalCapital Asia's team has conducted pitch meetings with banks to decide the most impressive capital markets transactions and advisers in Asia in 2017.