JAKARTA: This year, China has announced a flurry of financial liberalization measures that were perceived by many in the U.S. and Europe as a sign of confidence among Chinese leaders about their economy’s growth prospects.
Some analysts, such as Paul Markowski, president of MES Advisers Inc., have argued that these reforms indicate Chinese leaders believe they have avoided a so-called hard landing.
In reality, these measures -- such as widening the trading band on the yuan, allowing greater capital inflows and permitting a domestic pension fund to invest in the stock market -- point to growing Chinese insecurity about the future. They are defensive steps intended to protect the economy from a coming slowdown and possibly to boost domestic asset prices.
China’s economy is slowing because of weaker demand for its exports in Europe and the U.S. and because it is reaching the limits of its investment-driven growth model. Growth in electricity consumption and railway cargo has halved since last year and data show that the transition to consumer-led growth is going slowly. As a result, the outlook for China’s currency has weakened and capital outflows have become an increasing concern.
These signs of weakness are the main reasons why Chinese officials have liberalized the exchange rate and tried to counter outflows by encouraging foreign and domestic investors to put more money into the Chinese stock market. (ln)