You are here: Home > Opinion > Editor's Pick

Adjust font size:

Vaulting into the global ranks [By Jiao Haiyang/China.org.cn]

The executive board of the International Monetary Fund made a decision on Nov. 30 to include the Renminbi (RMB) in its Special Drawing Right (SDR) basket. Effective from Oct. 1, 2016, the RMB will become the fifth member and third largest currency of SDR basket with a weighting of 10.92 percent behind the U.S. dollar (41.73 percent) and the Euro (30.93 percent), but ahead of the Japanese yen (8.33 percent) and the British pound (8.09 percent).

Although the weighting is slightly below market expectations, it is still a highly significant event. Now, people's attention has gradually shifted to a series of new issues closely related to their daily lives, such as the basic exchange rate system and the impact on the stock market.

An eventful period at home

China's stock market has witnessed great ups and downs in the past few years. Understandably, it occurred when the world economy has taken an unbalanced turn for the worse and the domestic economy was undergoing major structural reform. Lacking in strong support from the real economy, financial revenue will possibly come unstuck from production revenue. Therefore, it is quite impossible for China's stock market to rise by a big margin in the short term.

According to The Analysis and Forecast of China's Macroeconomy (2015-2016), a report released at a forum held at the National Academy of Development and Strategy of Renmin University of China (RUC) on Nov. 22, China faces a major risk that all kinds of "recession-type" bubble are constantly accumulating to cause further financial distortions.

Thus, China should pay special attention to the bubbles likely to form in the following three areas in 2016 and take preventive measures.

First, the bond market. According to the RUC report, with stock price continuously falling and the promotion of IPO's being suspended, the huge speculative funds raised in the prosperous period have begun seeking alternatives. A lot of money is flowing into the bond market where a new bubble is already beginning to brew.

In the first eight months of this year, the Shanghai Stock Exchange (SSE) issued a total of 514 corporate bonds valued at about 276.25 billion yuan, an increase of 56.7 percent over the same period of last year. In September, the coupon rate of corporate bonds averaged 4.54 percent, or 1.72 percentage points lower than the previous year.

On Sep. 25, Vanke, one of China's largest real estate developers, issued 5 billion yuan's worth of five-year corporate bonds with the coupon rate down to 3.5 percent, an all-time low.

Secondly, since April, real estate sales have shown an obvious sign of recovery influenced by a series of easy monetary policies. Particularly since June, when the stock market bubble suddenly vanished, a large number of speculative funds flowed into the real estate market in first-tier cities, where a new bubble is brewing.

In the first nine months, the traded housing areas and sales in China increased by 16.1 percentage points and 24.2 percentage points respectively compared with the same period of last year. It is worth noting that, despite overall recovery, there is still a trend of differentiation. Compared with the first-tier cities like Beijing, Shanghai and Shenzhen where business is flourishing, the third- and fourth-tier cities are suffering a quick decline in housing sales, which may become an important factor in the future.

Third, there is strategically emerging industry. The report points out that, a series of government programs to encourage entrepreneurship and innovation and to provide aid to poverty-stricken areas with excessive subsidies and a lack of capital market forces to identify risk, a new bubble may emerge in the strategic emerging industries.

Since the social security network has not been effectively established in China, there is no "soft landing pad" available for those people who might fail in entrepreneurship and innovation. A "collapse tide" will probably have a huge impact on the economy and society.

Behind the fast development of some strategically emerging industries are a large number of policy subsidies. Once they are canceled, these enterprises will probably lack sufficient capacity to survive and it will be difficult for them to create real market demand. More importantly, it will encourage innovative talents to take on excessive debt, and thus dampen public enthusiasm and confidence in entrepreneurship and innovation.

A complicated external environment

According to the RUC report, the downturn in global market demand and the financial turbulence and economic downturn with emerging economies as the main part will probably further directly squeeze the space for China's economic recovery. Particularly, the fluctuation of the RMB exchange rate and Chinese capital flows into foreign markets will likely trigger a new risk following the stock market crash.

Here are some statistics. Anticipation that the U.S. Federal Reserve will raise interest rates has resulted in a large outflow of Chinese funds and a huge impact on China's foreign exchange market and financial market. At the end of September 2015, the balance of funds outstanding for foreign exchange were 27.4 trillion yuan, 2 trillion yuan less than the 29.4 trillion yuan at the end of 2014.

In addition, the capital outflow also has a negative impact on China's business credit. In the first nine months, foreign currency loans stood at -265.91 billion yuan, a decline of 641.51 billion yuan or 170 percent compared with the 375.6 billion yuan in the same period of last year.

In such a complicated situation, China should pay close attention to the rapidly changeable financial market abroad and the likely new bubbles at home. It should strengthen financial supervision, steadily promote reform of financial system, and make corresponding policy adjustments at any time according to the international and domestic situation.

The author is a researcher with the National Academy of Development and Strategy, Renmin University of China.

This article was translated by Li Jingrong based on the original unabridged version published in Chinese.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

Print E-mail

Go to Forum >>0 Comment(s)

Add your comments...

• User Name Required
• Your Comment
• Enter the words you see:   
  Racist, abusive and off-topic comments may be removed by the moderator.