China’s Battle to Regain Economic Control

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In a battle against declining economic outcomes, China is attempting to regain a semblance of control by changing existing policies and halting pessimistic statements in the media. The task is overwhelming and endless, as new measures appear to have little effect in the face of declining growth, capital flight, and rising anxiety. Still, Beijing is fighting a downturn on several key fronts.

First, fiscal and monetary policy have been deployed since declining economic activity settled in during 2013. Deficit spending has been ongoing, and is expected to rise in 2016 from 2.3 percent of GDP in 2015. Fiscal stimulus has been used for some time, loosening restrictions on purchasing real estate and financing public infrastructure. Monetary stimulus through cuts to the reserve requirement ration and direct liquidity injections has increased funds available for lending, but at present Beijing now walks a tight rope between improving economic conditions and causing fears of currency devaluation.

Additional policies have attempted to stop the bleeding in the stock market and capital account. Stock market policies were implemented in the second half of 2015 to limit the rapid withdrawal of funds. A more stringent stock circuit breaker mechanism was implemented to halt trading activity if the market declines by over 7 percent, but after this tripped markets twice in one week, it was suspended. Regulation to curb capital flight has been implemented in the insurance sector, as the State Administration of Foreign Exchange capped purchases of insurance products overseas at $5,000 per transaction. Mainland Chinese residents had been purchasing insurance in Hong Kong averaging $50,000 in order to shield themselves from further RMB depreciation. However, capital flight continues through both recorded and unrecorded (“hot money”) transactions. The latter is reflected in a surge in the errors and omissions entry in the balance of payments. China is depleting its foreign currency reserves to combat such outflows, and some analysts are concerned that reserves will be reduced to a critical level in a matter of months.

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If the economy cannot be easily swayed, the media can. Media discussion about economic conditions are at present closely monitored, and journalists have been jailed for publishing reports that depict economic and financial events negatively. A new law, going into effect on March 10, will require online media publishers to obtain approval before operating online. Foreign companies, including those in joint ventures, have been banned from producing digital content. Information on China’s economy is increasingly controlled. Notably, this month, the People’s Bank of China omitted data on financial institutions’ foreign exchange holdings, which might expose the scale of state interventions to bolster the RMB. This has left observers nervous about the true state of the economy.

In a final effort to reduce panic, control has required that China find individuals to hold responsible for the economic downturn. Xiao Gang, Chairman of the China Securities Regulatory Commission since March 2013, was ousted from his position, held responsible for China’s plunging stock market and failure of his circuit-breaker policy discussed above. Wang Baoan, head of the National Bureau of Statistics, was arrested after making a speech on the risks of capital outflows.

Worried yet? For many Chinese, and for long-time China hands, many of these events are familiar. Policy to curb panic, regulation to cover bad practices, suppression of information, arrest of top officials who go against (wittingly or unwittingly) the party line. All of these events taken together, and in a relatively short period of time with little good news to create hope, are disturbing, especially considering that China is attempting to restructure the economy wholesale. In order to do so, reforms need to keep coming, perhaps more rapidly, and uncertainty needs to be reduced, not by government guarantees but by more transparent data, clearer definition of financial and economic plans (particularly for the exchange rate), and a more marked government timeline and plan for reform. Beijing’s battle to regain economic control hangs in the balance.

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