Room for less alarmist outlook on China

There are fears surrounding China on almost every front. Weaknesses are perceived regarding its gross domestic product (GDP), investment, its currency and capital outflows. The data on employment is thought insufficient. The positive current account is seemingly built on weaker imports. The level of truly impaired loans is uncertain.

Our own views are rather less alarmist.

Regarding the currency, we do believe the People's Bank of China (PBOC) now favours a relative stability of the yuan over further appreciation, but cannot conceive of a political desire to devalue/depreciate the currency. The PBOC wants to turn the yuan into a convertible currency, which will mean increased volatility.

Volatility is by no means synonymous with depreciation, and a significant depreciation would cause problems with respect to the opening up of the capital account. It will be important for China to remain attractive to international investors so that net capital flows are kept under control. If international investors fear a lower exchange rate, their investments in China would likely be curtailed. It therefore seems much more likely that China will curb capital outflows or otherwise delay the opening-up of the capital account than that they will accept a large depreciation/devalu…