The Chinese Communist Party (CCP) and the People’s Bank of China (PBoC) -- the country’s central bank -- recently admitted the existence of a serious gap in their communications strategy. Sadly, the fundamental opacity of the CCP makes this an insurmountable challenge. Exacerbating this issue further is the fact the PBoC is de facto an advisory board accountable to Premier Li Keqiang’s State Council. This results in the PBoC, akin to the Federal Reserve or the ECB (European Central Bank), remaining near to powerless and submissive to the whims of the State Council.
Adding to the woes is the fact that what the world needs from China, now more than ever, China does not possess. China needs a central bank governor similar in poise and authority to Ben Bernanke (now Janet Yellen) or Mario Draghi. It is safe to assume we are more or less being kept in the dark with regards to key Chinese economic and financial data, and policies mandated by Beijing.
Let’s take the example of the currency adjustment last August. Beijing decided to depeg the renminbi to the US dollar to make it more flexible. The move was promising, as it aimed to offer greater exchange rate flexibility with 2% devaluation relative to the US dollar, and to make the currency more market-driven in order to satisfy one of the International Monetary Fund’s (IMF) requirements for official reserve currency status.
For this reason, world markets were left utterly perplexed in August. What Beijing sought as a positive policy step was misinterpreted as the government’s first shot in a new currency war. Such instances compel us to sit and pull our hair out trying to make sense of it all.
Beijing’s motive was not clearly communicated, and this culminated in negative speculation and, eventually, widespread apprehension. Markets saw the devaluation as Beijing’s desperate response to rescue a sinking economy. It was widely perceived that the move to a more flexible currency reflected the abysmal state of the economy, something official figures concealed. Poor communications surrounding the move not only sent world markets into a state of hysteria but also cost the country $320 billion of its foreign exchange reserves from August till now as Beijing frantically attempted to limit a free fall of the currency.
Lapses in the CCP’s communications strategy have also impacted global perceptions of the credibility surrounding official figures, especially concerning growth.
Many Western economists do not give much credence to official GDP growth rates, some expressing their distrust by going as far as referring to them as “purely figments of official imagination.”
In fact, recent figures on electricity consumption, bank lending, and freight volumes allude to increasingly weaker growth than what the official quarter-to-quarter composite data suggests. Power output as a metric is also a reliable indicator of growth. Effects of supplying exaggerated and misrepresented data for the benefit of the CCP is continuously being felt globally in the form of a looming global crisis, with some predicting it to induce more dreadful and punitive repercussions than the sub-prime mortgage crisis of 2008.
Misguided and harmful policy choices can be attributed to last summer’s collapse of the local equity market, during which we witnessed a fall of 40% peak. In 2014, the CCP devised a scantly thought-out strategy talking-up equity prices to allow state-owned enterprises (SOEs) to float shares for raising funds needed in paying off their excessive debts. No amount of intervention could avert the collapse that resulted from the ensuing bubble.
Complicating matters for the CCP even more is the onslaught of issues they are having to face as consequences of their misguided and poorly-communicated policies, and manipulated economic and financial statistics. This is further widening the communications gap as more salient long-term matters such as addressing distortions in the real economy are being side-lined.
What is absolutely essential for the CCP to do at this present moment is to sustain a transparent communications strategy that effectively elucidates the government’s short-term and long-term plans for the currency and equity markets.
Thankfully, Zhou Xiaochuan, PBoC governor, emerged out of oblivion on February 16, vindicating his institution’s communications strategy by saying: “The central bank is neither God nor a magician who can turn uncertainties into certainties.” Mr Zhou’s statement was needlessly demoralising and his analogy fatuous at best.
A nation as entrenched in the global financial system as China can only stand to lose by discouraging independent and transparent communications between its central bank, currency institutions, equity market entities, and the rest of the world.
The CCP must restrain itself from being complacent and negligent about fabricating information. Whatever the policy intentions are, the CCP must be assiduous about disclosing them lucidly and in a thoroughly detailed manner, as this is necessary to reduce the scope for misinterpretation. Manipulating domestic economic data won’t help its case either.
As is being seen in multiple cases, the CCP’s unorthodox and arcane policies are ineffectively communicated to the outside world. This leaves speculators and analysts completely bewildered and incapable of making educated predictions, and steers world markets towards chaos. But maybe that’s their strategy, to deliberately restrict the flow of information to the outside world.
The bottom line is if China is to maintain its growth trajectory of 7%, it ought to respect the norms and conventions of global financial communities and play by their rules.
They could start by not being reticent about their indispensable economic information. Re-working the communications strategy could be the first step in ameliorating the bedridden financial status quo plaguing the second largest economy in the world.
However, it won’t be all uphill once this issue is addressed, debilitating effects of the global slowdown and other macro-pressures exerting themselves on the nation will be difficult to subdue. China’s hardships will only increase, as the country carries on its transition from the secondary to the tertiary sector in the wake of a global recession affecting everything from commodity prices to currencies.