《华尔街日报》
A Rare Look Inside China’s Central Bank Shows Slackening Resolve to Revamp Yuan
Minutes of closed-door meetings show how leaders lost interest in making the yuan’s value more market-based; Xi Jinping’s second thoughts
Minutes of closed-door meetings show how leaders lost interest in making the yuan’s value more market-based; Xi Jinping’s second thoughts
People’s Bank of China headquarters in Beijing. In January, the central bank ditched the market-based mechanism for valuing the yuan that was announced last August. Photo: Qilai Shen/Bloomberg News
By Lingling Wei, Updated May 23, 2016
BEIJING—Behind closed doors in March, some of China’s most prominent economists and bankers bluntly asked the People’s Bank of China to stop fighting the financial markets and let the value of the nation’s currency fall.
They got nowhere. “The primary task is to maintain stability,” said one central-bank official, according to previously undisclosed minutes of the meeting reviewed by The Wall Street Journal.
The meeting left little doubt China’s top leaders have lost interest in a major policy shift announced in a surprise move just nine months ago. In August 2015, the PBOC said it would make the yuan’s value more market-based, an important step in liberalizing the world’s second-largest economy.
In reality, though, the yuan’s daily exchange rate is now back under tight government control, according to meeting minutes that detail private deliberations and interviews with Chinese officials and advisers who spoke with The Wall Street Journal about the country’s currency policy.
On Jan. 4, the central bank behind closed doors ditched the market-based mechanism, according to people close to the PBOC. The central bank hasn’t announced the reversal, but officials have essentially returned to the old way of adjusting the yuan’s daily value higher or lower based on whatever suits Beijing best.
Currencies usually rise and fall based on market forces. China's government said it would loosen its hold on the yuan last August, instead of its traditional policy of setting the currency's value. It hasn't worked out so well. Photo Illustration: Andrea Liang/The Wall Street Journal
The flip-flop is a sign of policy makers’ deepening wariness about how much money is fleeing China, a problem driven by its slowing economy. For now, at least, officials believe the benefits of freeing the yuan are outnumbered by the number of threats. Re-emphasizing the yuan’s stability would also bring a sigh of relief to trading partners who worried a weaker currency would boost Chinese exports at the expense of those produced elsewhere.
Freeing the yuan, the biggest overhaul of China’s currency policy in a decade, was meant to empower consumers and help invigorate the economy. The negative reaction, from financial markets world-wide and Chinese who sped their efforts to take money out of the country, was so jarring that the top leadership, headed by President Xi Jinping, began to have second thoughts.
At a heavily guarded conclave of senior Communist Party officials in December, Mr. Xi called China’s markets and regulatory system “immature” and said “the majority” of party officials hadn’t done enough to guide the economy toward more sustainable growth, according to people who attended the meeting.
Chinese President Xi Jinping at a meeting in Beijing on May 17. He told Communist Party officials in December that China’s markets and regulatory system were ‘immature,’ which led to the flip-flop on currency-policy liberalization. Photo: Ding Lin/Zuma Press
To the central bank, there was only one possible interpretation: Step on the brakes.
Yi Gang, a deputy central-bank governor, said in April in Washington that “the market is still the No. 1 factor” in determining the yuan’s value.
Instead, people close to the PBOC said, the bank guides the daily direction of the currency by alternating between setting the yuan’s value against the dollar and a basket of currencies. The central bank’s press office didn’t respond to requests for comment.
Earlier this month, Beijing staged what appeared to be a publicity blitz aimed at reaffirming its overall economic reform intentions while keeping the yuan basically stable. That came after a wave of credit helped gross domestic product expand 6.7% in the first quarter, still the slowest pace in seven years. Much of the $1 trillion in new credit flowed into the housing market, spurring questions over the sustainability of China’s debt-fueled expansion and the leadership’s resolve to restructure the economy.
The People’s Daily, the Communist Party’s mouthpiece newspaper, published May 9 a lengthy article that cautioned against going back to old ways to stimulate growth.
People familiar with the matter said top economic advisers to Mr. Xi ordered up the article, which also stressed the need to keep the yuan “basically stable.” The information office of China’s State Council didn’t respond to requests for comment.
Mr. Xi, 62 years old, took power in late 2012 and has established himself as China’s most powerful leader in decades.
China’s economic policy was long the purview of the nation’s premier. That changed under Mr. Xi, who has concentrated controls in his own hands. At the same time, he has been dismayed that his decisions on structural overhauls haven’t been effectively implemented by the government led by Premier Li Keqiang, officials close to Mr. Xi say.
People who are sympathetic to Mr. Li say the premier is in a bind because his job duties also include hitting Mr. Xi’s economic growth targets. Those people say meeting the targets means the government has to dial back on closures of smokestack factories, freer capital flow and other changes.
The preference for stability in China’s currency policy rather than change reflects the jockeying that has begun as party officials look ahead to next year’s reshuffling at the top. A majority of the seats on the seven-member Politburo Standing Committee will open up. “No one wants to make mistakes at this juncture,” one senior Communist Party official says.
The retreat from making the yuan more market-based puts China’s central bank in the difficult position of having to battle continuing downward pressure on the currency, also known as the renminbi. Since the end of April, the yuan’s value has dropped three weeks in a row.
Keeping the currency stable comes at the expense of China’s foreign-exchange reserves and restrains the PBOC’s ability to protect the economy.
China had $3.22 trillion in currency reserves in April, down from nearly $4 trillion in June 2014. The U.S. Treasury Department estimates Beijing sold more than $480 billion in foreign-currency assets from August through March to support the yuan.
The money flow out of China by companies and individuals slowed to $28 billion in April from more than $100 billion in December and January, according to estimates from UBS Group AG. Chinese authorities have stepped up controls aimed at discouraging outflows.
“China’s underlying depreciation pressures remain unaddressed, as restructuring and reform have so far advanced in fits and starts,” says Harrison Hu, China economist at Royal Bank of Scotland. “This leaves the risk of jolts to financial markets open.”
Currency policy has been one of China’s most politically charged economic issues. Those who are pushing the central bank to allow the market to take the yuan lower, as the PBOC indicated it would do in August, include the Commerce Ministry, which watches out for exporters helped by a weak yuan.
Such companies have found allies in economists at the government think tank China Academy of Social Sciences, who argue the yuan has become overvalued as the economic slump drives capital to leave China.
On the other side are China’s giant state firms, which are generally ill-equipped to deal with market swings and hold large amounts of debt denominated in U.S. dollars. As a result, they prefer that the yuan stay close to the dollar.
The central bank has been a voice for a freer yuan as a way to inject greater discipline into the economy. It ultimately answers to Mr. Xi, who initially promised to give market forces a “decisive” role in the economy when he took power.
The Chinese president set out to make the yuan more viable internationally, and one of his top economic priorities for 2015 was to get the International Monetary Fund to include the yuan in its basket of reserve currencies.
Achieving the milestone would show China’s growing economic clout. The nation represents about 15% of the world’s output, nearly triple what it was a decade ago.
Last year, Zhou Xiaochuan, China’s longtime central-bank governor and a champion of market-oriented policies, saw an opportunity to accomplish two goals at once: give the market bigger sway in setting the yuan’s value, which the IMF required, and let some air out of the currency.
It had become increasingly costly for the PBOC to keep the yuan close to the dollar. “It is the time to change the currency policy,” Mr. Zhou said in March 2015.
In August, the PBOC said it would base the yuan’s fix, or the value set each day by the central bank, on the previous day’s market close. Until then, the value had been entirely determined by the central bank itself. The PBOC paired the policy shift with a devaluation of almost 2%.
Zhou Xiaochuan, China’s longtime central-bank governor and a champion of market-oriented policies, said in March 2015: ‘It is the time to change the currency policy.’ Photo: jacky naegelen/Reuters
The announcement came with few details and scant explanation. Investors saw the move as a suggestion that China’s economy was in such bad shape that the central bank was taking extraordinary steps to help Chinese exporters. The yuan plummeted, and countries from Kazakhstan to Vietnam to Pakistan quickly devalued their own currencies.
The panicked response upset Chinese leaders. Within a day or two, a group on economic matters led by Mr. Xi instructed the central bank to stabilize the yuan, which it did by dipping further into its foreign-exchange reserves.
As early autumn winds dissipated the summer heat in Beijing, the temperature was rising in the southern part of the walled Zhongnanhai compound where Mr. Xi works. The leader didn’t like what he saw.
The attempt to make the yuan more market-driven, described by one economic official as “depreciation disguised as reform,” was turning into a major cause of market uncertainty and capital outflows.
Chinese stocks tumbled nearly 25% in two weeks following the currency move, and the country’s currency reserves fell $93.9 billion in August.
In November, the IMF gave its nod to the yuan’s inclusion with its reserve currencies. There was a sense of “mission accomplished” among many Chinese leaders, and the central bank’s commitment to its new “fix” mechanism started to waver, according to the people close to the PBOC.
At the party’s year-end economic conference in December, Mr. Xi indicated that the turmoil in China’s financial markets had made him think twice about hurrying in reforms, according to the officials with knowledge of the meeting.
Mr. Xi talked about the need to guard against risks and said China’s international standing depended on “whether we can mind our own business well.” About two weeks later, the PBOC abandoned the market-based mechanism.
Eswar Prasad, a China scholar at Cornell University and the IMF’s former top official in China, says the “uneven and haphazard approach to making the exchange rate more flexible highlights the tensions between the government’s desire to free up markets and its tendency to override markets when they do not produce the results it wants.”
The powerful State-Owned Assets Supervision and Administration Commission was instrumental in convincing Chinese leaders to backtrack. The more the yuan is allowed to weaken, officials said, the more expensive it will be for already struggling state firms to service their loans.
An investor in a stock-exchange hall in Beijing on Jan. 4 as shares sank on the first trading day of 2016. Making the yuan more market-driven wound up rattling investors and spurring capital outflows. Photo: VCG/Getty Images
A 3% depreciation of the yuan could add $25.6 billion to Chinese companies’ annual interest payments on dollar debts, according to estimates by analysts at BNP Paribas.
“The exchange-rate policy is being hijacked by state-owned enterprises, whose words carry a lot of weight with the leadership,” an official close to the state agency says. Companies with high dollar-debt exposure include China’s three national airlines and its largest shipping firm, China Cosco Holdings Co.
In the past few weeks, the strengthening dollar has renewed pressure to steady the yuan. The yuan is down 0.9% since the end of April, erasing the currency’s gain of 1% during the previous two months.
In late February, some central-bank officials expressed frustration they had to retreat from yuan liberalization because of pressure from the state sector. The comments were made during a meeting in Shanghai with economists, bankers and representatives from state-owned and private companies.
Central-bank officials defended the interventions again during the March closed-door meeting in Beijing, saying ordinary Chinese might rush to dump yuan for foreign currencies if the yuan is allowed to weaken too much.
The head of one of China’s largest brokerages expressed dismay that all the emphasis was on stability. The chief economist at one of China’s top banks asked why the PBOC had been so quick to prop up the yuan. An overvalued currency could drag down the economy further by forcing Chinese manufacturers to cut prices and lower wages, the economist argued.
“If we’re bent on stabilizing the yuan above what it’s really worth, how will that affect the economy?” the economist asked.
The frustration put PBOC officials on the defensive. “The comments all of you made are correct,” said one official. At least for now, though, he added, the market’s influence on the yuan would be decided by Beijing.
The Future of Banking Is in China
Tech companies use internet payment systems as a wedge into an array of money-management services
Tech companies use internet payment systems as a wedge into an array of money-management services
The Alipay app for now is mainly a high-tech credit card that makes it easy to use a mobile phone to exchange money. Photo: Zhang Peng/LightRocket/Getty Images
By James T. Areddy and Alyssa Abkowitz,June 2, 2016
SHANGHAI—Wu Jun’s rose gold iPhone is a financial supermarket.
The 33-year-old market researcher in Shanghai usually keeps yuan equivalent to a few hundred dollars deposited online to cover her daily spending—and more ahead of big sales. It takes her only a few taps on the screen to buy investment funds, split restaurant bills with friends and send cash to family members. She recently dipped into the account for a $7.50 box of tea at a Shanghai convenience store.
“I use it about every day,” Ms. Wu said. “Click here, and they just scan the code. You don’t even need to take out your wallet.”
None of this directly involves a bank. In a living example of what U.S.-based fintech companies can only aspire to, China’s giant technology companies are using their internet payment systems as a wedge into an array of money-management services, prying deposits and fee-generating business away from the country’s banks.
A recent Citigroup report says financial-technology companies in China already have a similar number of clients as the country’s major banks. Ant Financial Services Group is among the pacesetters, positioning its Alipay phone app—one of the systems used by Ms. Wu and 450 million others each month, the company says—as a bazaar for consumer financial services the way its affiliate Alibaba Group Holding Ltd. grew to dominate online shopping.
The Alipay app for now is mainly a high-tech credit card that makes it easy to use a mobile phone to exchange money. At checkout, users call up a QR code that the clerk scans to complete the payment, sort of like Apple Pay, except it works nearly everywhere. Money can also be sent directly to other people.
http://m.wsj.net/video/20151120/112015cpayment2/112015cpayment2_v2_ec664k.mp4
In China, mobile payment has become a part of people’s everyday lives. The WSJ’s Menglin Huang spends a day without cash in the southern city of Shenzhen and finds out how you can pay for things digitally. Photo: Diana Jou/The Wall Street Journal
Mobile Payment: Going Cashless in China
In China, mobile payment has become a part of people’s everyday lives. The WSJ’s Menglin Huang spends a day without cash in the southern city of Shenzhen and finds out how you can pay for things digitally. Photo: Diana Jou/The Wall Street Journal
Mobile Payment: Going Cashless in China
Increasingly, Alipay is peddling financial products alongside services such as taxi booking and noodle deliveries. Press the tile marked Yu’E Bao to park spare cash in an interest-bearing account or Ant Fortune to buy higher-yielding investments. A credit function aims to make it easier to weigh risks. The group’s MyBank, its new online-only bank, said this year it had issued 870,000 loans at an average amount around $6,100.
Another digital rival is Tencent Holdings Ltd. , which is building financial services on the back of its popular WeChat messaging system. During Lunar New Year, its over 760 million users exchanged 32 billion “red packets,” a twist on a holiday tradition to gift small amounts of cash.
Last year, Tencent joined Ant in launching online-only banks that accept minideposits and microloans, extending their leadership in the country’s $235 billion internet payments business.
At Tencent’s WeBank, the one-minute process to set up an account requires little more than a mobile-phone number, the applicant’s national identification number and the user’s photo taken with the phone’s front-facing camera.
The government has supported the digital-finance trend to spur consumer spending and arrest a slump in economic growth that has sunk to quarter-century lows. But the industry at times has moved faster than regulators can keep up with: Blowups in peer-to-peer and other online investment firms have repeatedly left depositors with nothing.
Ms. Wu is wading in cautiously. She said she is comfortable keeping hundreds of dollars deposited online but cites “the safety issue” for bigger amounts, which she prefers to keep in a bank, where deposits are government-guaranteed. Ant Financial and Tencent say they have invested in technology that makes payments secure, such as QR codes that can change every 60 seconds, making them unique for each transaction.
China is adopting such services much more quickly than the U.S. Despite a widespread push by Apple, Samsung and Android to promote their mobile-payment technologies, paying with a mobile phone is still considered a novelty. A survey released in March by the Federal Reserve found only about a quarter of U.S. smartphone users had used their device to make a payment in the previous 12 months.
In the U.S., a wide divergence of technologies used by brick-and-mortar merchants is one hurdle. Retail behemoth Wal-Mart Stores Inc., for example, doesn’t accept Apple Pay.
Roughly half of U.S. smartphone owners use their phones to conduct banking activities like checking account balances, transferring money between accounts or receiving alerts, the Fed survey showed.
In China, bankers say they are losing deposits to wealth-management companies that advertise high returns by text message. Online payment services are absorbing fees that could be generated by wire transfers and credit cards, which never caught on in China. Peer-to-peer networks are issuing mortgages and underwriting weddings. Bankers say the fintech companies remain in the ramp-up stage and predict the firms will eventually face more regulation and begin to act more like banks in setting fees and interest payments. ?
The fintech industry is blurring business lines when it comes to deposits. While the government guarantees bank deposits, banks and fintech companies often serve as platforms for higher-yielding investments that carry no such assurances.
“You have to have a bank,” said Li Ying, a 34-year-old in Shanghai. But after ticking off the various ways she uses ?mobile finance, including transferring money and parking deposits, she said, “we are going to use banks less and less often.”
去年今日此门中，人面桃花相映红。
人面不知何处去，桃花依旧笑春风。
人面不知何处去，桃花依旧笑春风。
