China to rely less on economic stimulus as it battles risks

Journalists raise their hands to ask questions to Zhou Xiaochuan, governor of the People's Bank of China during a press conference held on the sidelines of the annual meeting of China's National People's Congress (NPC) in Beijing, Friday, March 9, 2018. (AP)
Updated 09 March 2018

China to rely less on economic stimulus as it battles risks

BEIJING: China has moved away from its old growth model which was heavily reliant on investment and will rely less on stimulus to boost the economy in future, People’s Bank of China governor Zhou Xiaochuan said on Friday.
Zhou’s comments echoed those of other top officials at China’s parliament this week which suggested that Beijing will be more cautious about spending this year while it focuses on reducing the risks from a rapid build-up in debt.
After years of heavy pump-priming, markets worry less generous stimulus could retard the pace of growth not only in China but globally.
But analysts believe Beijing will continue to keep the system well supplied with cash to avoid the risk of a sharp slowdown in economic growth, even as they continue to tighten the screws on financial regulations.
“We now emphasize the new normal of the economy, shifting from the past growth model of quantitative growth... referring to the accumulation of capital and investment to boost economic growth,” Zhou told reporters on the sidelines of the annual parliament session.
“While pursuing higher quality growth, we will have to reduce our reliance on the old growth model of investment,” said Zhou, in what was likely his last news briefing before his expected retirement this month.
Zhou said China needs to improve its regulatory supervision as soon as possible to curb risks to the financial system.
He said China has begun to make progress in reducing such risks, but numerous threats remain, such as a lack of transparency at financial holding companies and digital currencies.
“Everybody should see that China has entered a stabilizing leverage and is gradually reducing the leverage situation. The trends are clear,” said Zhou, referring to high debt ratios.
Zhou pointed to a moderation in China’s broad M2 money supply growth last year as evidence that the official “de-risking” and “de-leveraging” campaign was working.
The PBOC said on Friday that M2 growth was 8.8 percent on-year in February, higher than January’s 8.6 percent growth but down from 11.1 percent in the year-ago period.
Financial risks from private financial conglomerates that used highly leveraged acquisitions to expand rapidly in recent years have come to forefront with the government seizure of Anbang Insurance Group Co. Ltd.
The central bank is drafting rules on financial holding companies, PBOC Vice Governor Pan Gongsheng said at the same news conference.
Earlier this week, Premier Li Keqiang announced a growth target of around 6.5 percent this year, the same level that it handily beat in 2017 thanks in part to massive government infrastructure spending and record bank lending.


Gold rush at Turkish bazaar a test of trust for lowly lira

Updated 15 August 2020

Gold rush at Turkish bazaar a test of trust for lowly lira

  • As precious metal prices soar, Turks rush to buy amid economic uncertainty and a volatile currency

ISTANBUL: Hasan Ayhan followed his wife’s instructions last week and took their savings to buy gold at Istanbul’s Grand Bazaar as Turks scooped up bullion worth $7 billion in a just a fortnight.

With memories of a currency crisis which rocked Turkey’s economy only two years ago fresh in his mind, the retired police officer was among those playing it safe as he queued in the city’s sprawling market, where a screen showed the gold price rise by one Turkish lira ($0.1366) in just 10 minutes.

“I think it is the best investment right now so I converted my dollars to buy gold,” the 57-year-old said. “I might withdraw my lira and buy gold with it too, but I am scared to go to the bank right now because of coronavirus.”

The day after Ayhan bought his gold on Aug. 6, the lira hit a historic low and remains skittish, laying bare concerns that Turkey’s reserves have been badly depleted by market interventions, which are showing signs of fizzling out.

Turks traditionally use gold for savings and there may be 5,000 tons of it “under mattresses,” with more added after the recent buying spree, Mehmet Ali Yildirimturk, deputy head of an Istanbul gold shops association, said.

Although bullion has never been more expensive, vendors at the Grand Bazaar said almost no one was selling their gold jewelry. There are only buyers.

HIGHLIGHTS

  • Currency touched record lows in three volatile weeks.
  • Local holdings of hard currencies at all-time high.
  • All are buyers at Grand Bazaar, despite expensive gold.

“I’ve been chatting with hundreds of people who are thinking about selling their cars or houses to invest in gold,” vendor Gunay Gunes said.

In the last three weeks, as selling gripped the lira, local holdings of hard assets such as dollars and gold jumped $15 billion to a record of nearly $220 billion.

There is no evidence suggesting people are about to pull savings from banks, and this week the lira has hovered around 7.3 versus the dollar, although it remains among the worst emerging-market performers this year.

Demand has eased since Turks withdrew some $2 billion in hard foreign cash from their banks during a March-May period in which a lockdown was imposed and the lira hit its last low. Analysts say that if Ankara cannot boost confidence in the currency, which has fallen almost 20 percent this year, import-heavy Turkey risks inflation and even a balance of payments crisis that will worsen fallout from the coronavirus crisis.

Given foreign investors now have only a small stake in Turkish assets, they say the key for President Recep Tayyip Erdogan’s government is convincing Turks to stop turning to the perceived stability of dollars and gold.

The central bank and treasury did not immediately comment on the dollarization trend or any policy response.

Finance Minister Berat Albayrak, Erdogan’s son-in-law, said on Wednesday the lira’s competitiveness was more important than exchange rate volatility.

The central bank has effectively borrowed on local dollar liquidity to fuel foreign exchange market interventions, which are meant to stabilize the lira.

Through Turkish state banks, which together are “short” foreign exchange by $12 billion, the central bank has sold over $110 billion since last year. In turn, the bank’s gross FX buffer has fallen by nearly half this year to below $47 billion, its lowest in years.

The central bank has said its reserves naturally fluctuate in stressful periods, and the treasury says the bank intervenes at times to stabilize the currency.

But ratings agencies say Ankara should take decisive steps, such as an interest rate hike, to rebuild reserves and restore confidence. Otherwise, rising current account deficits and possible debt defaults could tarnish a solid reputation for meeting foreign obligations.

“Locals don’t want to keep Turkish lira, they’ve been dollarizing and buying gold. Turks have hardly ever done that,” said Shamaila Khan, New York-based head of EM debt strategy at AllianceBernstein, which manages $600 billion. “That is why you need proactive policies because if you get to that stage where locals are unwilling to keep their money in the bank then you’re heading to a balance of payments crisis. That’s when the alarm bells will start ringing.” 

Some banks imposed fees on withdrawals this week, while the central bank has curbed cheap credit channels it opened to ease the coronavirus fallout. Yet while lira deposits now earn more than the 8.25 percent policy rate, their real return is negative with inflation at 11.8 percent.

Traders say such backdoor tightening needs to reach 11.25 percent to stabilize the lira, which has nearly halved in value since early 2018.

Market expectations have risen for a formal rate hike that economists say would reinforce central bank independence, even while it could slow economic recovery.

Politics may stand in the way.Erdogan, whose popularity has dipped this year, holds the view that high rates cause inflation, and sacked the last central bank governor for disobedience.

He said on Monday he hoped market rates would fall further.

But firms such as System Denim, which imports materials and makes clothes for companies like Zara and Diesel, are feeling the pinch from rising costs. Owner Seref Fayat said he converted his 4 percent euro-denominated loans to lira at 10 percent. “No need to take on additional FX risk,” he said. “I pay a higher rate, but at least I can see ahead.”