China slashed the value of the renminbi by two percentage points last week in a move that took many off guard.
The currency subsequently fell more than 3 percent despite official denials the devaluation is a long-term strategy.
On paper, cheaper renminbi should have attracted foreign capital to the Chinese stock market.
However, trading remains lukewarm, with investors wary of further moves to depress the currency.
Beijing insists the devaluation is part of market reform but we know there’s more to it than meets the eye.
After various stimulus measures failed to rekindle growth — exports contracted 8.3 percent last month — some western observers say Beijing is in panic mode.
That might be an exaggeration, but judging by recent developments, Chinese leaders are uneasy about the status quo.
The devaluation may not be the “unexpected” move it has been cracked up to be.
That said, Hong Kong people are less interested about characterizing the devaluation than pondering its impact on their economy.
The most immediate consequence is that Hongkongers with renminbi assets have suffered losses but not a lot.
Until 2014, when the cross-border stock trading link opened, the renminbi daily purchase quota had been capped at 20,000 yuan (US$3,128).
Already, the weaker renminbi has made imports more expensive.
That will curb the appetite of Chinese consumers for foreign goods including those from Hong Kong, compounding uncertainty in an already depressed retail market.
Hospitality, leisure and gaming have been losing traction amid a slowing mainland economy. Beijing’s anti-graft purge added a big drag on these sectors.
Wealthy Chinese may cash out of their renminbi assets and buy into the Hong Kong dollar, using the proceeds to buy local property.
We could see home prices surge, undoing years of cooling measures by the government.
Hong Kong entrepreneurs may withdraw their money from the mainland or hold back their investments.
In hindsight, tycoon Li Ka-shing has been proven right.
He reduced his investment in the mainland when many were betting that the economy will continue to grow at a rapid pace.
The flight of Hong Kong money from the mainland also has political implications.
After Beijing offered incentives to Hong Kong capitalists to invest in the mainland, it’s unlikely to be as generous this time around.
On the day of the devaluation, mainland financial magazine Caijing published an article by Hong Kong economist Steven Cheung which discusses the dangers posed by the Chinese economy.
Cheung warns that Beijing’s economic policies are “profoundly unclear without any direction”, leading him to lose confidence in the economy.
He says a “great recession” does not have to be a big one but a moderate recession could have a crippling impact if it persists for a number of years and policymakers fail to stem it.
The Great Depression in the United States before the World War II and Japan’s more than two decades of tepid economic performance since the 1990s have these hallmarks, he says.
China is on the verge of such a “great recession” after a series of serious miscalculations.
Here are a few of them:
1. Allowing monopolies and protectionism in many key industries such as the auto sector.
2. Sluggish financial reform in Shanghai’s Lujiazui financial district.
3. Political infighting and an anti-corruption campaign that has entangled genuinely capable regional officials.
4. Ideological tightening in higher education.
5. False statistics such as those for national income, misleading policymakers.
6. Manipulation of monetary policy, including exchange rates, to offset an economic downturn.
Cheung is an admirer of Nobel economics laureate Milton Friedman who believes that government regulation is usually a result of rent-seeking, cronyism and abuse of power.
This article appeared in the Hong Kong Economic Journal on Aug 13.
Translation by Frank Chen
[Chinese version 中文版]
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