World attention has justifiably been on Ukraine, but we are seeing some very interesting moves coming out of the financial sector in China these days -- moves that can be characterized as pretty aggressive in terms of challenging the markets.
Last week, markets were surprised to see movements in the Chinese currency as the yuan moved down 1.3% to levels not seen since June of last year. These moves may seem small by comparison to the crazy volatility of most other currencies, but in China this is significant. It is clearly a move orchestrated by the People’s Bank of China, with most analysts commenting that this was an effort by the government to introduce two-way movement into a market that was too complacent and believed that the government would only allow appreciation of the currency. We still believe that the RMB will appreciate gradually over the year, and indeed has already turned around somewhat this week to gain about a third of the decline from last week.
Finally, in what we believe is a sea change in policy - we are seeing an apparent debt default by a solar energy company. This is the first bond default in modern history for China. The government could bail out the company, but is expected not to step in. This clearly brings back memories of Bear Stearns in the U.S. but China seems to be making a very careful calculation to introduce real risk to a country that has traditionally done everything in its power to avoid surprises.
All of this would point to the trend we have seen over the last few months – China choosing long-term reform over short-term growth. But earlier this week the government announced at the opening ceremony of the National People’s Congress that it is targeting a 7.5% growth rate for 2014 - expected by many analysts, but still on the high side and a bit of a stretch, as well as a break from the last few years when China came in with growth forecasts lower than most others in the market.
My view: I have to applaud China for taking on some very bold initiatives and goals - building long-term strength by weeding out weak players in the economic system, but also remaining focused on growth. They seem capable of meeting the challenge, and I look forward to their success.
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