Communication Breakdown

by Refayat Mosaowir Haque

The CCP (Chinese Communist Party) and the PBoC (People’s Bank of China), 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), to remain near to powerless and submissive to the whims of the State Council. Adding to 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; one who could arise sanguine in these times of turmoil to reassure markets and alleviate concerns. 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. Ironically, sometimes we are bestowed with revelations that actually cause more confusion and paranoia than optimism.

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 IMF’s (International Monetary Fund) requirements for official reserve currency status. The hope was that the renmimbi would, in essence, become internationalized. Conversely, internationalizing a currency entails it’s strengthening and that it becomes more market driven, given China’s economic reality achieving both is a near impossibility. No intervention will provide the renmimbi with both the reputation of being strong and market driven; an inherent and indomitable contradiction prevails. 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 US$320bn of its foreign exchange reserves from August till now as Beijing frantically attempted to limit a free fall of the currency. A year and a half ago Chinese reserves stood at around US$4tn and last month it fell to US$3.23tn; a loss of US$770bn, nearly half of which was exhausted in the last six months.

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.” This isn’t surprising given that reported GDP growth rates are dubiously close to growth targets set by the CCP. The approximately 7% rate set by the government is considered questionable to many. 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, and the drastically low increase of just 0.1% last year implies that growth is much slower than official estimates. 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 a more dreadful form of protracted attrition and to have more punitive repercussions than the subprime mortgage crisis of 2008.

Given the conspicuous nature of the Chinese economy’s decline the official growth rate of around 7% is untenable. It is crucial to ascertain how the official rate stands at roughly 7%. Let’s analyze one way the official statistics bureau calculated real GDP growth, this method is based on nominal GDP growth figures to account for inflation. In Q3 of last year nominal GDP growth stood at 6.2%, and with the inclusion of 0.7% deflation official calculations declared the real GDP growth to be 6.9%. However, during that quarter the consumer price inflation increased to 1.4%. Heightening concerns, the 0.7% deflation taken into account in their calculations stem from falling producer prices, which reflects the decline in the global prices of imported commodities, and not domestic deflation. Then, it is easy to see why the inclusion of “deflation” in their calculation cannot be accepted. Analysts have attempted to discover alternative deflators, but this task has been nothing short of arduous and grueling due to the lack of trustworthy and accountable data on sectoral weights and price levels. Notwithstanding this impediment, analysts have predicted the country’s growth closer to 5 to 6%, nothing close to the 7% declared officially. This so-called “doctoring” of figures is old news, however, it’s imperative that it stops for the sake of the country’s long-term growth and peaceful coexistence with the global economy.

The communications crisis is not only confined to inadequate communications of policy decisions and misrepresentative data reporting, but it also includes misguided policies that are a) kept under wraps for fear of scrutiny, and b) completely beyond economists and analysts subscribed to the free market canon. 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 to trough. In 2014, the CCP devised a scantly thought-out strategy talking-up equity prices to allow SOEs (State Owned Enterprises) 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 sidelined. Official Markit/Caixin factory PMI (Purchasing Managers’ Index) figures released February 1st revealed the record sixth straight month of decline in manufacturing. The PMI at the beginning of the month stood at 48.4, anything below 50 signals contraction. Interestingly enough, this report focuses more on small and medium sized companies and not the larger SOEs. SOEs are notoriously inefficient and indebted organizations often managed by kleptocrats under the protection of the CCP, so it makes sense that they were omitted from the report [author’s sarcasm]. The inclusion of SOE data in the report would have resulted in figures significantly lower than 48.4.

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. This in addition to, reaffirming its commitment to supply-side reforms it has been promising for years with a detailed, and accountable, timeline for policy implementation. Thankfully, Zhou Xiaochuan, PBoC governor, emerged out of oblivion February 16th 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 demoralizing and his analogy fatuous at best; one wouldn’t expect an individual locally deemed to be a “leading reformer” in the CCP to emerge from the shadows only to say something distasteful.

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 and equity market entities, and the rest of the world. The CCP must restrain itself from being complacent and negligent about distributing 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, often times 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. To quote Mao Zedong, “Disequilibrium is normal and absolute whereas equilibrium is temporary and relative”, “disequilibrium” in this context results from the absence of parity in terms of information. Perhaps it is to the CCP’s advantage to contain certain information within its inner circles, and to inhibit dissemination to external entities both local and foreign.

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. Reworking 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 haphazard and difficult to subdue. China’s hardships will only increase, as the country carries on its transition from secondary to tertiary sector in the wake of a global recession affecting everything from commodity prices to currencies.