This year wasn’t a step forward for the Chinese economy, but there are plenty of things cooking for 2014.
GDP growth slowed, managing a rate of barely more than 7 percent, just the number needed to keep things stable. That would be a rate other countries would covet, if private and local debt wasn’t growing even faster.
Exports hit a rough patch in June, but recovered toward the end of the year. While still substantial on an absolute basis, they are now a minimal source of growth.
Knowing full well that growth from exports will not be forthcoming and that investment rates of 50 percent of GDP inevitably lead to bubbles, the policymakers in Beijing have shifted gears and are planning a couple of bold but risky initiatives.
Using the Yuan
China has imported more than 2,200 tons of gold since September 2011 and has confiscated all of its domestic production, which is the largest in the world. A private Chinese company purchased the former headquarters of JPMorgan Chase & Co. in New York City, rumored to contain the largest gold vault in the world.
Gold is still at the heart of the global monetary system, and a country with international ambitions needs gold readily available for its currency to be taken seriously. Clearly, China wants this, as it also signed several bilateral agreements with different countries to trade directly in yuan. Still, the yuan has now overtaken the euro as the standard for some measures of traditional trade financing.
The regime also announced it will accelerate the convertibility of the yuan, which means the floating of the now tightly managed currency. It could happen in 2014.
Free Trade Zones
A free-floating currency, however, is useless, unless there are capital markets that can absorb inflows and outflows of foreign currency. Up until now, this has also been tightly managed. This year, however, China’s largest city, Shanghai, was established as the country’s first free trade zone, where foreigners can buy assets that are not on a negative list of sensitive investments. There will be more of these zones in 2014 and eventually the whole country will be opened to foreign investment.
If China manages to successfully float the yuan and open its capital markets to investment, it could bring a much needed efficiency boost to a lopsided economy.
Alas, if history is any judge, the rule of law, streamlined regulatory standards, a culture of innovation, and a growth engine based on productivity (not debt), are factors China is missing in its reforms.
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