Bloomberg columnist William Pesek says that systemic risk in China’s financial sector as well as laggard reform efforts on the part of Beijing are undermining hopes for the Renminbi to become an international reserve currency any time soon.
Writing for Asia Times Online, Pesek notes that the Chinese currency has received a sustained boost from escalating tensions in the Korean peninsula, with the offshore yuan rising for 15 consecutive days.
According Pesek, however, this robust appreciation will do little to burnish the long-term status of the yuan in the absence of urgently needed reforms and a transition away from credit-fuelled growth.
The International Monetary Fund’s 2015 decision to include the yuan in its special-drawing rights program was seen by many as portending a greater international role for China’s official currency, with IMF head Christine Lagarde stating in January 2016 that the move was “a clear indication of the reforms that have been implemented and will continue to be implemented.”
In Pesek’s opinion Beijing has failed to effective implement the reform measures required to shore-up the status of the yuan, as well as the broader health and sustainability of the Chinese economy.
The IMF has since said in its annual checkup on China that the country is on a “dangerous trajectory” of “credit-fueled growth,” that is “increasing risks of a disruptive adjustment and/or a marked growth slowdown.”
“The sharp growth in recent years reflects both a rise in credit to the real economy and intra-financial sector claims,” said the IMF. “The increase in size, complexity and interconnectedness of these exposures has resulted in sharply rising risks.”
According to Pesek it will be difficult for Beijing to wean China’s economy off its dependence upon credit extended by the country’s goliath banking sector.
“China…now has one of the world’s largest banking sectors – in fact, four of the five biggest institutions by assets are Chinese,” said Pesek.
“Trouble is, at 310% of GDP, the role banks play in China’s economy is already above the average of most developed economies and almost three times that of emerging nations.”
Pesek notes that the Chinese Communist Party’s legitimacy still depends upon the maintenance of economic growth, compelling local governments to “[do] their worst via borrowing and fresh credit creation to make their growth quota for the motherland.”
While President Xi Jinping has shown exceptional resolve in combating entrenched government corruption as well as thwarting potential political rivals, Pesek says he is “surprisingly timid” when it comes to economic reforms that are urgently needed during a period of economic transition.
“The glacial pace of reforms, five years into Xi’s reign, comes as China grapples with the transformational pressures all nations do when they move upmarket.”