“China will keep its currency in a tight range for now,” she explained. “After the decision, it is impossible to predict but I think they will probably move towards further flexibility by widening trading bands to inject more volatility, rather than devaluing in a big move.
“This means the economy will continue facing headwinds from the strong currency, and growth will have to come from other sources rather than exports.”
The final point is a view shared by Westaway; while he does see controlling the renminbi as a key factor, he believes that the more pertinent issue is the ongoing shift within the Chinese economy from export to consumption.
“The challenge for China is not letting the renminbi appreciate too fast,” he said. “But they are trying to stimulate consumption in order to get domestic demand and consumer spending up, and for that they need the currency to strengthen, so they are caught in two minds and there is no easy answer.
“The Chinese economy has been unbalanced in recent years, and a lot of the grace that they have had has come from a lot of investment spending on infrastructure. Any economy that has 50% of its growth coming from investment is inherently fragile and unsustainable, and the challenge is to encourage the Chinese consumer to start spending more.
“It is not going to happen overnight. Chinese consumers still need to save a lot because they do not have a social security system or free healthcare and when they get older they do not want to be left with nothing. China needs to make these infrastructural changes.”
Westaway went on to say that while the renminbi-dollar peg could pose problems in the future, the greatest danger to the Chinese economy may actually come from within.
He said: “China’s economic levers are centred on stimulation as GDP growth drops to 7% – though I think they will miss that this year – through resorting to easier credit and lower interest rates, which is just stoking up the credit boom that they were worrying about in the first place.
“There is a possibility that China will just grind to a halt – getting the currency wrong is an element, but the biggest risk is that confidence in the financial system falls, there could be a hard landing.”
