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Perception Gaps
A Summer Davos event gives a flavor of what international experts have to say about interest rates and more
By Eric Daly | NO. 40 OCTOBER 1, 2015



On September 9 at the Summer Davos forum in Dalian, at the end of a wide-ranging discussion entitled "The Global Balancing Act," impressively coiffured host Stephen Engel, a Bloomberg journalist, asked his four panelists for a show of hands concerning whether or not they thought the Federal Reserve would raise interest rates one week later.

Intriguingly, the two Western-based commentators answered yes, while their Chinese-based counterparts said no.

On September 17, Janet Yellen vindicated the naysayers, and the world was left to speculate whether it would be the November or December meets when the Fed would make it long-awaited move.

The news was most likely greeted with a collective sigh of relief among markets. At the talk, Helen Zhu, head of China equities at global asset manager Blackrock in Hong Kong, said that for many developing economies, China included, the prospect of the Fed stalling would be welcome, giving them a chance "to catch up."

Regarding the situations faced by the world's two largest economies, Engel humorously asked the panelists whether it was U.S. Fed Chairwoman Janet Yellen or Zhou Xiaochuan, Governor of the People's Bank of China (PBC), who had the harder job.

Zhu said that the coming rate hike decision was the greatest communication challenge the Fed chair had faced. Zhang contrasted the PBC's sudden actions with those of the Fed, which has been teasing interest rate hikes for what seems like forever. He predicted that if and when a hike does occur, its effects will likely prove anticlimactic.

Randall Kroszner, economics professor at the University of Chicago and former Fed board member, mirrored this, saying the last (unexpected) tapering move by the Fed in reality had very limited effects on the market.

When Engel asked Kroszner if the global situation caused the Fed to reevaluate its decision, the economics professor posited that one doesn't want to react to the market so much in regards to fundamentals as sometimes volatility was just "noise."

He pointed to encouraging features such as labor market recovery and contrasted it with inflation, which has failed to meet its targets, using this together with China's recent difficulties as an example of how "there's always a reason not to move."

On the matter of China's recent 2-percent devaluation of the yuan, Zhang Yichen, Chairman and CEO of CITIC Capital Hong Kong, dismissed rumors of the value being further lowered to 10 or even 20 percent. Zhu agreed that double-digit depreciation was unlikely.

Citing the recent fixing changes and the devaluation itself, Engel asked if there was an intention to float the yuan, a prospect which invited skepticism from Zhang, though the former did say that the further internationalization has the potential to stoke future growth on the global market.


Janet Yellen, Chairwoman of U.S. Federal Reserve, at a news conference after the Fed announced that it would leave the interest rate unchanged on September 17 (XINHUA)

Communication problems 

None of the panel shared Engel's concern about forthcoming competitive currency devaluation on a global scale, despite Engel's pointed references to Viet Nam and Kazakhstan having recently widened their bands in response to recent developments.

Though the panel shared the opinion that the rationale underlying China's recent currency moves had been sound and made the best of contemporary conditions, some maintained the devaluation had incorrectly signaled to the markets that exports were, in Engel's words, "falling off the cliff."

The problem with the devaluation, they claimed, was its abruptness, given the logic behind it appears quite opaque to foreign eyes.

Engel even wondered aloud if the PBC should shift to a more regularly scheduled style of announcement, akin to the Fed's FOMC meetings. Kroszner did point out that the PBC had in fact held a press conference to address confusion in the days following the devaluation, a rare move for the organization.

At one point, Engel raised the thorny issue of whether or not the Chinese Government has also been sending mixed messages by encouraging foreign hedge funds to invest in the market but then releasing communiqués accusing those very same funds of short selling.

Zhu said that the intention was not to purposefully discombobulate outside parties and that the government was taking one or two step backs after "taking two steps forward," in what remains a tentative process.

Zhang said that his country was facing a very tricky balancing act of both deleveraging and turning what was a primarily investment-based economy into a consumption-driven one, a task few countries have had to tackle within such a short space of time.

Future prospects 

Another global economic matter gaining a lot of attention recently has been the free fall in commodity prices. Alan Davies, the Australian CEO of Diamonds and Minerals for Rio Tinto, said that while it was tempting to see this as "the canary in the coalmine," he did not believe that this was the case.

In terms of high value-added materials, Davies said that the fundamentals have always worked because countries need the metal and minerals required for urban growth but that it is important that capital be allocated to the right projects over the next couple of years.

When Engel asked if low oil prices will become an engine for growth and whether or not commodity investors will be forced to diversify their portfolios in future, Davies answered that he thinks there is still a lot of growth to go yet, not least in China, given that country at present makes up more than one half of certain commodity markets.

Questioned as to how long the present global down cycle would last, Davies replied that it is hard to say as the global economy has seen more turbulence in the last decade than in periods of several consecutive decades prior.

As regards future prospects in China, however, Davies was practically bullish, saying that now that reforms are in place, he can see space for market expansion with growth over the next 10 years being projected to exceed that of the previous quarter of a century in terms of absolute value.

Zhang also said that whether or not one sees GDP as a reliable indicator, what is undeniable is that growth in the Chinese economy remains strong, especially relative to other economies, pointing to his country's considerable trade surplus as evidence.

Copyedited by Kylee McIntyre

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