ROUND-TABLE DISCUSSION:Chinese economy's soft landing
said to be badly needed for world, Japan

September 04, 2015

Everything possible should be done to guide the Chinese economy to a soft landing so that its recent instability does not hurt the global economy, according to noted economic watchers in Japan.

Global stock markets have come under downward pressure following a round of devaluations of the Chinese yuan in August and concerns are growing that China's economic downturn may adversely affect global economic activities, notably resources markets and the course of U.S. interest rate policy.

"The bottom line is that the Chinese economy will have to make a soft landing, not whether it will be able to do so," said Kazuto Uchida, an executive officer of the Bank of Tokyo-Mitsubishi UFJ. Warning that a failure to do so will cause repercussions in various fields, including not just the global economy but also the security environment around the world, Uchida said that measures to help ensure its soft landing should be taken by the international community.

The series of reductions in the yuan's peg rate against the dollar was implemented "in somewhat of a panic," said Hideo Hayakawa, a former executive director of the Bank of Japan. Market participants have come to realize that China's economy is in worse shape than was generally believed, he said.

The two financial experts were discussing the course of the Chinese economy and possible fallout on the global economy from it at a discussion organized by the Japanese independent think tank The Genron NPO. Their discussion, taped Aug. 20 for release on its Web site, was joined by Genron NPO President Yasushi Kudo as moderator.

According to Uchida, the yuan devaluations, announced for three days in a row from Aug. 11 to 13, had two objectives. In view of an economic slowdown and a sharp decline in exports, China tried to prop up its economy by taking measures on the foreign exchange front, he said.

Hoping to internationalize the yuan, China has endeavored to get it adopted by the International Monetary Fund in a review of currency basket components for its special drawing right (SDR) system this autumn. But in early August, the IMF made a comment that indicated it was not in favor of the yuan being adopted as such a currency.

Through the latest yuan devaluations, China apparently aimed to demonstrate its resolve to break with the current managed float system in favor of a full float system, Uchida said.

Market participants expect China to devalue the yuan by about 10 percent to 6.7-6.8 yuan to the dollar from the previous level of 6.11 from now on, according to Uchida. China's currency devaluation amounts to a move to spread its deflation to other countries, he noted.

China's move will also have a significant impact on the course of resources' prices and the fate of resources-oriented countries, he said. Another problem is whether the United States will tolerate the yuan devaluations in light of its swollen trade deficit with China, he said.

Hayakawa, currently an executive fellow of the Fujitsu Research Institute, took a negative view of the expected yuan devaluation of about 10 percent. China is unlikely to seek so large a devaluation, in consideration of the U.S. response to its action, he said. If economic activity is to be bolstered, China should take such economy-boosting measures as an increase in infrastructure investment, Hayakawa said.

The latest reductions in the yuan peg rate have come at a time when the Chinese government is having difficulty attaining relatively modest growth of 7 percent.

Hayakawa noted that a reduction in China's economic growth itself will not be a matter of concern. The challenge for China is how to shift to a growth path that emphasizes individual consumption and service while moving away from past excessive dependence on investment and exports in driving its economy, he said.

China implemented an economy-boosting package worth about 4 trillion yuan after the global economic debacle triggered by the bankruptcy of Lehman Brothers in 2008. This left surplus facilities, speculative "bubbles" in real estate investment and excessive liabilities for local governments, Hayakawa said.

The negative assets have made it difficult for China to shift to a consumption-oriented growth policy, he said. Because China may be able to take other measures, such as an increase in infrastructure investment, to cope with the current situation, its economy is unlikely to enter an unsupported downturn in the immediate future, but this would be a deviation from its avowed policy of fostering individual consumption as a main engine for its economy in order to achieve stable medium growth, Hayakawa noted.

Excessive savings, which lie behind past overheated capital investment, have caused speculative investment in real estate and stock markets, and in various other business areas, Uchida noted.

Since China has not become a fully open economy, there is much leeway for China to control itself and there is a good chance of a soft landing, he said.

China's successful shift to consumption-oriented growth will expand economic fields where Japan and China will be able to work together, facilitating trade and investment between the two countries, Hayakawa said.

In China, Internet-related businesses are gaining strength, he said. These businesses are "more innovative even when compared to their Japanese counterparts," he said.

"The seeds are growing" to pave the way for these Chinese businesses to play an active role and cooperate with Japanese companies when a consumption-oriented economy is realized in China, Hayakawa said.

At a time when economic relations between Japan and China are becoming stronger than ever, the two countries will have to grapple with their common challenges, such as an aging society, in the years to come, Uchida said. Therefore, appropriate measures should be adopted to improve the economic situation in Asia, he said.

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