When finance ministers and central bank governors from the world’s most important economies gathered in Istanbul at the weekend, China had a simple message for them: don’t worry; everything’s under control.
Too bad Shanghai wasn’t listening. The country’s stock market fell another 2.5% Monday as it reopened after a four-day weekend to celebrate the 70th anniversary of the end of World War II. The Shanghai Composite is now over 40% off its June peak and is back close to where it started the year.
“The correction in the stock market is almost done,” Zhou Xiaochuan, the widely-respected head of the People’s Bank of China, said in a statement summarizing the country’s presentation to the G20. He added that “the financial market is expected to be more stable” in future.
But any boost to sentiment from such pronouncements didn’t outlive Monday’s news flow, as China revised down its growth figure for last year and said its foreign reserves had fallen by a record amount in August.
China’s National Bureau of Statistics trimmed its estimate of gross domestic product growth in 2014 to 7.3% from 7.4%, due largely to a large downward revision in the contribution from services that offset an upward one to the contribution from agriculture and industry. That’s bad news because it’s the relatively underdeveloped service sector that the government is pinning its hopes on to sustain growth at a level of around 7% for the short-to-medium term. China’s Finance Minister Lou Jiwei had told the G20 they expect “a new normal” of around 7% GDP growth a year for the next four to five years.
Many analysts think this year’s figure will fall short of that (and suspect that the official figures are already being massaged up). Lou indicated that Beijing has already ratcheted up public spending to sustain growth, telling the G20 that it would rise 10% this year instead of the 7% initially budgeted.
The stock market shrugged off the growth revision, but was more rattled by figures showing that Beijing’s foreign reserves fell by $94 billion last month, the biggest monthly drop on record.
Last month, the PBoC allowed the yuan to drop by 1.9% against the dollar in a one-off move, as well as announcing moves to let the exchange rate move a little more freely. At the same time, it has been channeling its reserves through a state-owned finance vehicle into the stock market, to cushion the market’s fall. On top of that, a broader phenomenon of capital flight has been in evidence for most of the last year as opportunities for profitable investment have narrowed and many of the country’s rich have sought to move more of their wealth offshore or reduce their exposure to the mainland economy.
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The $94 billion drop in reserves is nowhere near the $200 billion that the authorities are reported to have spent propping up stock and currency markets over the last month. However, it is more than double the $42 billion drop in July.