An aerial photo taken with an unmanned aerial vehicle on Sept. 27, 2015 shows the Nanpu Bridge over the Huangpu River in Shanghai, east China. (Xinhua/Niu Yixin)
LONDON, Oct. 15 (Xinhua) -- China is carrying out more reforms than all the other countries in the world put together, and China's success over the past decades and its current reforms are benefiting the world in different ways, a British researcher has said.
Jan Dehn, research director of Ashmore Group, a Britain-based asset management company, told Xinhua in a recent interview that he is very positive about China's reform stories and its economic outlook.
MOST SUCCESSFUL
"China has emerged over the last 25 years as the world's most successful export-led economy. The world has never seen such a successful export-led economy," said Dehn.
"It grows so fast, has become so powerful in such a short time, and it is even performing better than Japan. And also it is bound to get much bigger, when you look at Chinese population ... its economy will be five times bigger because its population is five times bigger than the United States," he said.
"China's economy is going to be by far the largest economy in the world, and by far the most important and dominant economy in the world," he stressed.
Three core components that have driven China's economic success are cheap labor, debt-fueled consumption of the Western countries, as well as a competitive exchange rate, said Dehn.
Though the export-investment growth model is extremely successful, these three premises or basic ingredients of growth model have become problems for China, as the country's wages are growing and the debt-fueled boom in the West is over, he noted.
The entire Western world has started to do quantitative easing monetary policies, which will eventually become inflationary and lead to the weakening of these countries' currencies, and China's currency is consequently likely to go up, he noted.
Dehn said that China has to change its growth model and has been also dedicated to this change, adding that's why his fundamental view on China is very positive, because he actually thinks Chinese policy makers are looking at a much longer term than most of the policy makers in the world.
"I think they also understand that there are only one or two alternatives to that export-led growth model, and that is domestic demand-led growth model," noted Dehn.
People visit the 118th China Import and Export Fair, also known as the Canton Fair, in Guangzhou, capital of south China's Guangdong Province, Oct. 15, 2015. (Xinhua/Lu Hanxin)
CHALLENGES AND SOLUTIONS
China faces two particular challenges in this transforming period - liberalization or openness of capital account and flexibility of the currency, Dehn said.
He explained that as China's consumption is going up, its imports of foreign goods and services will also be pushed up, therefore the current account surplus will be diminishing; and when the currencies in the Western countries are depreciating, Chinese currency is going to appreciate, which will damage its exports further.
In order to have a stable overall balance of payments, China has to open its capital account to finance the falling current account surplus decline or a deficit, Dehn said, cautioning that might lead to market and currency volatilities.
He suggested China attract long-term institutional investors like pension funds, insurance companies, sovereign wealth funds and central banks, because they are large and sophisticated investors that have a long-term view.
"It is quite important to speed up the process of granting the RQFII (Renminbi qualified foreign institutional investor) quotas, and to screen and allocate more quotas to such investors," said Dehn.
He advised China to convert the QFII (Qualified Foreign Institutional Investor) quotas to RQFII, as the later investment vehicle give investors daily dealing and basically free access to the market.
He added that when a market is first opened up, it faces speculators, retail investors, hedge funds and other short-term investors, and that is why China's currency market and stock market saw volatilities over the past few months.
CENTRAL BANK'S ROLE
China's central bank has to be involved in the reform towards a consumption-led growth and help facilitate Renminbi to become part of the special drawing right (SDR) of the International Monetary Fund, he said, adding: "A global reserve currency has huge advantages."
He took the United States as an example, saying the U.S. dollar is the world's most preeminent reserve currency and that U.S. companies do not need to buy foreign exchange for a transaction with foreign companies, and this means the United States does not need to have any foreign currency reserves, nor needs to export more than imports to build up those reserves, but only to feed consumption.
China is making very rapid progress in settling international transactions in Renminbi, from around 2 percent two years ago to the current more than 30 percent, and on the track to reach over 50 percent in the next couple of years, said the researcher.
"And if we have 50 percent settlement, then of course we don't need half of China's foreign exchange reserves. You can use the other half (of foreign exchange reserves) for investment purposes, or use them as starting capital for an investment bank, and then you can lever up the investment bank ten times like other banks do," he said.
"I think these will make China extremely powerful, because the world desperately needs infrastructure investment and many Western countries have too much debt, they cannot afford to make these investments themselves," he noted.
(File photo)
BOND MARKET
One of the other significant advantages of being a global reserve currency is that the world central banks will start to look at China's bond market as a risk-free market, Dehn said.
"I think China's bond market is a super interesting market, and I think it is still overlooked by many investors. In the past 18 months, China's bond market is performing better than the U.S. treasury market even in dollar terms," said Dehn.
"And going forward, the world is going to have two major problems: One is how can investors find an alternative investment instrument where they will not lose their money, and the second is where they can find another global reserve currency which is not going to devalue. And China has the answers to both questions," he said.
He said China's bond market is set to rally in the next ten or twenty years and advised China to take more measures to develop the bond market and open the capital account.
"The Western economies have squandered the last seven years without doing any reforms, any deleveraging, and anything that is long-term," said Dehn.
"By doing capital account liberalization, interest rate liberalization, developing its municipal bond market, SDR inclusion, the state-owned enterprise reforms, China is doing more reforms by itself than all the world's other countries put together," added Dehn.
