China: for Standard&Poor’s is quiet for now, but more reforms needed

China continues to dominate discussions of the Asia-Pacific (and, at times, global) economic and financial landscape. But the story has changed. Gone are the days when forceful, effective, and timely macroeconomic stimulus by Chinese authorities supported domestic (and global) growth and calmed global markets. Markets have now shifted their focus to the Chinese currency markets, with the macroeconomic story relegated to a secondary plot. And the markets are scrutinizing Chinese authorities' ability to deliver positive outcomes as never before. Perhaps most importantly, worries about China now reverberate across global financial markets. Here the Standard & Poor's research about China in early 2016.
 
Although there was no material change in China's macro story, markets sold off violently over fears that a fast-depreciating yuan would stoke a currency war. The 12-month forward yuan pricing was reflecting a 6% drop against the US dollar. This was on top of ongoing concerns about the true state of the Chinese economy, including continuing questions about the veracity of the data and the extent of capital outflows. In response to these pressures, the Chinese authorities intervened heavily in the currency market by selling US dollars and buying (and stabilizing) the yuan. But this has not come without a cost. China's official reserves are now US$3.2 trillion, down from US$4.0 trillion in June 2014.

Meanwhile, developments in China's real economy have been fairly steady. China's National People's Congress issued an assessment of growth, after completing its recent session, presenting a 2016 GDP growth target of 6.5%-7%. "While the first-ever move to a range is an important step away from the longstanding policy of "growth guarantees," we still think that the target is too high (our forecast is for 6.3% growth this year)", Standard & Poor's says, explaining that this is because, absent a large boost to ether external demand or productivity growth (neither of which looks forthcoming), the only way to generate this pace of activity will be to continue to pump more credit into the economy. "Moreover, we also see a worryingly slow pace of reforms in key areas", S&P says. These reforms-including consolidation, commercialization, and resolution of nonviable firms-are needed to better allocate credit and free up resources to support the transition to a more consumption- and services-based economy.