China’s easing inflation and concerns of a global economic slowdown have prompted expectations that Beijing is done with tightening for now. One senior market watcher, however, is going a step further, expecting the central bank to start easing monetary policy.
Enzio von Pfeil, CEO of Commercial Economics Asia, says the increase in social unrest across China is a big worry for policy makers.
"The frequency of social unrest that we read (about)...is picking up to such a degree that the Chinese authorities know that they have to get growth going again, because their whole model is based on high growth and jobs and income growth," observed von Pfeil, who already warned about the country’s social problems back in June, which he had described as a bigger concern than inflation. He says the so-called “Arab Spring, ” referring to the revolutionary wave of demonstrations and protests happing from Tunisia to Libya, is stirring similar sentiment in China.
"I think that the Arab Spring has a great deal to do with this, because I think that that has shaken Chinese leaders' faith in the leadership of the local government in China. It's stuff you read about, land grabsthe whole time... riots," von Pfeil said.
“I think there's a school of thought out there that says that we'd better get growth going again and one way to do that is ease monetarily,” he added. “Indeed Wen Jiabao was recently…saying that he felt that inflation's peak had already been passed. In other words, we're not in such an inflationary environment as we were before.”
Von Pfeil expects easing monetary policy to support economic growth, which will make China-focused stocks attractive.
“What they'll do is they will increase the base money growth yet again; they will reduce some of the reserve requirements on the technical monetary side," he said. "And what that means, is that Hong Kong is a buy at this stage — the H shares here, because with them being very, very low, low PEs (price earnings ratios), low priced-to-books.”
On the subject of the possibility of a fully-convertible yuan, the Hong Kong-based economist says he doesn’t expect Beijing to take that step any time soon, and even if they do, the yuan would weaken, rather than strengthen as most would expect.
“I don't think that China is ready yet to open up the capital account gates, to allow the renminbi to float,” he said.
“My guess would be in fact, somewhat contrary to the market, that the renminbi may actually fall, not rise, because there's so much capital flight out of China by all of these corrupt officials, that you may actually see people wanting to get out of the renminbi, more than getting into the renminbi.”