Asia Economy

The experts weigh in on China's GDP, rate cuts, yuan, Plenum

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It's an action-packed time for China; a heavily anticipated third-quarter GDP release and surprise rate cut last week, the high-profile Fifth Plenum this week, and signs of success for its push to have the yuan to included in the International Monetary Fund's (IMF) special drawing rights (SDR) basket.

With so much going on in Beijing, CNBC brought in the experts. Here are their thoughts, in their own works, on the key issues impacting the world's second largest economy.

John Silvia, chief economist at Wells Fargo, is skeptical the cuts to China's benchmark one-year bank lending rates and reserve requirement ratio (RRR), plus a hike in the deposit rate, will provide a much-needed boost to businesses.

Is the rate cut and RRR cut the right approach for China?

The transition in China ... could be anywhere between three to five to 20 years. Structural reform, regulatory reform is a long-term structural approach to changing and improving the economy. The interest rate change is more of a cyclical, short-run - what are we going to do now? It will help the property sector. I do think it helps, obviously, equity valuations because you're lowering the discount rate applied to equity earning.

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What's the impact on small-to-medium-sized enterprises (SMEs) that are starved for credit?

Those firms that do depend on access to credit, absolutely they are benefiting from that. [But] to what extent are these firms willing to leverage in the economy where it's perceived that economic wealth is more 6 percent than 6.9 percent? I love the term flexible. I mean it basically says yeah we're flexible, more likely flexible down than up. And so 6.9 become 6.5; and you're a small firm, yes, I can borrow. But I'm borrowing now in a smaller final sales expectation environment.

Is the rate cut going to funnel more money into SMEs?

Well, the question is 'are the banks willing to raise those deposit rates to attract capital?' They'll only do that if they perceive that they are going to be able to use that money. If the economy has indeed slowed then expectations are probably more muted in terms of how are you going to use that capital. So I would say that I would be skeptical on the argument that the money's going to show up in the SMEs.

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Could the deposit rate change backfire?

Absolutely. In a high saving economy, such as China, with uncertainty about where your future entitlement benefit, state support is going to be, absolutely it would lead to higher savings. Again, diminished expectations for growth - now you're offering savers a higher interest rate, to put money aside, you're probably going to get a significant offset.

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Is it misleading to say China won't tinker with exchange rate policy in order to get into the SDR currency basket?

I think it's a side issue. It really is the free flow of capital. Can you actually trade that currency, can you use it for trading purposes in terms of exports and imports? That is the fundamental story. Whether the exchange rate is all that stable or not, it's a very different story.

Vasu Menon, vice president of group wealth management at OCBC, says there are many new issues to be addressed in China's new Five-Year Plan.

Should China go for a 0 percent interest rate?

I think China's beyond the big bang approach. They did that previously and you see what's happening right now. You've got a credit-fuelled economy which is being burdened by all the debt. China doesn't want that. They want to send a signal to the markets that they are doing something to cushion the slowdown of the economy.

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But I suspect they will do something more targeted. What they're trying to do is undertake more targeted measures, more moderate measures. Going to 0 percent will be great but that will create other problems too.

On the rate and RRR cuts:

If you look at the 6.9 percent growth rate that came through in the third quarter, and if you look at the breakdown of those numbers, a lot of that growth was fuelled by the financial services sector because of securities trading. The Shanghai-Hong Kong Connect boosted volumes and I think the financial sector contributed. That's not sustainable going forward and clearly the Chinese know that.

If you break the numbers down, the underlying growth in terms of industrial production is still very weak. The PMI numbers are still running below 50. So I think it's more of a move to make sure the economy doesn't slow down even further.

How will the new Five-Year Plan differ?

This one is going to be quite interesting because it's happening at a time when China's economy is slowing down quite sharply. The government has got a challenge. It's not just about reform, I think it's [more about] trying to not waver on reform while ensuring that the economy posts a decent set of numbers. There's a balance here. The Chinese economy is going through a rebalancing exercise and it'll be interesting to see how they go about doing it without compromising economic growth.

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The other thing that is different this time round, China is trying to get itself included in the [IMF's SDR basket], the MSCI, financial liberalization, currency liberalization. It's interesting to see what they will do with the Five-Year Plan, as far as these areas are concerned.

Zhang Zhiwei, chief economist at Deutsche Bank, reckons Friday's move by the PBOC indicates that China's leaders care more about their growth target than they've let on.

On the rate and RRR cuts:

I think the interest rate cut came as a surprise and what we learned from this is probably that government cares a lot about the GDP growth target of 7 percent. And after the GDP data release, on Monday last week, they probably got some feedback from the market and from policy circles, other policy observers as well, that the Q3 GDP number [of] 6.9 [was] probably still a bit shocking to many. They are committed to deliver better GDP growth in Q4. And that commitment seems to be stronger than we thought.

Agenda highlights of China's 5th Plenum

On the Fifth Plenum:

This is going to be a reveal of a preliminary draft and I don't think they will release the details, including the growth target, very soon. The final draft will be approved in the NPC [National People's Congress, which is China's legislature] in March next year. The target itself will probably be announced in the media sometime in the next three,four months, without a specific date pre-announced. So there's quite a bit of uncertainty on that.

Benjamin Bedley, head of investment strategy for Asia at HSBC Private Bank, said talk of the yuan's inclusion in the IMF's currency basket is vindication of China's policy steps.

On liberalization of the deposit rate:

I think that it's the latest in a serious of steps aimed at liberalizing China's financial system. Toward the end of last year, we had the Hong Kong-Shanghai stock connect, which has been successful generating north and south bound flows ino the respective equity markets. In August, there was a change to the mechanism on the renminbi ... All of this goes toward continued liberalization of the way the Chinese financial system operates.

The fact that there are media reports out there at the moment that the IMF is considering including the renminbi in the SDR basket in some ways can be viewed as vindication of China's recent policy steps by that institution. We think that the easy monetary policy in China, which we saw once again on Friday, is going to continue ... It was not a surprise to us on the interest rate cut and the RRR cut ... I think it reflects recent data showing growth is slowing. We think growth is in the process of stabilizing and we are constructive on China's equity markets, particularly H-shares, through the end of next year.