•  In 2014, 43 countries ranked China as their top export market, higher than the comparative figure for the US, at 31. The recent slowdown in the Chinese economy and volatility in its financial markets have therefore sparked fears that the Chinese economy was headed for a “hard landing” and that it would drag down much of Asia with it. But much like the dreams of a vast insatiable market two centuries ago, today’s fears are understandable but overblown. To many, China’s economy seems like what Winston Churchill described the Soviet Union half a century ago: “a riddle wrapped in a mystery inside an enigma”. China is indeed a complex economy but is not necessarily beyond comprehension. China’s economy is at a major inflection point. It is facing three necessary but significant challenges at the same time: •  First, the Chinese economy is adjusting to a lower rate of growth. Managing this moderation without major dislocation is a key priority for China’s policymakers. •  Second, China is addressing risks and vulnerabilities in its economy and financial system. Doing this without triggering a crisis of confidence is another key priority. •  Third, China’s economy is undergoing perhaps the most comprehensive and ambitious structural reform programme of any country in modern times. BIS central bankers’ speeches  1  In the short term, these three objectives may at times be in conflict, presenting a trilemma of difficult trade-offs for policymakers.
•  Local governments are now allowed to raise funds in the bond market, reducing their reliance on land sales to fund expenditures. •  And earlier this week, on 1 May, China replaced all business turnover taxes with a more efficient value-added tax (VAT). But work remains in the areas of reducing off-budget spending, strengthening social spending, and refining environmental and property taxes. Domestic financial liberalisation is another area where the glass is half full and half empty. A lack of depth and sophistication in China’s domestic financial market has limited the returns on household savings, indirectly crimping their purchasing power. It has also restricted financing to promising businesses. •  China has taken the important step of liberalising interest rates. •  But it also needs to develop deeper and broader capital markets. This will help better price risk capital and ensure that financing flows to more productive economic activities. China has proceeded with capital account liberalisation in a careful and systematic way, “crossing the river by feeling the stones”. •  Since 2008, the use of RMB outside China has been permitted for all current account transactions. •  Capital account transactions in RMB were subject to various quotas and schemes, which have been progressively expanded. •  And late last year, China allowed foreign institutions to issue bonds in China’s onshore interbank bond market for the first time.