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He says for emerging markets the bandwidth of risk is now widening because the advanced markets, as they begin to recover and then restore back more and more interest rates, emerging markets will face capital flows back to the rich countries.
He also talks about the state of the Chinese economy and the benefits that may emerge for other emerging economies.
Below is the verbatim transcript of Andrew Sheng's interview on CNBC-TV18
Q: Many believe US, European Union and Japan will largely continue with currency printing and easy money policy in 2014. What will this mean for emerging markets like us in 2014?
A: There are many uncertainties that one cannot completely prevent, because we live in a very complex world of huge inter-dependencies, very complex feedbacks, then make policy judgement in an era of turbulence and huge uncertainty. My favourite phrase is that for emerging markets the bandwidth of risk is now widening because the advanced markets, as they begin to recover and then restore back more and more interest rates emerging markets will face capital flows back to the rich countries and therefore we must be prepared. This means that not only will the long-term U-curve of the advance country interest rates - U-curves will begin to steepen, it has been very flat for a long time, but also the risk spreads for the emerging markets will rise. That has several implications.
Number one, if you overshoot on interest rate issue your growth will slow down and if you keep interest rates too low there will be very large capital outflows with consequent implications on your asset prices. So financial stability, monetary stability, inflation, growth, employment could all be hit by this phase of tapering. The good news of course is that advance country central banks have become much more responsible. They are aware of the implications and they will phase it in a staggered manner or an acceptable manner. I think emerging markets will have a little bit of breathing space to adapt to this new environment. There are many other issues that we cannot predict. For example, territorial complex, technology shifts, diplomatic incidences - all these and maybe civil unrest could disrupt the game, so to be able to predict this is not easy.
Q: There is fear that China could hard land because of rising bad loans or non-performing loans (NPL). There is a fear that monetary and fiscal stimulus given after Lehman led to ghost cities and highways leading to nowhere and all those loans turning bad?
A: Markets are driven by greed and fear and it is the fear of risks that will enable individuals, banks, regulators, corporates to take more caution and deal with it. There is no doubt in my mind that China has fiscal space, foreign exchange space and the policy space to deal with it. It is a very, very large economy. It can take minor stresses to the system much better than many small very open economies. The capital account of China is still not open. The reserves are over USD 3 trillion. There is relatively little foreign debt so far, but domestic debt is rising.
One must also need to understand that even though domestic debt is rising, the counterpart of it is investments of course on an unprecedented scale, but the asset is there and so therefore the question is managing liquidity, managing cash flow, balancing the maturity risk and of course weeding out the weaker players. So in the short-term, yes in absolute terms probably NPLs will rise, in relative terms it would still be manageable.
Q: What's your assessment of Chinese growth in 2014 and 2015? Wouldn't growth slowdown because an appreciating yuan will hurt exports?
A: I do not like to predict the future, because the future is very difficult to predict. Second point is that my own assessment of what is happening is that of course the investment levels will not be as large as before because there is adjustment on the monetary policy side and some control on the credit side, but domestic consumption is beginning to move and there are several reasons for this. It is partly due to the improvement in the changes in the one child policy, urbanisation is still continuing, introduction of e-commerce. There are many minor factors that on their own you would not notice, but cumulatively Chinese domestic consumption is becoming more and more important as an engine of growth.
Q: How exactly do you see the Yuan in 2014? Does it continue to remain stable to appreciating?
A: I think the policy of the People's Bank is to maintain flexibility in its management. I think they want a stable currency, but they would also be interested in allowing market forces to determine the band of fluctuation. When that is going to be widened no one knows, but I think that is the general direction of policy. The issue that one needs to be very clear about is has the exchange rate broadly reached its equilibrium level. I think nobody can say this with precision, but broadly speaking as you can see the way imports and exports are behaving a more equilibrium level is about there.
Q: Indian businessmen tell us that with wage inflation in China and an appreciating currency, they will be able to snatch some markets from China. Your thoughts?
A: Rightly so. The minimum wages have begun to rise. It is part of the 5th Plan. You cannot have domestic consumption rising unless you have wages rising. So rising wages is very good for the domestic consumption area and domestic consumption rise will be very good for imports and so commodity exporters of China will find this very, very useful. On the other hand the rise in the Real Effective Exchange Rate (REER) of China as the wages rise, its export competitiveness is reduced to some extent and that gives export space to countries like India and that is good news for all exporters in this regard.
However, one should also realise that as the wages increase it also forces a productivity adjustment by the exporters and by domestic corporations. So to some extent the increase in wages will be compensated by productivity gains. The total-factor productivity (TFP) will definitely increase also. How it is going to be played out is going to be difficult to see, but I agree with you there will be lots of opportunities for other emerging markets, particularly since the exchange rates are much more flexible.
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