SINGAPORE (Aug 19): There have been more benefits than costs to China’s decision over a year ago to change its currency fixing levels, even if waves of volatility rocked financial markets after the news was announced on Aug 11, 2015.

One such example is the greater flexibility in the RMB setting mechanism, which we currently enjoy today.

“One year on after a lot of trauma, people are now settled on the understanding that it was an adjustment in the way the currency is managed,” notes Julian Wee, senior markets strategist for Asia at National Australia Bank (NAB).

“The central bank changed the fixing mechanism to include more factors like movements in major currencies, and to give more weight to what markets were saying. In a small way, it was a step towards greater liberalisation,” he explains.

Wee believes the reforms undertaken by the Chinese government have been well thought out and effective in addressing some of the cracks that have become evident over time.

But more importantly, beyond the headline numbers of slowing fixed asset investment (FAI), there has been a nuanced shift in the composition of China’s FAI.

Wee says that even as the growth rate of total FAI has decelerated, some of its components have picked up, in particular relating to transport infrastructure, information and communications, healthcare and environmental management.

In short, the Chinese government is succeeding in weaning the economy away from its old model of breakneck growth powered by indiscriminate investment.

This is being replaced by more thoughtful and well-directed allocations of capital towards the key infrastructure and sectors that will make the greatest contribution to a new economic model of growth.

“You also have to remember that China is very much a developing economy. Outside of the top tier cities, many parts of the country are still in need of investment,” Wee highlights.  

“The key thing in China is whether they will persist with reforms, and have the political will to tolerate the pain in sectors where the pain has to be,” he concludes.

In the short-term, Wee expects the RMB to depreciate to a range of 6.80-6.90 against the U.S. dollar by year-end, before trading higher in 2017, as China makes a forecast transition to a higher growth trajectory next year.