BN: So what can we expect to see from China in the next financial year? Do you expect the country's policy decisions to continue to drive volatility?
Liu: It will be important for the People's Bank of China to manage the market's expectations after the devaluation earlier this year.
Managing a floating exchange rate system will be a steep learning curve for the central bank and it will continue to be tested by some unexpected future domestic and external events.
That said we believe that it is not in China's interest to allow large exchange rate volatilities. The central bank has recently rejected market speculations for a sharp depreciation of the exchange rate by 10 per cent.
Given the large foreign debt exposures by Chinese corporates, a large depreciation may significantly increase the debt burden of these firms. In addition, excess exchange rate volatility may hurt the RMB's chances to enter into the SDR basket.
BN: What then is the long-term road map now for the RMB? Has the plan for financial market liberalisation changed?
Yetsenga: China's intent to liberalise both its financial markets and currency is unlikely to change, although certainly the exact path and the timing could shift as a result of China's current circumstances.
Over much of the post-crisis period, China has had a relatively stable domestic backdrop against which to reform its domestic financial system and financial markets, cross border capital account and exchange rate. At present, however, efforts to stabilise the domestic environment could see cyclical considerations take precedence, at least for a time, against some of the other reform efforts.
This is not to suggest that reform is stalling, far from it. It is more that domestic reforms are likely to take policy focus over some of the currency and financial sector issues which have dominated (from the external perspective) the reform agenda for a number of years.
BN: The over-riding anxiety outside China is the danger policies won't work as expected. If China succumbed to an economic hard-landing, would liberalisation be impacted?
Liu: Given the current environment, slower growth may be inevitable though we do not believe an economic hard-landing scenario will materialise given huge policy leeway and good fiscal fundamentals.
China will still be one of the fastest growing major economies of the world, even if growth were to slow to 5-6 per cent in the coming years.
Slowing economic growth will not impede China's reforms and financial market liberalisation. In fact, some important financial liberalisation remains firmly on China's agenda over the medium to long-term: developing a vibrant bond market, liberalising interest rates and capital account liberalisation to name a few.