Rocks and hard places China's government faces extremely unappetising policy options
Jan 15th 2016, 9:25 by R.A. | LONDON
Timekeeper
CHINA’S wild stock markets command attention, but it’s the foreign-exchange moves that really bear watching, for those worried about the Chinese economy and its effect on the world. The backdrop against which this drama is unfolding is one in which total debt in China is close to 300% of GDP and continues to rise rapidly as the government seeks to promote steady growth.
My column this week explains the short-run exchange-rate trade-offs confronting the leadership. Markets are pushing for depreciation of the yuan; that is why it tends to fall against the dollar when allowed to by the People’s Bank of China and why China’s reserves sink when it isn’t. Depreciation makes economic sense. True, China still runs a whopping great trade surplus. But its surplus is entirely concentrated in processing trade, in which China is just one link in a long supply chain, and in which exchange-rate valuations across the chain are what matter. More important is slowing growth and weak demand in China, and the declining return on investment in Chinese projects. At the same time, those Chinese with savings are desperate for the opportunity to diversify them out of yuan-denominated assets.
But depreciation is potentially very costly. It could stoke panic among those keen to move money out of China, leading to a chaotic rush for the exits. It would also strain highly indebted Chinese firms, so saddled with debt that any rise in the cost of dollar-denominated loans could touch off a nasty deleveraging cycle
Not depreciating is also costly, however. It means a steady drain on reserves and imposes a constraint on domestic monetary policy. Tightening capital controls might look like a way out of the mess. But it would leave domestic savers unhappy and put a chill on foreign investors still interested in putting money in China. A slowdown in FDI would worsen near-term capital flight while undermining long-run growth.
But the short-run trade-offs are not the only considerations that matter. China is going to need to deal with its debts at some point. How it chooses to do so has big implications for the future of the Chinese economy.
There is a strong argument for locking down the capital account to remove the pressure imposed by global capital markets, and then using that freedom to clean up the country’s bad debts and push through the structural reforms needed to support sustainable long-run growth. That solution might have the added benefit of delaying opening to a time when the Fed isn’t raising interest rates, leading to a tightening of global financial conditions.
The risk, and it is a big one, is that the backtracking on capital-account openness wouldn’t be used to clean up the domestic economy, but would instead be an excuse to rollover bad debts and delay reform: that China, in other words, would follow the Japanese path.
Indeed, one can imagine that a closed capital account would give the government room to further loosen monetary policy. Once interest rates and reserve requirement ratios for banks had been cut as low as possible, or as low as policy-makers dared, the government would find itself cornered. Only massive fiscal stimulus or depreciation could then increase monetary stimulus. The groundwork for a lost decade or several would be laid. Given the brittleness of the political system, lost decades are a frightening thing to contemplate.
The alternative is no less scary. In the late 1990s, troubled Asian economies with big debts depreciated massively. Financial crisis and deep recession were the result. Given the brittleness of the political system, a full-fledged Asian crisis is a frightening thing to contemplate.
But while the crisis countries suffered terribly in 1997-8, they sprang back remarkably quickly. Growth rates immediately after the crisis were slower than they had been before, but still healthy. The sudden revaluation in exchange rates and asset prices, and the waves of defaults and bankruptcies they triggered, were extremely unpleasant. They did mean, however, that the crisis countries didn’t stumble along for years pretending that nothing was the matter.
China’s government could try to chart a safer path. The national government has lots of fiscal capacity. It could force firms to recognise bad loans, close insolvent businesses, and use that capacity to ease the pain on creditors and shore up banks. It could continue on with reforms to both the internal markets and the capital account. But that path would imply both a sharp slowdown in growth, and possibly a recession, and severe pain imposed on lots of politically powerful people.
China has lousy options for dealing with its economic mess, but they are options other economies have followed in the past and lived through. The really big problem for China is that its government is not built to cope with these sorts of economic strains. The really big problem for the rest of the world is that China’s economy accounts for a much larger share of global economic activity than any of those other troubled countries ever did.
READ MORE: http://www.economist.com/blogs/freeexchange/2016/01/rocks-and-hard-places
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Chân thành cám ơn Quý Anh Chị ghé thăm "conbenho Nguyễn Hoài Trang Blog".
Xin được lắng nghe ý kiến chia sẻ của Quý Anh Chị trực tiếp tại Diễn Đàn Paltalk: 1Latdo Tapdoan Vietgian CSVN Phanquoc Bannuoc .
Kính chúc Sức Khỏe Quý Anh Chị .
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