Andy Xie: China is running out of ways to keep its many bubbles inflated.
The “impossible trinity”, or trilemma, here says that a country cannot run an independent monetary policy with a fixed exchange rate and free capital flows. Some may argue that China controls its capital account. It is true that the government has shut down underground currency exchange channels, which has lessened some of the pressure on the exchange rate. But corporate foreign debt, cumulative foreign direct investment and offshore renminbi in total are similar to the forex reserves. These monies could all be withdrawn legally. Further, every person can buy US$50,000 of foreign currency from banks per annum. That’s six times the per capita income. China’s capital account is really open.
The government is not dealing with capital flight either technically or fundamentally. When renminbi leaves, the People’s Bank of China hands over the dollars and puts renminbi back into the banking system, to stop interest rates from rising. The way to fight capital flight is to raise interest rates. Running down forex reserves doesn’t solve any problems.
The reality is that the political imperative is in conflict with economic needs. To move beyond an investment-led economy, China must cut taxes, shrink the government and reform state-owned enterprises. But political insecurity is driving resources further into the government’s hands. The alternative model is for stability to depend on people’s goodwill, not an iron fist. It is hard to see such a shift any time soon.
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Dr Andy Xie 謝國忠, Shanghai-based independent economist, has just been named “ 50 Most Influential Persons in Finance”by Bloomberg, and is currently director of Rosetta Stone Advisors.Dr Xie is one of the few economists who has accurately predicted economic bubbles including the 1997 Asian Financial Crisis and the more recent subprime meltdown in the United States. He joined Morgan Stanley in 1997 and was Managing Director and Head of the firm’s Asia/Pacific economics team until 2006. Prior to that he spent two years with Macquarie Bank in Singapore, where he was an associate director in corporate finance. He also spent five years as an economist with the World Bank.
Dr Xie earned a PhD in economics in 1990 and an MS in civil engineering in 1987 from the Massachusetts Institute of Technology.