Andy Xie: Keeping the Chinese Economy Afloat…

Andy Xie, our renowned Chinese economist, travel extensively in the country to figure out what’s going on with it’s economy. He opined that floating hte RMB and protecting the forex reserves will allow China to aviod a repeat of hte Asian Financial Crisis. 

Andy Xie shared at Caixin: 

Learning from the Asian Crisis

There are similarities between China today and Southeast Asia fifteen years ago. China could learn from the latter’s experience and control the financial risk in today’s uncertain environment.
Between 1992 and 1996 the low U.S. interest rate prompted a massive amount of hot money to flow into Southeast Asia. The money was mainly lent to the region’s banks, which lent the money out for investment in commodity industries and property speculation. The tide reversed in 1997. It triggered massive devaluation and economic contraction.
When faced with capital outflow pressure, Southeast Asian countries used their forex reserves to defend the exchange rates. Like China today, they had controlled exchange rates. They had plenty of forex reserves when the outflow pressure began. But, after defending the exchange rates for an extended period of time, they couldn’t back down from the policy until depletion of the forex reserves forced them to devalue. Some countries even borrowed considerable amounts from the International Monetary Fund to continue the wrong policy. All they achieved was subsidizing capital flight. 
Without forex reserves, these countries couldn’t support their financial systems. The financial collapse brought massive economic contraction and widespread suffering. If these countries had floated their currencies at the first sign of outflow pressure, they wouldn’t have suffered as much.


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