1/8
I think too few of the senior finance officials in Beijing fully understand the relationship between domestic financial stability and closed financial markets with significant government intervention and moral hazard.
scmp.com/economy/china-… via @scmpnews
I think too few of the senior finance officials in Beijing fully understand the relationship between domestic financial stability and closed financial markets with significant government intervention and moral hazard.
scmp.com/economy/china-… via @scmpnews
2/8
Chairman Hu Xiaolian of China Exim Bank, for example, is proposing that “By the middle of this century, China might have the world’s biggest, and most open financial market to function with the world’s most inclusive rules and norms promoting international cooperation.”
Chairman Hu Xiaolian of China Exim Bank, for example, is proposing that “By the middle of this century, China might have the world’s biggest, and most open financial market to function with the world’s most inclusive rules and norms promoting international cooperation.”
3/8
But this is unlikely, especially because he also says later that “Instead of being driven by financial speculation in the offshore market, China places an emphasis on a stable exchange rate combined with stable macroeconomic and monetary policies, and this will boost...
But this is unlikely, especially because he also says later that “Instead of being driven by financial speculation in the offshore market, China places an emphasis on a stable exchange rate combined with stable macroeconomic and monetary policies, and this will boost...
4/8
confidence in the yuan and help foreigners accept the currency for its payments.”
But he doesn't seem to understand that it is only because the capital account has been largely closed that the PBoC can manage both currency stability and domestic financial stability.
confidence in the yuan and help foreigners accept the currency for its payments.”
But he doesn't seem to understand that it is only because the capital account has been largely closed that the PBoC can manage both currency stability and domestic financial stability.
5/8
What Hu doesn’t recognize is that the latter (a stable exchange rate combined with stable macroeconomic and monetary policies) exists only because the former (the world’s biggest, and most open financial market) doesn’t. These two conditions are incompatible.
What Hu doesn’t recognize is that the latter (a stable exchange rate combined with stable macroeconomic and monetary policies) exists only because the former (the world’s biggest, and most open financial market) doesn’t. These two conditions are incompatible.
6/8
For 15 years Beijing has insisted that China would soon get all the benefits of an internationalized currency and financial markets. This has never happened precisely because for 15 years Beijing has been unwilling to accept the cost of the resulting financial instability.
For 15 years Beijing has insisted that China would soon get all the benefits of an internationalized currency and financial markets. This has never happened precisely because for 15 years Beijing has been unwilling to accept the cost of the resulting financial instability.
7/8
The problem is that by now the domestic financial system is so distorted, debt levels so high, balance sheets so mismatched, and technical insolvency so common that Beijing will be unable even to choose former condition over the latter. Not to mention that the amount...
The problem is that by now the domestic financial system is so distorted, debt levels so high, balance sheets so mismatched, and technical insolvency so common that Beijing will be unable even to choose former condition over the latter. Not to mention that the amount...
8/8
of “bezzle” in the system (in this case the capitalization of malinvestment that should have been expensed) is so immense that any meaningful adjustment will force some (probably the government) to absorb a huge amount of losses.
of “bezzle” in the system (in this case the capitalization of malinvestment that should have been expensed) is so immense that any meaningful adjustment will force some (probably the government) to absorb a huge amount of losses.
Here is an old WSJ article that shows that at least some in the PBoC have always understood the relationship between capital controls and domestic financial stability. It concludes: "The report appears to be a rare acknowledgment by China’s central bank...
wsj.com/articles/the-t…
wsj.com/articles/the-t…
... about the need for controls on capital outflows. Previously, it described its actions as cracking down on speculative outflows."
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