Thursday, September 08, 2011

No market forces for the Renminbi - Arthur Kroeber

Arthur Kroeber
While the US administration is falling short of calling China a "currency manipulator", US fear for the Chinese currency still prevail. In Foreign Policy economic analyst Arthur Kroeber argues why its financial authorities do not trust the markets to set its rates.
China's exchange-rate policy is mainly driven by the aim of enhancing the country's export competitiveness. But other factors play a role, namely a desire to maintain domestic and regional macroeconomic stability, keep inflationary pressures at bay, and force a gradual upgrading of the industrial structure. From Chinese policymakers' point of view, all these objectives suggest that the exchange rate should be carefully managed, rather than left to unpredictable market forces. While economists may argue that long-run economic stability is better served by a more flexible exchange rate, Chinese officials can point to the excellent track record their policies have produced: consistent GDP growth of around 10 percent a year since the late 1990s, inflation consistently at or below 5 percent, export growth of more than 20 percent a year, and a steady increase in the sophistication of Chinese exports. Until some kind of crisis convinces them that their economic policies require major adjustment, China's economic planners are likely to stick with their current formula...
[W]e can reasonably expect rapid growth in the Hong Kong RMB bond market. But the growth of that market, and granting foreigners access to the domestic Chinese government bond market, remain severely constrained by political considerations. Just as Chinese officials do not trust markets to set the exchange rate for their currency, they do not trust markets to set the interest rate at which the government can borrow. Over the last decade Beijing has retired virtually all its foreign borrowing; more than 95 percent of Chinese government debt is issued on the domestic market, where the principal buyers are state-owned banks that are essentially forced to accept whatever interest rate the government dictates. There is absolutely no reason to believe that the Chinese government will at any point in the near future surrender the privilege of setting the interest rate on its own borrowings to foreign bond traders over whom it has no control. As a result, it is likely to be many years before there is a large enough pool of internationally available safe RMB assets to make the RMB a substantial international reserve currency.
Much more arguments and facts in Foreign Policy. Arthur Kroeber is a speaker at the China Speakers Bureau. Do you need him at your meeting or conference? Do get in touch.
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