Controlling the looming economic risks
China should strengthen communication about its policies and takes steps to stabilize its exchange rate
According to the latest Central Economic Work Conference of China, preventing and controlling risks is a very important part of its policies. While the global market is in a period of flux, preventing and controlling financial risks in China is more meaningful than ever.
Developed countries, such as European countries and the US, have seen the effects of globalization and are taking steps to encourage overseas capital and manufacturing industries to come back to the developed economies.
Meanwhile, many countries, including China, no longer have the advantage of cheaper labor costs. These factors could result in some changes in the global industrial chain’s specialization and then influence international capital flow. To the emerging markets, including China, this can mean capital outflow and more challenges in export. The differentiation of global monetary policies and the expected rise of interest rates would help drive capital to flow from emerging markets to the developed countries.
China should prevent the risks brought by both the real estate industry and RMB exchange rate at the same time. In the past few years, a large amount of global capital entered the emerging markets in different ways and gathered at the real estate industry and stock market, where the profit rates were relatively high. As China’s own currency was not the international reserve currency, there are problems with currency and maturity mismatch.
Once policies change, the previously in-flowed capital will be evacuated rapidly, which could cause the collapse of assets value, depreciation of the RMB, the slump of the stock market and other systematic risks. At present, the US dollar is becoming stronger, and the RMB is under great pressure of depreciation. Meanwhile, the domestic real estate market is under stricter control and capital outflow is growing stronger.
If the real estate market is over-cooled or causing individuals to sell their properties and invest overseas, this will aggravate the depreciation of the RMB. Under these circumstances, the control policies over real estate should be tailored for different cities, rather than being the same throughout all of China.
A certain degree of capital control needs to be maintained, especially the supervision of capital outflow of companies that are following China’s “going out” strategies. For example, some companies are disregarding cost when doing overseas acquisitions, paying high prices for no reason. China should strengthen communication about its policies and take steps to stabilize its exchange rate.
China should also be cautious of unexpected, rapid inflation. Since last year, the producer price index (PPI) of industrial products has been much higher due to supply-side reform and exchange rate fluctuation. The consistent rise of the PPI will affect the consumer price index (CPI).
If we take international factors into account, Donald Trump’s policies to help with the US’ inflation and economic recovery could also lead to global expectation of inflation, which would indirectly influence China’s domestic bonds, stock market and commodities prices.
Moreover, if the inflation exceeds expectation, it would restrict what China’s monetary policies could do, making it difficult to prevent and control future financial risks.
It is also crucial to prevent global sources from spreading financial risks to China in the current global political and economic environment.
In Europe, political turbulence has affected the financial market in the Eurozone. Several important elections will be held this year, including those of the French president and German chancellor, and Brexit is to be carried out soon. The banking system in the eurozone also faces challenges, especially the fragile banking system in Italy, which could affect other banks in the eurozone. These factors will affect the eurozone, even global trade and monetary policies, and have a huge impact on the global financial market.
In the US, new President Donald Trump’s policies could raise uncertainties and influence global expectations for inflation and the global financial market. Trump might make big changes to the US’ current macro policies. Trump’s stated policies on trade are a form of deglobalization, which may, in a short time, affect China’s exports and apply more pressure to the RMB.
At present, it seems China has underestimated the changes that might take place in the China-US relationship after Trump takes office. As many low-income people in developed countries didn’t benefit much from globalization, Trump’s policies will cater to their desires.
China should negotiate on that, should the free trade process be blocked. If Trump’s fiscal policy is carried out, it will encourage the rising expectation of inflation, likely causing the Federal Reserve to increase interest rates to deal with inflation, further pressuring China’s RMB depreciation.
Song Ke is deputy director of the International Monetary Institute of Renmin University of China.
The views do not necessarily reflect those of China Daily.