Con­trol­ling the loom­ing eco­nomic risks

China should strengthen com­mu­ni­ca­tion about its poli­cies and takes steps to sta­bi­lize its ex­change rate

China Daily European Weekly - - Comment - Song Ke

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.

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