‘In­dia Needs to Have a Tight Mon­e­tary Pol­icy’

The Economic Times - - Money -

The US Fed could raise in­ter­est rates by three times or even more, said Andy Xie, a Shang­hai-based economist and a for­mer chief Asia economist at Mor­gan Stan­ley. In an in­ter­view to Sanam Mir­chan­dani on the side­lines of the CFA In­sti­tute’s In­dia In­vest­ment con­fer­ence ear­lier this month, Xie, a spe­cial­ist on China and Asia, said he does not ex­pect there to will be a trade war un­less China de­val­ues its cur­rency sig­nif­i­cantly. Edited ex­cerpts:

US Pres­i­dent Don­ald Trump has threat­ened to im­pose 45% tar­iff on im­ports from China. Are we star­ing at a trade war? If the US names China as a cur­rency ma­nip­u­la­tor, there will be very lit­tle room to ne­go­ti­ate. The key is that China needs to tighten the mon­e­tary pol­icy to sta­bilise the ex­change rate. I do not be­lieve a real trade war is go­ing to hap­pen un­less China takes steps like de­valu­ing the cur­rency more sig­nif­i­cantly.

Trump’s cam­paign rhetoric is now vis­i­ble in his of­fi­cial stance. Do you think he will be able to act on it? On immigration, def­i­nitely. He is go­ing to build a wall. Jobs are plen­ti­ful in the US; it is just that jobs don’t pay a lot. They are try­ing to move up the low end of the min­i­mum wage some­what. That re­quires the bor­der of US and Mex­ico to be sealed. They will re­strict skilled labour immigration and try to bring back some high­pay­ing man­u­fac­tur­ing jobs. In the long run, the US prob­lems are struc­tural and not easy to re­verse. The key fac­tors are ed­u­ca­tion and health­care. Ed­u­ca­tion sys­tem in the US is very poor com­pared to Asia and par­tic­u­larly East Asia. Health­care costs are way too high at 18% of GDP. With­out these two things, the US in the long run can­not com­pete. The Chi­nese peo­ple are more pro­duc­tive. In the long run, China will be­come the cen­tre of the global econ­omy. It is only not hap­pen­ing now be­cause the gov­ern­ment is pur­su­ing the wrong poli­cies.

What is your take on the tra­jec­tory Fed pol­icy might take af­ter Trump’s takeover? In the short term, I can en­vi­sion the US lim­it­ing immigration. They may im­pose 5-10% tar­iff for im­ports. They are think­ing about in­fra­struc­ture stim­u­lus. When the labour mar­ket is pretty tight, it means the in­fla­tion risk can rise. US real econ­omy may be grow­ing at 2.5%. Trump’s poli­cies may add 1%. The Fed is ex­pected to raise three times in the next one year. It may be more. When in­fla­tion was pick­ing up in the past, Fed used to raise 200-300 bps in a year. The big sur­prise for this year would be Fed raising in­ter­est rates much quicker than peo­ple ex­pect.

What im­pact will this have on EMs? Will the out­flows to de­vel­oped markets con­tinue? Yes, that will con­tinue. China’s cur­rency pol­icy will be key. If China says that US is raising in­ter­est rates, so we should de­value, then that would cause tur­moil in EM cur­ren­cies. I feel China will keep the cur­rency sta­ble and tighten the mon­e­tary pol­icy. That would pro­vide sta­bil­ity and that would slow down the liq­uid­ity re­turn­ing to the US. 2017 will be a very tough year for emerg­ing economies but it is not go­ing to be like a 1997-1998 (Asian fi­nan­cial cri­sis) as long as China pur­sues the right poli­cies.


What is your out­look for In­dia? EMs in­creased credit too much in the last eight years dur­ing the loose mon­e­tary pol­icy in the West. In times like this, right pol­icy is mon­e­tary and cur­rency sta­bil­ity, not eco­nomic growth. In­dia needs to do the same. The mon­e­tary pol­icy needs to be on a tight­en­ing bias. Sta­bil­ity over growth is what this world is all about.

What is your take on In­dia de­mon­etis­ing high-de­nom­i­na­tion notes? Tin­ker­ing with mon­e­tary and fis­cal pol­icy and think­ing that you can get the econ­omy to higher growth path is in­cor­rect. In­dia is about struc­tural re­forms, how to turn idle labour into cap­i­tal for­ma­tion. In­dia must have an engi­neer­ing driven idea of build­ing the coun­try. I don’t un­der­stand the ob­ses­sion with tak­ing out of high-de­nom­i­na­tion cash. The peo­ple who are us­ing cash to dodge taxes can­not be very rich peo­ple.

China is grow­ing at faster than ex­pected rate but debt risks are loom­ing. Do you see fur­ther risk from China? China is slow­ing down. The gov­ern­ment still does not un­der­stand how to re­solve the prob­lem. In China, most of the debt is held by com­pa­nies and most com­pa­nies are re­lated to the gov­ern­ment. So it is the gov­ern­ment that is highly in debt. The fi­nan­cial cri­sis in China is very much about if the gov­ern­ment is will­ing to deal with the con­sequences of too much in­vest­ment. If you bor­row money to in­vest, that in­vest­ment has to be worth that much money. If you build the same fac­to­ries again and again, then these fac­to­ries are worth­less be­cause there are too many fac­to­ries al­ready. The gov­ern­ment is still strug­gling in terms of how to go for­ward.

Do you think there are chances of a hard land­ing in China? It is very much a gov­ern­ment choice. If the gov­ern­ment does not want to have hard land­ing, they can post­pone that with more debt. It is a bad thing if they keep stretch­ing what is go­ing on. Hard land­ing is a good thing be­cause you are deal­ing with your mis­takes. Even if China does have a hard land­ing, the im­pact is go­ing to be re­stricted to cer­tain ar­eas.

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