‘India Needs to Have a Tight Monetary Policy’
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.