Bei­jing urged to break ‘feed­back loop’ be­hind yuan’s falls

Arab News - - BUSINESS -

SHANG­HAI: Bei­jing needs to stem cap­i­tal out­flows and man­age ex­pec­ta­tions when mar­ket jit­ters risk putting falls in China’s yuan into a po­ten­tially de­struc­tive feed­back loop, a se­nior Chi­nese cen­tral bank re­searcher said.

“At the mo­ment, the fall in the yuan’s ex­change rate is shap­ing mar­ket ex­pec­ta­tions. De­pre­ci­a­tion trig­gers cap­i­tal flight, and cap­i­tal flight ex­erts even big­ger pres­sure on the yuan,” said Wang Zheny­ing, head of the Sta­tis­tics and Re­search De­part­ment of the Peo­ple’s Bank of China’s (PBOC) Shang­hai Head Of­fice, said.

“There­fore, it’s nec­es­sary to break this feed­back loop... for ex­am­ple, by slow­ing cap­i­tal out­flows,” he said.

China has al­ready been step­ping up ef­forts to man­age ex­pec­ta­tions in the for­eign ex­change mar­ket and to tighten con­trol over cap­i­tal out­flows in a bid to ease de­pre­ci­a­tion pres­sure on the yuan, which has fallen about 2 per­cent against the US dol­lar this month and more than 6 per­cent so far this year.

The in­ter­view was aimed at pro­mot­ing Wang’s “Trad­ing Eco­nom­ics” the­ory and new­ly­pub­lished book on the sub­ject and sheds some light on the aca­demic think­ing within the PBOC that in­flu­ences the opaque pol­icy-mak­ing process at the cen­tral bank.

Wang, for­merly vice head of the Fi­nan­cial Mar­ket Man­age­ment de­part­ment at PBOC’s Shang­hai Head Of­fice said the econ­omy and fi­nan­cial mar­kets were un­bal­anced sys­tems dom­i­nated by pos­i­tive feed­back loops that could lead to ex­plo­sive eco­nomic growth or avalanche-like mar­ket cri­sis.

“Un­der cer­tain cir­cum­stances, it is in­ef­fi­cient, and ir­ra­tional. And when it’s ir­ra­tional, it can be de­struc­tive,” Wang said, ar­gu­ing it was nec­es­sary to stop, or slow, the chain re­ac­tion cur­rently tak­ing place in the yuan mar­ket.

It was not clear how much sup­port his the­ory has within pol­i­cy­mak­ing cir­cles, but it chimes with re­cent moves by Bei­jing to brake the yuan’s fall.

Wang also used the feed­back loop model to ex­plain the boomand-bust cy­cle in China’s stock mar­ket last year.

“There was a feed­back loop be­tween stock price rises, and mar­gin fi­nanc­ing. And when such a feed­back loop was formed, trad­ing mo­men­tum, or a trend, was formed in the mar­ket,” Wang said.

He stressed it was im­por­tant for pol­i­cy­mak­ers to find the feed­back loop that de­ter­mined the over­all trend, rather than to seek the sim­ple causal re­la­tion­ship in a com­plex sys­tem.

Wang also cau­tioned that trade pro­tec­tion­ism — as es­poused by US pres­i­dent-elect Don­ald Trump dur­ing his cam­paign — risked plung­ing the global econ­omy into a sim­i­lar vi­cious cy­cle of pro­tec­tion­ism and counter-pro­tec­tion­ism.

“The de­vel­op­ment of the hu­man race is pro­pelled by an in­creas­ingly in­ter-con­nected trad­ing net­work. But if we cut the net­work, the world econ­omy will be sep­a­rated into iso­lated is­lands, and our eco­nomic growth will slow down.”

Pro­tec­tion­ism by in­di­vid­ual coun­tries would then cre­ate a “down­ward spi­ral” that would re­sult in stag­na­tion and even­tu­ally hurt ev­ery coun­try.

Wang said “Trad­ing Eco­nom­ics” was the cul­mi­na­tion of 15 years of ob­ser­va­tion and anal­y­sis.

He plans to trans­late his book on the the­ory into English next year.

Yuan fur­ther weak­ened last week and for the first time since 2008 fall be­yond 6.9 against the US dol­lar. (Reuters)

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