Easily fed decision will make China faces tough choices
If the Fed raised interest rates by 50 basis points immediately and end the era of cheap money, I'm afraid no one will panic. After all, the United States Central banks over the course of several months in hair, and although their delays in the hands will allow some observers to challenge their ideas, but fundamentally speaking, we hardly had any reason to believe that such a small gesture can make the world's largest economy into a recession.
but, as Bloomberg-view article pointed out, the United States fed a relatively easy decision, but will give the other side of the world's economic policymakers have encountered trouble. Recently, the people's Bank of China has been eating his $ 3.4 trillion in foreign exchange reserves, at about $ 100 billion a month in spending, to prop up the value of the Yuan. Higher United States interest rates and the dollar exchange rate is bound to stimulate further capital outflows from China, especially in China under the background of economic worry.
look, China's leaders seem to have accepted the moderate depreciation of the Yuan, while preparing the complete liberalization of RMB exchange rate. In the future, this value may include the euro and a basket of 13 currencies, Yen to decide, and this objective can only increase the pressure for devaluation. If the people's Bank of China will take substantive action now, the gliding of the Yuan would quickly become dive. Us $ in the overall strength of the emerging market currencies, the real float will lead to currency devaluation may even depreciate by more than 30%.
in this case, few weapons can be used in China. In November, Yuan joined the International Monetary Fund's reserves monetary elite club for Chinese leaders, which of course is a major victory, has systemic importance. If they use capital controls to prevent further down, you will put yourself in great embarrassment, needless to say, this will make people question their ability to manage the economy.
China has no choice, only managed to get past that, to allow the Yuan to depreciate, and find a way to slow the speed decrease. In the eyes of Trump, of course, is a kind of currency "manipulation", but strictly speaking, this approach does not go against the market, China will, just think of a way to mitigate the market impact of the decision.
this situation reveals a disturbing truth: the Fed raising interest rates is a typical lower-risk decisions, but at the same time, Chinese leaders are the options facing high risk. They can expect the best results only return a certain degree of stability, decades before that Super growth is impossible.
earlier, when China's debt levels are low, the Government has a huge surplus, investment is almost full. Now, credit has been a serious expansion. Overcapacity in the excessive investment in fixed assets has left it cannot be ignored. Rural-urban migration has slowed, even if it is working-age population began to decline. Now has no easy reform. China must adjust both stimulate competition and increase productivity, more efficient allocation of capital, is to encourage innovation, requires fundamental sacrifices.