It is for that reason that the central government is trying to turn the tables a little, to make 2005 the year of capital outflows. It is not a very sexy tag, but it sounds better than, say, "The Year of Capital Flight" – which goes back only to the late nineties, after all.
Fat Dragon is not one to join the near-consensus among the chattering classes in Hong Kong investment banks who have confidently pronounced that Beijing will de-peg the renminbi from the US dollar in the first six months of this year.
It is probably rude to remind people that they have been wrong in making the very same prediction before. Goldman Sachs has the worst record. They tipped a change in the renminbi policy in 2003 and have been a bit sheepish since.
Fat Dragon still believes that the peg is not the policymakers' priority. That remains the financial system, including making sure the listings of the big state banks, planned for some time, go off smoothly.
However, the central bank does want to start to regularize capital flows. That is why their insurance companies will be allowed to invest offshore (in bonds, to start with); companies which do IPOs offshore will be able to keep the money raised there; and more and more local enterprises will be allowed to invest overseas.
Seeds of disaster
Some of these policies contain the seeds of disaster, of course. Chinese companies have little experience in investing overseas and they are going to make some big mistakes, especially as some will do so just because they can.
Some of the investments will be motivated by little other than the thrill of the deal, plus the kick that any mere mortal gets from staying in the Grand Hyatt for weeks on end. These measures will amount to a few billion dollars in capital outflows – not much compared to the US$200bn-plus that came in last year.
But China can absorb this money without much difficulty. The sterilization program has worked passably well so far in mopping up excess funds from the system.
The problem with China is not the amount of cash sloshing around in the system. It is the incompetent and corrupt fashion in which the banks lend it out. So capital inflows on their own do not mean China has to revalue its currency. Despite all the predictions about how they are about to move on the currency, stunningly for politicians, China's leaders have so far done everything they have said they would on the exchange rate and the capital account. They have gradually, cautiously liberalized the latter to prepare for the time when they can start to tamper with the former, just as they said they would. There is nothing they would like better than to keep quietly doing so, so when they do get around to changing the currency peg, lots of people, especially speculators, will have forgotten about the issue anyway.
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