No Case for Complacence

C.P. Chandrasekhar

Though restricted to a single day, the 1625-point collapse of the Sensex on 24 August 2015, which was the largest single-day decline in six years, appears to be a signal that all is not well with the Indian economy. More troubling is the steep depreciation of the rupee from Rs. 63.8 to Rs. 66.7 to the dollar over the fortnight ending August 25. The government has tried to brush these developments under the carpet claiming that the disease is global and the Indian economy is strong enough to resist contagion. All that is needed is to stick with reform, it argues.

What emerges, however, is that as a result of continuous and incremental liberalisation, including of transactions on the capital account, the Indian economy is extremely vulnerable to even minor shocks such as flagging growth in parts of the world economy or policy measures such as an interest rate hike that encourage the exit of investors from financial markets in developing countries. That makes the current global environment one that can be extremely damaging for India.

The world’s investors are on the run, away from equity, to gold and bonds, especially U.S. Treasury bills, indicating that the flight is to safety. The result has been a collapse in equity markets worldwide. Given the whimsical behaviour of investors, this may be seen as of little consequence. But the fears that have overcome investors this time seem more significant because of the factors prompting them. These include: evidence and implications of a major slowdown and crisis in China; the consequences of that for emerging markets, especially commodity producers and countries that have attracted large capital flows during the period that followed the financial crisis of 2008-09; and, the resulting spin-off effects on the US, and the negative feedback loop that would be triggered by the likely U.S. response to its predicament.

Read the rest of this entry »

China’s RenMinBi Strategy

C.P. Chandrasekhar and Jayati Ghosh

When the value of the Chinese currency – the RenMinBi – started falling on 11 August, there was more than just surprise among international observers. The surprise came from the fact that hitherto, ever since the RMB was officially taken off the US dollar peg in 2005, the Chinese government had managed the value of the RMB so that it would change in relatively gentle and barely noticeable movements – as evident even from Chart 1 that covers movements over the past three months only. Yet the 1.8 per cent decline on 11 August was followed by two further days of decline, such that over these three days the currency fell against the US dollar by nearly 4.6 per cent.

Chart 1: RenMinBi per US$

Ghosh Chandrasekhar--fig1--renminmi to dollar

Only on Friday 14 August did the RMB appear to stabilize against the US dollar, after the People’s Bank of China (the central bank) raised the value slightly through its open market operations, to close the day at 6.3975 per dollar, compared to the low of 6.4010 per dollar of the previous day. An official of the bank has announced that “there is no basis for the exchange rate to continue to depreciate,” but this story is not over, and most analysts expect that there will be some further depreciation of the RMB in the medium term.

Read the rest of this entry »

The “Chinese Dream” and its Challenges

Martin Khor

Last week saw the completion of China’s leadership transition, with Xi Jinping as the new President and Li Keqiang the new Premier.

President Xi set the world speculating when he spoke of “striving to achieve the Chinese dream of great rejuvenation of the Chinese nation.”

One Western newspaper commented it was a collective national dream, contrasting it, unfavourably, to the “American dream” of giving individuals equal opportunities.

But to the Chinese, the promised renaissance of the nation is a reminder of the collective humiliation during the colonial era and the “dream” to win back its previous place as a world leader in science, technology, economy and culture.

Read the rest of this entry »

The "Chinese Dream" and its Challenges

Martin Khor

Last week saw the completion of China’s leadership transition, with Xi Jinping as the new President and Li Keqiang the new Premier.

President Xi set the world speculating when he spoke of “striving to achieve the Chinese dream of great rejuvenation of the Chinese nation.”

One Western newspaper commented it was a collective national dream, contrasting it, unfavourably, to the “American dream” of giving individuals equal opportunities.

But to the Chinese, the promised renaissance of the nation is a reminder of the collective humiliation during the colonial era and the “dream” to win back its previous place as a world leader in science, technology, economy and culture.

Read the rest of this entry »

China’s exploding debt

C.P. Chandrasekhar

If the international media are to be believed the world, still struggling with recession, is faced with a potential new threat emanating from China. Underlying that threat is a rapid rise in credit provided by a “shadow banking” sector to developers in an increasingly fragile property market. Efforts to address the property bubble or reduce fragility in the financial system can slow China’s growth substantially, aggravating global difficulties.

The difficulty here is that the evidence is patchy and not always reliable. According to one estimate, since the post-crisis stimulus of 2008, total public and private debt in China has risen to more than 200 per cent of GDP. Figures collated by the World Bank show that credit to the private sector rose from 104 per cent of GDP in 2008 to 130 per cent in 2010, before declining marginally in 2011. The evidence suggests that 2012 has seen a further sharp increase.

Read the rest of this entry »

Currency Concerns Under Uncertainty: The Case of China

Sunanda Sen, Guest Blogger

Concerns have been rising, in recent months, over the current state of China’s external balance and the future of the RMB. Apprehensions relate to the negative balances, which have been visible in China’s financial balance since the last quarter of 2011. The negative sums were respectively (-) $ 3.02 and  (-)$ 4.21 billion during the second and third quarters of 2012, preceded by an even larger sum at (-)$ 29.0 billion in Q4 2011. Such deficits contrast with the surpluses in the financial account usually maintained, which were as much as $13.20 billion during Q4 of 2010.  These changes have been matched by tendencies for its official reserves to slide downwards. For instance, there was a $ 6 trillion drop in official reserves between March and June 2012. Pressures on the RMB rate even led to its depreciation, from 6.30 per dollar in April 2012 to 6.41 by August 2012. The currency, however, reverted to its earlier phase of appreciation, with the rate moving up from RMB 6.38 to RMB 6.31 between 24th July 2012 and 18th January 2013.

Differences relating to the exchange rate have continued to prevail across officials and think tanks in China and the US, with the latter holding China’s exchange rate management responsible for the continuing global account imbalances between the two countries. With pressures on China to appreciate the currency, the US Treasury even came to the point on in April 2010 of deciding whether China can be treated as a currency manipulator. The on-going dynamics of China’s foreign exchange transactions can be better understood by tracking the following major breaks in China’s exchange rate policy:

First, an end to the prevailing fixed RMB-dollar rate in 2005, which came largely with pressures from the US. Despite the twin surpluses between the current and the capital account, China was maintaining, since 1997, a fixed exchange rate at around 8.27 RMB per dollar. The change to managed floating, still supported by direct purchases of foreign currency which were flowing in abundance with the twin surpluses, led the RMB to rise immediately to 8.11 per dollar, with gradual appreciations since then. With appreciations continuing, the change to a floating RMB did not, however, lead to currency speculation till the third quarter of 2011.

Read the rest of this entry »

China’s Rebalancing

Yılmaz Akyüz

It is now generally agreed that China cannot go back to the export-led growth it had enjoyed in the run-up to the global financial crisis even with a return of the US and Europe to vigorous growth.  It needs to expand the domestic market by reversing the secular decline in the share of private consumption in GDP, which has been hovering around wartime-like levels of some 35 per cent.  It should do so not so much by reducing the household propensity to save as by increasing the share of household income in GDP which has been in a downward trend for almost two decades.  This would require a judicious combination of wage, agricultural pricing and tax policies and significantly increased government transfers, particularly to poor rural households, financed with dividends from state-owned enterprises (Export Dependence and Sustainability of Growth in China).

Read the rest of this entry »

China's Rebalancing

Yılmaz Akyüz

It is now generally agreed that China cannot go back to the export-led growth it had enjoyed in the run-up to the global financial crisis even with a return of the US and Europe to vigorous growth.  It needs to expand the domestic market by reversing the secular decline in the share of private consumption in GDP, which has been hovering around wartime-like levels of some 35 per cent.  It should do so not so much by reducing the household propensity to save as by increasing the share of household income in GDP which has been in a downward trend for almost two decades.  This would require a judicious combination of wage, agricultural pricing and tax policies and significantly increased government transfers, particularly to poor rural households, financed with dividends from state-owned enterprises (Export Dependence and Sustainability of Growth in China).

Read the rest of this entry »

The Eye of the Currency Storm: Currency war gives way to currency confusion

Ilene Grabel

Through much of 2010 and 2011 many of us watched the unfolding “currency war.” The currency war construct came into vogue after Brazil’s Finance Minister Guido Mantega began to complain openly in 2010 about the pressures placed on his economy and currency (and that of other rapidly-growing developing countries) by the cheap credit made available by the US Federal Reserve and other wealthy country central banks. Brazil’s President, Dilma Rousseff, joined the rhetorical fray later in 2012 by calling US President Obama and European leaders on the carpet for what she termed the “monetary tsunami” of hot money coming from rich countries.

Read the rest of this entry »

China on the verge?

Matías Vernengo

It has become increasingly common to suggest that on top of the European debacle and the sluggish recovery in the United States, China might be on the verge of a collapse, and with it the last bastion of economic growth in the world economy would also be gone. Not only the center is stagnant, but also the periphery of the global economy is very fragile. But the probability of a Chinese slowdown is greatly exaggerated.

Paul Krugman, who has been correct about the need for fiscal expansion in the United States, and about the European Central Bank (ECB) mismanagement of the Greek crisis, for example, has suggested that China is in the middle of a housing bubble that can burst at any time (see also Jayati Ghosh and C. P. Chandrasekhar here for a similar, but broader view of the dangers in 2012). This view insinuates that growth in China is fundamentally dependent on domestic demand, but that the sources of the expansion are fragile. It, further, suggests that China now looks very similar to the US before the Lehman Brothers crisis in September 2008.

Read the rest of this entry »