Now is 'best opportunity' to free exchange and interest rates
By Feng Jianmin |
July 2, 2012, Monday
|
Print Edition
Print Edition
ANDY Xie
Independent economist; director, Rosetta Stone Capital Limited
China is used to incremental reforms, such as setting up special economic zones with favorable tax plans and other preferential policies. But the special economic zone plan should fail in the financial sector. Unlike in industrial sectors, capital flows in the financial system at unlimited speed.
That's why huge constraints and strict quota have been placed on every progress of financial reforms. Such reforms don't have much significance to the overall system.
China will have a big problem because of the rigid system. The bubble in the property sector wouldn't have been so big if there are flexible exchange rate, interest rate and banking systems. Government officials believe that the bubble is bursting due to tight control of the central government. Such thinking and reluctance for reform will eventually bring a financial crisis to China.
Many have proposed to the government reform ideas that are painless and riskless. I think it's impossible. The cutting point now is to liberalize the exchange and interest rates.
There will be a huge risk if capital market and interest rate-based products are opened up before exchange rate liberalization.
China has missed already two good opportunities for the liberalization.
The first was before 2004, when the world's attention was not yet on China. The second was during the 2008 financial crisis. Now is the best opportunity, as China's foreign currency reserves are near balance. If the market is allowed to decide exchange rate, there won't be excessive fluctuation nor a huge impact on the manufacturing industries.
One target of a floating exchange rate is to protect the size of foreign currency reserves, which are at the heart of China's financial stability.
Independent economist; director, Rosetta Stone Capital Limited
China is used to incremental reforms, such as setting up special economic zones with favorable tax plans and other preferential policies. But the special economic zone plan should fail in the financial sector. Unlike in industrial sectors, capital flows in the financial system at unlimited speed.
That's why huge constraints and strict quota have been placed on every progress of financial reforms. Such reforms don't have much significance to the overall system.
China will have a big problem because of the rigid system. The bubble in the property sector wouldn't have been so big if there are flexible exchange rate, interest rate and banking systems. Government officials believe that the bubble is bursting due to tight control of the central government. Such thinking and reluctance for reform will eventually bring a financial crisis to China.
Many have proposed to the government reform ideas that are painless and riskless. I think it's impossible. The cutting point now is to liberalize the exchange and interest rates.
There will be a huge risk if capital market and interest rate-based products are opened up before exchange rate liberalization.
China has missed already two good opportunities for the liberalization.
The first was before 2004, when the world's attention was not yet on China. The second was during the 2008 financial crisis. Now is the best opportunity, as China's foreign currency reserves are near balance. If the market is allowed to decide exchange rate, there won't be excessive fluctuation nor a huge impact on the manufacturing industries.
One target of a floating exchange rate is to protect the size of foreign currency reserves, which are at the heart of China's financial stability.
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