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Easing financial regulation needed to nourish China's real economy
By Sun Lijian |
June 25, 2013, Tuesday
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Print Edition
Print Edition
STATISTICS released by China's General Administration of Customs on June 8 show that in May Chinese exports totaled US$182.77 billion, up 1 percent year on year.
The slower growth rate, which fell 13.7 percentage points month on month, is a sign that inflows of flight capital in anticipation of yuan's rise have been brought under control.
However, amid pervasive monetary easing in developed countries, flight capital will only pour more vigorously into emerging markets like China, where reform of exchange rates is incremental, and add to their management costs.
Multinationals worldwide have established their supply chains based on regional comparative advantage, and have leveraged the economies of scale brought about by industrial clusters. Therefore, short-term hikes of exchange rates won't significantly dent trade surplus.
By contrast, if the Western economic rebound is fast, the benefit of a bigger surplus will be enough to offset the impact of currency appreciation on multinationals' exports.
If the exchange rate and other factors are on a long-term upward spiral, forcing them to overhaul supply chains, the Chinese economy might be hit by an industrial hollowing-out that once afflicted East Asia.
If by that time the operations of most Chinese firms remain at home, and should the buying power of domestic consumers grow remarkably, the Chinese economy will likely boom amid a falling trade surplus.
At present, China's changing trade surplus mirrors the influence of external factors. This is especially the case when the government took note of risky local financing vehicles and exorbitant home prices and began to restrict large-scale investments.
Close link
We have witnessed a very close link among smaller trade surplus, economic slowdown and businesses' leaner profit margins.
In other words, the policy combination adopted by the United States and Japan, comprised of quantitative easing and protectionist measures, has indeed dealt a blow to trade and supply chains.
As a result, a large chunk of long-term capital in China is turning into liquid funds. They take the lead in shorting activity, and their exodus threatens to leave behind an industrial hollowing-out and volatile financial asset prices.
As such, we must plan ahead and take the following actions.
First, at future meeting with their Western counterparts, the Chinese leadership, bearing in mind the need to promote free trade and investment in real industry, ought to cement cooperation mechanisms to this end, thereby denying opportunity to speculators.
Second, to swiftly reduce speculative pressure, the priority now is not to speed up yuan's rise, because doing so will cause exchange rate overshooting amid sloshing liquidity all over the world.
Now is not the time to cushion the blow of yuan's rise on investments and exports by opening China's capital account, because developed countries are embracing de facto zero interest rates, making it hard for emerging markets to compete.
Although the financial crisis has severely damaged asset prices in the West, enticing Chinese acquisition of competitive firms and technologies, we need to realize that such buyout is primarily about serving overseas production and trade, rather than looking for fire sales.
What's more, the risk of outbound investment is grave, particularly when elevation of yuan's global profile is underway.
The first order of business for the Chinese economy is to relax financial regulation, making it easier for the finance sector to fund the real economy. In this way, idle capital can be channeled to diverse investments and increase goods and services for the domestic market.
Moreover, strict oversight must be maintained on flight capital, to rein in excessive appreciation of yuan's nominal exchange rate and inflation caused by overheated sectors such as real estate. A stable yuan helps restore Chinese firms' global competitiveness and desire to invest.
Meanwhile, we need to dismantle some regulatory barriers and cut red tape, to encourage foreign capital to stay put in China. Formation of a vast Chinese consumer market also hinges on this assumption.
Third, the disadvantage of yuan's often-forced appreciation must be turned into an advantage in our bid to propel China's service industry.
Through massively introducing luxury brands and high-end products first into first-tier cities, together with drastically reducing tariffs, we can create the right domestic market environment.
Deregulation
We need to make best of Shanghai's free trade pilot area to profit from quality imports in fostering our premium consumer market and culture. This goal serves as a template for the development of relevant services and the shift of Chinese companies' profit model away from the entrenched export-led growth.
By adhering to this vision, the Chinese economy will be fueled by a virtuous cycle - with high-income people leading consumption, foreign and domestic businesses gaining from cooperation and the labor force also sharing the windfall.
By then, a fully convertible yuan and a deregulated capital account would cause limited repercussions to the real economy. And a vibrant internal market is a great boost to trade and financial integration of Asia and beyond.
It is notable, however, that yuan's status as a global currency is a natural product of long-term development, not one of wishful thinking. It is not attainable independent of a sound real economy.
The author is executive dean of the School of Economics at Fudan University. The views are his own. Shanghai Daily staff writer Ni Tao translated his article from Chinese.
The slower growth rate, which fell 13.7 percentage points month on month, is a sign that inflows of flight capital in anticipation of yuan's rise have been brought under control.
However, amid pervasive monetary easing in developed countries, flight capital will only pour more vigorously into emerging markets like China, where reform of exchange rates is incremental, and add to their management costs.
Multinationals worldwide have established their supply chains based on regional comparative advantage, and have leveraged the economies of scale brought about by industrial clusters. Therefore, short-term hikes of exchange rates won't significantly dent trade surplus.
By contrast, if the Western economic rebound is fast, the benefit of a bigger surplus will be enough to offset the impact of currency appreciation on multinationals' exports.
If the exchange rate and other factors are on a long-term upward spiral, forcing them to overhaul supply chains, the Chinese economy might be hit by an industrial hollowing-out that once afflicted East Asia.
If by that time the operations of most Chinese firms remain at home, and should the buying power of domestic consumers grow remarkably, the Chinese economy will likely boom amid a falling trade surplus.
At present, China's changing trade surplus mirrors the influence of external factors. This is especially the case when the government took note of risky local financing vehicles and exorbitant home prices and began to restrict large-scale investments.
Close link
We have witnessed a very close link among smaller trade surplus, economic slowdown and businesses' leaner profit margins.
In other words, the policy combination adopted by the United States and Japan, comprised of quantitative easing and protectionist measures, has indeed dealt a blow to trade and supply chains.
As a result, a large chunk of long-term capital in China is turning into liquid funds. They take the lead in shorting activity, and their exodus threatens to leave behind an industrial hollowing-out and volatile financial asset prices.
As such, we must plan ahead and take the following actions.
First, at future meeting with their Western counterparts, the Chinese leadership, bearing in mind the need to promote free trade and investment in real industry, ought to cement cooperation mechanisms to this end, thereby denying opportunity to speculators.
Second, to swiftly reduce speculative pressure, the priority now is not to speed up yuan's rise, because doing so will cause exchange rate overshooting amid sloshing liquidity all over the world.
Now is not the time to cushion the blow of yuan's rise on investments and exports by opening China's capital account, because developed countries are embracing de facto zero interest rates, making it hard for emerging markets to compete.
Although the financial crisis has severely damaged asset prices in the West, enticing Chinese acquisition of competitive firms and technologies, we need to realize that such buyout is primarily about serving overseas production and trade, rather than looking for fire sales.
What's more, the risk of outbound investment is grave, particularly when elevation of yuan's global profile is underway.
The first order of business for the Chinese economy is to relax financial regulation, making it easier for the finance sector to fund the real economy. In this way, idle capital can be channeled to diverse investments and increase goods and services for the domestic market.
Moreover, strict oversight must be maintained on flight capital, to rein in excessive appreciation of yuan's nominal exchange rate and inflation caused by overheated sectors such as real estate. A stable yuan helps restore Chinese firms' global competitiveness and desire to invest.
Meanwhile, we need to dismantle some regulatory barriers and cut red tape, to encourage foreign capital to stay put in China. Formation of a vast Chinese consumer market also hinges on this assumption.
Third, the disadvantage of yuan's often-forced appreciation must be turned into an advantage in our bid to propel China's service industry.
Through massively introducing luxury brands and high-end products first into first-tier cities, together with drastically reducing tariffs, we can create the right domestic market environment.
Deregulation
We need to make best of Shanghai's free trade pilot area to profit from quality imports in fostering our premium consumer market and culture. This goal serves as a template for the development of relevant services and the shift of Chinese companies' profit model away from the entrenched export-led growth.
By adhering to this vision, the Chinese economy will be fueled by a virtuous cycle - with high-income people leading consumption, foreign and domestic businesses gaining from cooperation and the labor force also sharing the windfall.
By then, a fully convertible yuan and a deregulated capital account would cause limited repercussions to the real economy. And a vibrant internal market is a great boost to trade and financial integration of Asia and beyond.
It is notable, however, that yuan's status as a global currency is a natural product of long-term development, not one of wishful thinking. It is not attainable independent of a sound real economy.
The author is executive dean of the School of Economics at Fudan University. The views are his own. Shanghai Daily staff writer Ni Tao translated his article from Chinese.
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