Rocks and hard places: China’s government faces extremely unappetising policy options

Posted: January 15, 2016 in economy
Tags: , ,

CHINA’S wild stock markets command attention, but it’s the foreign-exchange moves that really bear watching, for those worried about the Chinese economy and its effect on the world. The backdrop against which this drama is unfolding is one in which total debt in China is close to 300% of GDP and continues to rise rapidly as the government seeks to promote steady growth.My column this week explains the short-run exchange-rate trade-offs confronting the leadership. Markets are pushing for depreciation of the yuan; that is why it tends to fall against the dollar when allowed to by the People’s Bank of China and why China’s reserves sink when it isn’t. Depreciation makes economic sense. True, China still runs a whopping great trade surplus. But its surplus is entirely concentrated in processing trade, in which China is just one link in a long supply chain, and in which exchange-rate valuations across the chain are what matter. More important is slowing growth and weak demand in China, and the declining return on investment in Chinese projects. At the same time, those Chinese with savings are desperate for the opportunity to diversify them out of yuan-denominated assets.But depreciation is potentially very costly. It could stoke panic among those keen to move money out of China, leading to a chaotic rush for the exits. It would also strain highly indebted Chinese firms, so …

via Economic Crisis http://ift.tt/1J6sORe

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