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2010-08-25

What will be China's economic challenges in the next twenty years?

Comments on Geng Xiao “China’s economic challenges in the next twenty years”, 24/08/2010, http://www.eastasiaforum.org/2010/08/24/chinas-economic-challenges-in-the-next-twenty-years/
It is an interesting article, although some points are unclear. The point on a more market determined or linked interest rate to balance savings and investment is excellent.

Firstly, what is the concept of structural inflation? Does is differ in any way from inflation as that in economics? If not much different, why the term of structural inflation is used at all?

Secondly, why is inflation necessary for the exchange to go possibly up and down? Market factors and forces to determine the exchange rate are many and varied, both longer and shorter term. Did Geng Xiao mean that inflation should be high enough to counter the appreciation in the nominal exchange rate?

If that is the case, then how much that inflation should be? Why is that necessary to run that risk in manipulating inflation to such a degree?

I think as long as the Chinese are allowed to hold foreign currencies and exchange them freely both ways, the pressure for the rmb to appreciate will dissipate very quickly because of high demand for foreign currencies by them. Also a freer domestic exchange rate management system will reduce the current account imbalance, if that is a problem. More people will travel overseas and study overseas.

Thirdly using inflation to manage exchange rate is likely to be a poor policy to adopt.

Fourthly, the point on using exchange rate for asset pricing is quite novel, but that would be in favour of the US more than China in the longer term. Would the Chinese authority do that?

Fifthly, those macro policies are likely to be the easiest economic challenges for China in the next twenty years. Real structural economic issues, such as emissions control and energy policies, urbanisation, productivity growth versus non-productivity growth such as more inputs like investment and labour etc, regional growth, income distribution policies and effects on social stability and efficiency and growth, assets prices management, to name just a few.

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