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2011-01-06

China's liquidity issues

Comments on Yiping Huang "China 2011: risks are from liquidity not liability", 2/01/2011, http://www.eastasiaforum.org/2011/01/02/china-2011-risks-are-from-liquidity-not-liability/

A few minor points.


Firstly, in terms of housing prices in China, it is interesting to note that the Chinese government has been talking down the prices and attempting to get them down significantly.

While a government engineered fall in housing prices is good news for buyers, it is not that good for house owners. Whether the approach is politically viable or sound in the longer term is yet to be seen.

The government had the responsibility of keeping housing prices in check in the first place. It failed to do that and now it is forcing them down and directly creating losers and winners because of its past policy failures. Isn’t that interesting?

What the government should do is to manage the bubble over time, rather than to burst it suddenly.

Secondly, in terms of liquidity, it has been reported that the Chinese authorities are either considering or have already allowed the direct deposit of foreign currencies overseas by Chinese exporters, that would reduce the pressure for the authorities to deal with them, lowering liquidity and increasing the degree of the limited monetary autonomy.

The authorities should consider allowing most Chinese to buy foreign currencies and consume or invest overseas that would further reduce the autonomous pressure on liquidity of future trade or current account surpluses.

In terms of the hot money, it is interesting that Chinese stock markets have performed poorly relative to others, including the US. Where has that money flown to or what has it bought?

There is also report that the IMF is considering to relax its stance on control of international capital flows that may make it easier for authorities to deal with international ‘hot money’.

Thirdly, in terms of inflation and the Chinese authorities’ monetary policy approach, what is the target or are the targets? Clearly public concern is the CPI because it affects their lives, whether it is due to structural or not. While there is a point to dealing with unhealthy speculative activities if appropriate policy tools are available, the government’s administrative measures are a step in a backward direction.

The reluctance to using interest rates as the main tool of monetary policies is a poor approach given that it robs from those who have deposits that earn interest.

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