There are more monetary tools available

Comments on Ran Li, Peking University, "Monetary policy and China’s soaring leverage problem", 31 May 2017

While your work in that survey and in your pursuit is interesting and possibly important, one has take a broad and creative approach to what monetary tools can and can’t do. A useful lesson is what the FED did or has done in the aftermath of the Global Financial Crisis (particularly the financial crisis in the US following its subprime bursts.
You stated that: “Trying to maintain both inflation and financial stability would divert the limited power of monetary policy and complicate the evaluation of central bank performance.”
Please have a look at what the FED did, often dubbed as the so called an unconventional approach/method, and you may come to a very different conclusion.
One should not simply take the conventional view of monetary policies and be limited by that. One has to think creatively in dealing with the often complex reality.
I think China has done quite a bit of creative approaches in terms of monetary policies in dealing with banking reserve ratios and non-first home housing lending/loans.
You also argued that “To address the surging leverage issue, the root cause of rising leverage should be addressed through reform. China should adopt and strictly implement macro- and micro-prudential measures to prevent systemic risks. Instead of directly targeting leverage, the PBC should take the spillover effects to financial markets into consideration of all their decisions and closely cooperate with financial regulators. Further financial liberalisation and the removal of special protection for SOEs are also essential.”
Unless your reforms include creative approaches such as what the FED and the Chinese authorities have done, your advocate may be really too conventional and lack of some common sense. One should not be simply following a ‘textbook’ approach because that may be dogmatic.

Chinese sovereign debt default likely?

Comments on Yiping Huang, Peking University, “Is a Chinese sovereign debt default likely?”, 28 May 2017

This post raises a number of interesting questions.

Firstly, about the argument of that the recent downgrading of China’s credit rating by Moody’s “could turn out to be more a warning of past problems than a prediction of future risks”. One can certainly argue one way or another on this particular rating by Moody’s, but did Moody’s change its methodologies in this specific case? Unless it actually did or it made some errors in the process, one should probably accept the rating or the approach. Certainly, one could argue whether its general approaches or methodologies are effective and reflective of future outlook or current status, but that is a quite different point. Having said that, it is inevitable that actions and reactions will occur regardless of the actual merits of the rating, particularly when it is a negative rating of China’s outlook or credit.
Secondly, does this downgrading in rating really and necessarily mean significantly heightened risks of a default of sovereign debts by China? That is likely to be a very long distance to bridge. A default means its inability to pay its debts at the time when they are due. It is largely a ‘cash flow’ issue and a ‘cash management’ issue. Does or will China realistically face this kind of scenario in the near future covered by the rating period, that is, its current assets/revenues fall short of its current liabilities? I would be extremely surprised to see that occur.
Thirdly, in the third reason that the author explained for why China’s money supply to GDP ratio is high, it is said: “And third, there is an inherent acceleration mechanism in China’s monetary policy. The money supply expands in good times in order to facilitate an increase in economic activity, but it also expands in bad times to stabilise the economy and the market.” Does that mean China’s money supply always accelerates, that is, both when the economy is expanding quickly and when it is in trouble in maintaining steady growth? If that is true, then isn’t that also one of the main reasons for its high money supply to GDP ratio?
Fourthly, it is said that there are not as many investment opportunities in China as in other countries (presumably industrialised countries), and that, limited opportunities for people to invest, have led to financial problems moves from one area to another in China. Why could China develop more investment opportunities or markets? What have been the main impediments to the development of more investment opportunities?

Government guarantees, reforms and growth in China

Comments on Jiao Wang, University of Melbourne, “No more ‘straight Aas’ for China?”

31/052017

While any governments should take it as their own responsibility to prevent systematic or even fairly large-scale failures of banks, financial firms and other major firms (even with the so called potential too big to fail situations or scenarios), a blanket guarantee may create serious moral hazard problems. As a result, a good policy of government guarantee (explicit or implicit) should only be set to the degree that some failures of banks, financial or other types of big firms are allowed, or only guarantee those at the margin with significant financial and other forms of penalties.

Such a policy, in conjunction with other forms of prudential supervisions, will be able to prevent large scale or systematic failures that can jeopardize the whole system, while still provide sufficient incentives to those entities for them to avoid the moral hazard issue.

While it is understandable that structural and other deeper economic reforms may have some effects on the growth rate of the economy, it is often too easy to argue that the government should not pursue growth simply because reforms need to be undertaken. I think one has to balance reforms and growth, particularly one has to be careful not to create unnecessary excuses for not to work hard on the growth front.

China is still a developing economy and there is still a long way to go and a lot of potential for high growth to catch up with the industrialised world. Any waste in terms of growth, that is, not being able to achieve its full potential should not be accepted as good performance.

Flexibility and creativity key to resolving nuclear issues and tensions on the Korea Peninsula

Comments on Moon Chung-in, Seoul: “Diplomatically denuclearising North Korea”,

26/052017

The author should be commended for this excellent proposal/approach as shown in this post. To achieve the paramount goal of denuclearisation in the Korea Peninsula, it may be necessary that everyone should do some compromise.

I think the offer of suspension of joint military exercises between the US and South Korea in conjunction with asking the North Korea to freeze its nuclear and missile programs is particularly constructive and very helpful, because it is a suggestion of a useful compromise from both of the opposite sides.

I think, depending on the progress in future negotiations of the relevant parties, it may also be helpful and desirable to consider some sort of security guarantee agreement. Such a guarantee may involve the four other parties outside the Korea Peninsula, namely the US, China, Russia and Japan, as guarantors.

Of course, such guarantee should not preclude the possibility of Korean unification, should both parties on the Korea Peninsula wish and agree to do so. But it should only be up to the two Koreas as opposed to any outsiders.

Once again, I highly commend the author for the excellent ideas presented in this post.

A good deal for China?

Comments on Dong Dong Zhang “What does their trade deal tell us about US–China relations?”, 24/05/2017

While it may be understandable that it seems from the post that the deal was very much one-sided, that is, give the US so much and China so little, given the so hard rhetoric Trump had against China for a while, I am still surprised the one-sided nature!

Is that really the case?

People have started talking about possible impeachment in the US now. How would people in China including its leadership view such a deal in the longer term in this context, that is, the Trump administration may not necessarily last for too long?