Considering China’s huge and growing income inequalities, and its massive disguised rural unemployment, it is easy to imagine a period of political instability that sends investors heading for the exits. Mix in China’s shaky financial system and the prospect of trade sanctions after an altercation over, say, Taiwan, and it is clear that the yuan might not always be a one-way bet. Last but not least, the Chinese authorities desperately need to maintain the country’s breakneck economic growth in order to preserve the Communist Party’s legitimacy. But, as the economy becomes richer and more complex, there will be no escaping the market imperative in internal credit allocation. Every other emerging market, even in Asia, has eventually had to cross this bridge. Indeed, the need to pursue financial liberalization to maintain growth is a central reason why middle-income countries are so prone to financial crises. That’s why Chinese authorities should move to greater flexibility now, and not wait until it is too late. So should we expect to see much bigger currency moves in China anytime soon? Should we ever expect to see wild gyrations in China’s exchange rate of the sort one routinely sees in, say, the Australian dollar or the South African rand? ...
Source: IIPM Editorial
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Source: IIPM Editorial
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Copyright: IIPM 2006
