Ha Jiming: RMB Is Hard To Resist Another Emerging Market Crisis.

< p > recently, some emerging market economies have fallen seriously, and the capital and < a href= "http://sjfzxm.com/news/index_cj.as" > foreign exchange market < /a > have seen varying degrees of intense concussion.

Many emerging market currencies have depreciated sharply against the US dollar since May of this year. The currencies of Indonesia and India depreciated by 12-15%, and the stock markets of the two countries dropped by 7.5 and 13.3% respectively on the four or five trading days after August 16th.

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The underlying cause of the P market turmoil is the expectation that the Fed's quantitative easing monetary policy reduction will lead to capital outflow in emerging markets.

But the deeper reason is the deterioration of financial and foreign trade in some emerging markets in recent years, high inflation and weak economic reform.

The city gate is on fire.

This scene reminds us of the tightening of the US monetary policy in 1990s and the subsequent Asian financial crisis, and its impact on China's economy and policy at that time.

For example, China's economy has fallen sharply due to the drag on exports. The RMB has been facing great devaluation pressure in the years following 1997 after being infected by peripheral currencies, and the previously established RMB convertibility reform has been postponed.

People can not help but ask, will the effect of the sudden change of external environment on China's economy, exchange rate and policy be reproduced? < /p >

< p > I believe that the changes in the external environment will not seriously affect the Chinese economy and the < a href= "http://sjfzxm.com/news/index_q.asp" RMB exchange rate < /a > in the short term.

But it may make the authorities more inclined to maintain the balance of economic growth and economic restructuring, which will undoubtedly increase the cost of economic imbalances and future rebalancing.

Once emerging market conditions deteriorate further and directly or indirectly affect China through contagion effects, the authorities may lose sight of each other in maintaining economic stability and exchange rate stability.

Once caught in this dilemma, some reforms that have already been launched (such as the opening of RMB exchange rate and capital account) and the continued bubble (such as real estate, government debt and excess capacity) may help to devalue the renminbi.

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< p > let us first recall the situation at that time. Before 1994, the US economy was sluggish, the financial industry was affected by the collapse of the savings bank, the monetary policy was very loose, and the federal funds interest rate dropped from 10.5% in 1989 to 2.9% in 1993. At the same time, many emerging economies borrowed a lot of short-term foreign currencies and invested in domestic long-term projects. The rise in debt was accompanied by the mismatch of maturity and currency, which gave birth to asset price bubbles.

At that time, the currencies of these countries were pegged to the US dollar, and the expectation of fixed exchange rate made the mismatch currencies lending more unbridled.

After the US began to raise interest rates in 1994, the capital flowed out. In order to control the external debt burden, these countries still insisted on the fixed exchange rate, but the high value of the currency increased the current account deficit. By 1997, some countries' foreign exchange reserves were almost exhausted, and the exchange rate was forced to fall off the cliff, and the Asian financial crisis finally broke out.

I was the representative of the International Monetary Fund in Indonesia at that time, witnessing the economic and social turmoil in Indonesia during the crisis.

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During the Asian financial crisis, the RMB had also faced tremendous pressure of depreciation, but it did not depreciate at last. P

The author believes that there are many reasons for maintaining the stability of exchange rate at that time, and the economic reasons are worth mentioning and contrasting with the current situation.

First, the RMB has depreciated 2-3 times in 1989-1993 years, which has once caused discontent among Asian countries. Some countries even believe that their 1997 crisis was caused by the significant depreciation of the RMB before.

Second, in spite of the fact that China's monetary policy failed to play a greater role in exchange rate fixing, the government's debt burden was light, so there was great room for the implementation of a proactive fiscal policy. The linkage between infrastructure construction and housing reform launched in 1998 has avoided a further downturn in the economy.

Third, when China's demographic dividend and reform dividend were released, cheap labor, capital and land, the booming private sector economic vitality and the government's active public policy complement each other, resulting in great synergy and complementarity.

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First, in recent years, the "a href=" http://sjfzxm.com/news/index_c.asp "RMB > /a" has significantly appreciated the currencies of the largest trading partner (US dollar, euro and yen). The recent emerging economic currencies have depreciated sharply against the US dollar, while the people's currencies have not depreciated. "P"

The yuan has no need to keep a peg at the dollar in the "moral sense". Moreover, after the reform in 2005, the Chinese government has stressed the need to continue to strengthen exchange rate flexibility and achieve two-way fluctuations.

Second, the overall leverage ratio of Chinese society is no longer the same.

The author estimates that the ratio of total social credit to GDP accounts for 103% in 1997.

Central government debt accounts for only 7.7% of GDP.

At that time, the local government had few debts, and the housing reform had revitalize the land that had not been monetized, which brought rich land revenue to the local government.

By contrast, Fitch estimates that by the end of 2012, the total credit scale of China accounted for 200% of GDP, of which central and local government debt accounted for nearly 50% of GDP, which might not include the implicit government debt under audit.

Land financial dividends have also been over released. The high price of land and housing has weakened China's competitiveness, widened the gap between the rich and the poor, obstructed the urbanization process, and intensified the economic and financial risks.

At this point, once the Chinese economy is defeated by external difficulties or internal imbalances, the government will not be able to afford financial resources.

Finally, the demographic dividend is disappearing, and the decrease in labor costs keeps rising costs.

As for the reform of dividends, let's ask ourselves, what is the existing geometry? < /p >

< p > if the neighboring emerging economies continue to deteriorate, what will be the impact of China's economy? First, the impact on foreign trade may not be less than that in 1990s.

This is not only due to the increase in labor force, land cost and exchange rate appreciation in recent years, but also in recent years, China's export structure has changed significantly, and more than half of its products are exported to emerging markets rather than developed economies.

In particular, the proportion of exports to Latin America and Asia, including ASEAN, has risen sharply, and the economy in these areas is now down sharply.

Second, once the monetary policy is loosened to stabilize the economy, there may be a vicious circle of devaluation and outflow of capital, especially when the US monetary policy is tightening.

It is true that China has a huge foreign exchange reserve of 3 trillion and 500 billion US dollars, which can be used to resist the pressure of temporary depreciation. Even if the market exchange rate is weakening, intervention in the foreign exchange market can temporarily stabilize the official price.

However, China may not be able to withstand the loss of monetary policy caused by non devaluation, which is also contrary to the spirit of China's high-profile exchange rate mechanism.

More importantly, the "gold content" of the renminbi is not high.

Compared with China's astronomical broad money stock, foreign exchange reserves may not be strong.

The ratio of China's foreign exchange reserves to M2 is much lower than that of many emerging markets, where the currency is depreciating.

Finally, whether or not the RMB is being overvalued is a question worth exploring.

Although foreign trade figures still show a favorable balance, rising labor and land prices, including interest rates, resources and environmental protection, are increasing the cost of production.

I advocated exchange rate reform and other factor price reform go hand in hand, just like normal people do push ups need ten pointing to the ground.

However, the pace of reform of other elements in China lags behind, and the exchange rate continues to appreciate to reduce external imbalances.

This is the lack of the so-called "top-level" design.

But I believe that the "top-level" design is important, and the "top level" promotion is more important.

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Above all, people expect the RMB exchange rate to happen for a while. Once the currency devaluation is expected, the banks and the market are increasingly worried, and there is no confidence in the future economic development and investment opportunities, then the economic recovery of the developed countries will bring more investment opportunities. History has proved that the US monetary policy is loose from tight to tight, often accompanied by the asset prices of developed countries in the past years, which will outperform the emerging economies, and the outflow of deposits may accelerate, so it is difficult to stabilize the RMB exchange rate. P

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< p > Ha Jiming is vice president and chief investment strategist of Goldman Sachs investment management department. He served as senior economist of the International Monetary Fund.

It only represents his personal views.

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