Chinese savers can scorch the world

http://www.ft.com/intl/cms/s/0/0888c11c-be3e-11e3-b44a-00144feabdc0.html?siteedition=intl#axzz2y9bt6G4O

2014.04.09 by Martin Wolf

PBOC proposed dividing the task into three periods

1)     In the first three years, controls on foreign direct investment by enterprises would be relaxed

2)     Over three to five years, the aim would be to relax controls on trade related credit and spur internationalism of renminbi.

3)     Over five to 10 years, the plan was to open up capital inflows before outflows

4)     PBOC planned to leave personal transactions, money-market instruments and derivative to the end.

Advantage

1)     It could prove to be a sharp spur to domestic reform

2)     China’s huge savings are now locked up inside China.

3)     At $3.8tn last December. It would be far better if some of this were converted into real assets.

Risky

1)     Very large increase in gross flows(and so Stocks) would follow on both sides of the balance sheet.

2)     If the system being opened up is riddled with price distortions and suffered with moral hazard, the chance of mishap are great.

3)     If the regulators are operating in an unfamiliar environment, as would be the case in China, the chances become greater still.

4)     If the debt to GDP ratio is also very high, the chances become even greater.

5)     This is a matter of global concern when the economy in question will be the world’s largest

Wolf’s thought

-       China needs to reform first and only then open up, ideally in close dialogue with its partners.

Debt troubles within the Great Wall

http://www.ft.com/intl/cms/s/0/b78d8c0e-b661-11e3-905b-00144feabdc0.html#axzz2y9bt6G4O

2014.04.01 by Martin Wolf

This leaves the Chinese government with an apparent dilemma: let the debt accumulation continue, creating bigger problems in the future; or implement rapid reform and risk a fall in investment and a bigger unplanned slowdown now. The solution must be a middle way: accelerate adjustment and reform, while sustaining aggregate demand through monetary and fiscal policies operated by the central government.

China’s ability to postpone a crisis might lead the powers-that-be to prefer the option of adjustment delayed. That could prove a huge mistake. Growth cannot be sustained by increasing indebtedness indefinitely. Reform and rebalancing are essential. From what I heard at the China Development Forum last month the Chinese authorities understand this. Indeed without these reforms, their plan for liberalising the capital account could be lethal. China can avoid a financial crisis. That is a boon, though it also risks reducing pressure for reform. Yet reform must come – and the sooner the better.