By Chi Lo
This publication highlights the tricky coverage selection that needs to finally be made in the course of China's structural reform in keeping with the idea of the most unlikely Trinity, among trade fee and financial coverage autonomy.
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Extra resources for China’s Impossible Trinity: The Structural Challenges to the “Chinese Dream”
Granted, such “selective easing” is meant to benefit the industries that are the focus of structural reforms, but they lack transparency and contradict with the PBoC’s efforts to shift to market-based lending from state-controlled credit allocation. Meanwhile, the State Council, which dictates all economic policies, directed various spending measures without adhering to formal budgetary and monetary policy process. Area of focus include railway investment, social housing, relending for small companies in the technology, health care and consumer sectors, and bond issuance by policy lenders.
Not only that. Changes without sufficient preparation will disrupt the real economy, risking derailing the reform plan. Consider this. Cheap labour, low-cost bank funding for infrastructure construction and large-scale fiscal spending funded by land sales have all contributed to China’s economic success. However, economic distortions have also emerged, labour and land costs are rising, cheap money is risking property bubbles and marginal returns on investment are falling and creating overcapacity.
Squashing speculators’ one way bet on the RMB thus signals a policy shift by the PBoC towards a freer exchange rate regime. Further widening of the RMB’s trading band should be a medium-term step towards the eventual goal of a floating exchange rate. History has taught us that open financial markets and a rigid exchange rate is a recipe for financial disaster. China has begun opening its financial markets, and greater exchange-rate flexibility is a logical step to go with financial reforms. Another reason relates to the macroeconomic balancing that Beijing needs to achieve alongside its economic restructuring efforts.