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December 06, 2005
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Rates before currency
This won't get the publicity it should. The chairman of the China Banking Regulatory Commission says interest rate reform must come before currency reform in China. Liu Mingkang proceeds to give American politicians a lesson they should pay heed to but won't: Liu said further reforms to the country's interest rate system would help companies better gauge currency risks, which would be crucial for introducing greater currency flexibility. "If you haven't got the full liberalization in interest rates, then you cannot give a pricing system for forwards and futures to hedge your foreign exchange risk," he said.Liberalising China's currency is but one part of a much broader problem - that of financial market and capital account reform. Without delving too deeply into macroeconomic jargon, financial markets are linked. Interest rates are the price of money, while foreign exchange rates can be thought of the mechanism between which different countries equalise their supply and demand for that money (or goods, it's the same thing). Liberalising one without the other could prove disasterous. Likewise, liberalising too quickly, in a "big bang" approach, would probably collapse China's banking system and seize up the entire economy. And if China liberalised its capital account (ie allowed citizens to freely convert yuan for foreign currency) the renminbi could depreciate rather than appreciate when floated. Is this what American politicians really want? The Chinese are slowly taking the necessary steps to liberalise their financial markets. It could be quicker, but when you are transitioning the world's fourth biggest economy from a quasi-central planning system to something approximating an open market system, taking your time is not necessarily a bad thing. posted by Simon on 12.06.05 at 11:41 AM in the China economy category.
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