Barry Eichengreen on China

posted by Marsha Vande Berg on September 17, 2015 - 1:00pm

Recent actions by Chinese authorities to rein in stock market volatility, depreciate the RMB and generally arrest actions they view as adverse to achieving requisite GDP growth raise questions that may end up overshadowing the worry about the economy’s fundamentals.

Authorities’ actions are giving rise to questions about the credibility of those who make the decisions and the capacity of those who advocate reforms to withstand pressures to achieve 7% GDP growth at all costs.

Given that China’s economy is the world’s second largest and may soon be the largest, the matter of credibility is in fact a global worry.  According to the World Bank, a 1% decline in China’s growth translates into ½% decline in global growth. In other words, if China’s GDP growth this year is 4% and not the advertized 7%, that will deliver a major hit on global growth, which the IMF already is preparing to revise downward from their earlier forecast of 3.5%.

Barry Eichengreen, professor of economics and author, speaking in mid-September to an assembled audience at the University of California Berkeley on the  topic, “Chinese Renminbi: Regional or Global Currency”,  characterized as less than reassuring recent events involving China’s currency, foreign exchange and public equities markets. 

He highlighted three hurdles which he said authorities must meet to achieve international status of their currency. The first is the size of the market where transactions are conducted in RMB. The growth in usage of RMB in cross border transactions would qualify in this instance.

The second hurdle is financial market stability, and the third is liquidity or the ease with which an investment can get in and out without moving the price against itself. Here China’s markets do not yet measure up. And if there were close before the advent of recent events, then the erratic nature and unpredictability of what has taken place since mid-June has in effect reversed a portion of the liberalization of recent times.

And at this stage, little is certain except for one worrisome factor– and that is the Chinese do not at least at present seem to be operating according to any plan.