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  • China has a hot new export market turmoil,

  • the eyes of the world were on the Shanghai composite and on the daily fixing of the Renminbi.

  • Sometimes that doesn't make for pretty reading, Martin Wolf here tell me his take on it.

  • One possible solution that got put forward in Devos, Martine, was the tighter capital controls,

  • this was the idea from bank of Japan governer Haruhiko Kuroda.

  • Will this work? is it a plan that can or is it desperate measures?

  • I suspect a bit of both. I mean China still has exchange controls, so it's not a fully liberalized system.

  • It's moving glacially, I think appropriately to becoming a fully liberalized system.

  • They could tighten the controls. And at the moment, or at least indeed for now for quite some months,

  • they'd be losing foreign currency reserves at an enormous rate.

  • They've lost almost 700 billion dollars in the last year and a half.

  • And even for China, which has 4 trillion dollars of reserves, or had in the beginning, this is an enormous amount.

  • So they can't really continue to do so. They're obviously doing it to try and stop the exchange rate from collapsing.

  • We all want it not to collapse cause it would create a big deflationary shock for the world, we really don't need that right now.

  • Um...but on the other hand, they don't really want to continue like this. So what are the alternatives?

  • Well basically, in the short run, the simplest thing is to stop the buying by Chinese people of dollars. And controls would do it.

  • Obviously, then we'll have to get into the question of why are they buying dollars?

  • Part of it is strike capital flight, I think. People are frightened about the anti-corruption campaign.

  • Part of it is a lack of good investment opportunities as the economy slows and they'd be investing far too much.

  • And part of it is Chinese corporates trying to redeem debt, which they can track it in dollars,

  • and now they realize the dollar's rising, the Renminbi is falling, it's getting more expensive all the time.

  • And so this is what's going on and some of that, the People's bank could stop if they really wanted to.

  • Why is this of concern to the bank of Japan though, is it the exporting deflation angle their real problem,

  • or do they worry about financial market turmoil in of itsefl?

  • I think that it's both and I think it's true for everybody.

  • There is a lot of concern now, pretty obviously in the markets and among policy makers about what's happening in China,

  • particularly since last summer when we had this sort of first bout of turbulence.

  • Pretty obvious that China is slowing quite fast that the authorities aren't completely in control of this process,

  • and among other things that they're not so closely linked, there's quite a bit of market turbulence being generated by China.

  • Part of that is capital outflow and the effects on the currency, and they're particularly concerned with the latter

  • cause China is the world's largest striding power, it's the world's largest exporter.

  • If the currency were to collapse and money were really to flood out,

  • because people would be desperate to get out as they're losing the value of their currency,

  • that could generate a lot of turbulence in the world.

  • Unpredictable, but the world is unbelievably delicate in the moment as we can see.

  • So that's the last thing anybody wants.

  • And you think what's the message you think tighter controls would give out?

  • Is it we've got the situation under control or is it we're running out of ideas?

  • Both, I think. Everybody understands that's the process of integrating the Chinese economy into the world economy,

  • particularly on the financial side, is going to be a very complicated process, very difficult with lots of risks associated with it.

  • And that's partly because China so huge, it's partly because China has been separate from the world economy on the financial side pretty well completely,

  • and it's partly because China is going through this huge complex transition to a liberalized, a more deregulated economy in theory without this giant investment boom.

  • And if you add these three things together,

  • you could easily imagine cause there are so much debt now in China and there are so much uncertainty in China that could be very very destabilizing.

  • I've got a sort of favorite number, um... they're many other ways of thinking about it.

  • The annual flow of savings, each year savings in China is about, when translated into dollars is worth nearly 5 trillion dollars.

  • That's almost doubled US savings.

  • If that were really allowed out, knows what it would do to the world.

  • So, yes. It is a bit of panic and it is going to be bumpy, and there are going to be processes of liberalization and then reversals.

  • I don't expect the full integration of China if it happens.

  • That happen to occur into way into the 2020s.

  • We've probably got a decay like this in front of us .

  • Yeah, and a bit interesting to see if there's a collision of views around this bank of Japan position.

  • Martin, thank you very much.

  • It's a pleasure.

China has a hot new export market turmoil,

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Martin Wolf on China capital controls | FT World

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    Kristi Yang posted on 2016/01/27
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