Beijing’s aggressive approach threatens to shortchange the tasks of safeguarding economic growth
.. the bank’s emphasis on propping up the yuan has constrained its ability to fight other economic ills such as persistent housing bubbles. “The issue of the exchange rate,” he says, “has become shackles on policy makers’ ability to take other necessary actions.”.. China’s currency-first policy is risky because the country now faces what economists call the “trilemma,” the theory that a country can’t at once have a controlled exchange rate, free capital flow and independent monetary policy.
.. it is also creating unintended stresses, including heightened risks of a full-blown cash squeeze
.. Since then, the PBOC has spent $1 trillion, a quarter of its currency reserves, to control the yuan’s fall.
.. China isn’t seeking to stop the yuan’s fall altogether, but to guide it lower in an orderly fashion. Too sharp a drop could drive up inflation by increasing import costs and cause uncontrollable capital flight—battering confidence in the Communist Party.
.. A weaker yuan also makes it harder for Chinese companies, from state banks to airlines, to service their more-than-$1 trillion foreign debt.
.. The PBOC is also refraining from using traditional monetary-policy tools such as one it usually employed when the economy needed a push: cutting the amounts banks are required to hold in reserve, so they can make more loans. China now has one of the highest reserve-requirement ratios in the world
.. “China should tighten as little as possible so that it won’t become too expensive for Chinese firms to borrow money, but it needs to tighten enough to keep money at home,”
.. “The strategy is ultimately about buying time, but it’s a bridge to nowhere unless the authorities successfully deal with the debt problem and undertake reforms that allow for healthier growth.”
.. China’s financial system faces a liquidity shortfall—the gap between how much money is needed to meet China’s 6.5% growth target and how much is available—of as much as 13.1 trillion yuan this year.
.. the Federal Reserve Bank of St. Louis called China’s $1 trillion reserve decline “unprecedented” and said China must eventually choose some combination of tighter capital controls, tighter monetary policy or a devaluation to avoid further depletion.
Economists and investors warn that because of the effect of higher interest rates on companies with massive debt, Beijing may eventually have to give up currency control and let interest rates fall.
“The greatest risk in 2017,” says Pimco’s Mr. Frieda, “is that China is forced to choose in favor of financial-system stability at the expense of exchange-rate stability.”