The China Debate

China’s rapid credit expansion is worrying. Will Chinese policymakers be able to contain the growth of credit without undermining economic growth and without triggering a banking or currency crisis? Aside from the consequences of Brexit, this is probably the most important issue facing global policymakers and investors today.

As it turns out, there are powerful arguments on both sides. The positives—high national savings and returns to investment, combined with the government’s broad tools for intervention—must be measured against a set of negatives—growing loan losses, the spread of shadow banking, large capital outflows, falling investment returns, and declining confidence in the government’s financial policy management. Against this complex background, it is no wonder that concerns and uncertainty are both high. What one can say confidently remains conditional: things are very likely to end badly if the credit buildup continues amid slowing economic growth...

Poking Bigger Holes in China's Great Financial Wall

At the third plenary session of China’s 18th Central Committee (the “Third Plenum”) in November 2013, China’s leaders adopted a broad national reform strategy (see here for a scorecard of the economic plans). Included were the liberalization of the country’s government-controlled financial system and the internationalization of its currency, the renminbi (RMB). A year ago, we argued that when it comes to freeing both its domestic and its external finances, China had a long way to go. We also suggested that the pace of liberalization would remain gradual, reflecting policymakers’ gradualist strategy to manage the risks associated with greater financial flexibility.

Well, they still have a long way to go; but the pace of regulatory change has unmistakably quickened. Authorities have been poking bigger and bigger holes in China’s Great Financial Wall. So big, in fact, that it may not be long before the wall is more symbolic than real.

China's Capital Controls and the Exchange Rate Regime

When the Chinese government wanted to damn the great Yangtze River, it moved more than a million people. When it wanted ring roads running through the 20 million people of Beijing, China built 270 miles in less than 30 years. So, when Chinese leaders say that they want Shanghai to be a global financial center and their currency the renminbi (RMB) to be an international leader, it’s natural to ask how, when, and at what cost...

Post hoc, ergo propter hoc?

On the occasion of the Fed’s Jackson Hole Symposium, the New York Sun published an editorial attacking central banking and fiat money. Let’s get this out of the way at the start: we are big fans of both. In our view, the world is a more stable and prosperous place with central banks than it was without them. And fiat money allows a central bank to stabilize the price of goods and services that would be quite volatile if, instead, we chose to steady the price of gold (the Sun’s apparent favorite). The result is higher growth from which we all benefit.

We also like tabloids. They’re fun. Our main problem with the Sun’s piece is its all-too-common mode of argument.

Inflation Targeting: Better than Bretton Woods

Over the past few years, there has been frequent talk about the need for international coordination of monetary policies. In particular, central bankers outside the United States have urged the Federal Reserve to consider the impact of its policies on emerging market economies.

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Money, Banking, and Financial Markets