China should not be too quick to ease capital controls, economist says
Issue among domestic priorities to come before capital account moves, economist says
China must not be too hasty in opening up its capital account before solving serious domestic problems, including a housing bubble and inefficient allocation of resources, a prominent economist said.
Yu Yongding, a member of the Chinese Academy of Social Sciences, a top government think tank, told a property forum on Tuesday the right decision for Beijing should be "to allow the yuan to float while keeping certain capital account controls".
The yuan and the capital account broadly encompass cross-border investment flows.
Yu, a former adviser to the People's Bank of China, said he did not expect the housing bubble to burst in the next two years - beyond that, he is not so sure. He also expected a sustainable economic growth rate of 6 to 7 per cent.
"Can you imagine home prices dropping 30 or 50 per cent? In Beijing, Shanghai and all those big cities, it's impossible," he said.
The housing market has shown signs of cooling in recent months, with home price inflation easing and transaction volumes falling. Developers are cutting prices in cities such as Beijing and Hangzhou, while one small developer has collapsed under heavy debt.
Yu said the banking system had limited exposure to the property sector, which accounts for 20 to 30 per cent of total lending.
He also shrugged off concerns about shadow banking. Even if banks' non-performing loans ratio rose to 10 per cent at the end of this year, they would still be in much better shape than 10 years ago, Yu said.
However, if Beijing lifted capital controls prematurely, a flood of 10 per cent of savings deposits across the border could be enough to shake the housing market and the economy, Yu said. Savings deposits stood at 105 trillion yuan (HK$131 trillion) at the end of February.
Yu urged the central government to speed up reforms, including ending its overprotection of state banks at the expense of consumers.
He said it also needed to tackle the poor return on capital in the real economy, which at 2.6 per cent was in stark contrast to annual interest rates of 6 to 7 per cent. "This is their honeymoon year. I hope they can seize [the opportunity] and do something and make corrections," he said, referring to the new leaders' first year at the helm.
Patrick Chovanec, the managing director and chief strategist of Silvercrest Asset Management, is less optimistic. He is worried the next crisis could be a very different one, making some of Yu's points irrelevant.
Chovanec told the forum he saw fundamental problems in the low efficiency in using credit to generate growth and the resorting of savers to property as the only store of value.
Mainlanders had very limited investment alternatives because of capital account controls, and that had resulted in multiple vacant homes owned by wealthy families, he said.
Chovanec said the banks were much more exposed to the property market than official numbers indicated.
"If people take money out of property, where can they go? Literally nowhere else, as long as the yuan is not convertible," Chovanec said. "One of the big obstacles [to yuan liberalisation] is what's happening in the property market."