Macroscope | When it comes to economic challenges, is China more like 1990 Japan than 1997 Thailand?
Harvard professor may have picked wrong comparison
“Those looking for a rough outline of the Chinese economy’s future would be wise to revisit what happened in Thailand in 1997, when the collapse of the baht precipitated the Asian financial crisis.” Harvard University’s Professor Carmen Reinhart wrote last month in an article on “China’s incompatible goals”.
Reinhart, co-author of the critically acclaimed This Time is Different: Eight Centuries of Financial Folly, argued that “China’s commitment to keeping the exchange rate steady appears to be incompatible with its recent turn towards more accommodative monetary policies.”
If the People’s Bank of China (PBOC) “is to prioritise financial stability and commit to fulfilling its role as a lender of last resort, it may be preferable to accept that devaluation [is] inevitable – before the country’s foreign-exchange reserves are depleted”, she concludes.
While admitting “China in 2016 is different in many ways from Thailand in 1997”, Reinhart said there were “key similarities in their responses to ongoing capital outflows”.
With domestic savings higher than investment, China must export capital abroad
She contends that while the natural monetary policy response, in any country, after a prolonged credit boom that typically leaves commercial banks with a “a mounting volume of non-performing loans”, is “to increase liquidity, lower interest rates” and even offer “direct assistance in the form of loans from the central bank” that can prove counterproductive.