Skip to comments.China’s two-way liquidity risk: capital outflows
Posted on 08/04/2012 2:29:26 AM PDT by TigerLikesRooster
Chinas two-way liquidity risk: capital outflows
Posted by Kate Mackenzie on Aug 01 12:11.
Izzy wrote in May how Chinas Rmb exodus is a huge (and still little-explored) story for the world economy, and its one that wont be going away as China recorded a net capital account deficit in Q2. Were wondering now how this might collide with risks to domestic liquidity specifically, whether a combination of Rmb exodus and local banking problems might affect the Peoples Bank of Chinas ability to maintain financial stability?
A very brief recap on the Chinese foreign reserves-domestic liquidity nexus:
- Demand from US dollar holders (domestic or foreign) to convert their holdings to yuan has typically been strong, because Chinas currency peg means the PBoC pays a favourable rate. - This creates a lot of Rmb inside Chinas economy, which is sterilised by raising Chinas required reserve ratios (RRR). - However, that demand has been falling of late as preferences switch from Rmb to USD. - Weve already seen the PBoC respond to liquidity shortfalls by reversing its normal repo operations.
(Excerpt) Read more at ftalphaville.ft.com ...
The Chinese economy is very weak. There are hundreds of unfinished major construction projects. The misallocation of resources driven by political rather than economic reasons is the source of the problem. Of course, not just in China, but anywhere it is tried.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.