Chinese School - Resolving China's excess liquidity

?  ?

BIZCHINA / Weekly Roundup

Resolving China's excess liquidity

By Xin Zhiming (China Daily)
Updated: 2007-07-27 17:06

It's a consensus that the public has preferred to save rather than spend
because it anticipates long-term spending pressure from the country's
restructuring of its pension, health and education systems.

China needs to raise labor wages and increase provision of such public
services as education and healthcare to enhance people's spending
propensity, Zhuang told China Daily.

The social security network must also be improved, which will also get
people more active in consumption, Zhuang said.

Related readings:
?Central bank raises interest rates, cuts interest income tax
?Survey: Rising food prices upset consumers
?Report: Liquidity high but manageable
?Special bond issue won't seriously impact liquidity?Securitization to
help China reduce excessive liquidity

From a global perspective, Li from CASS said that the low savings rate of
developed countries has led to the trade deficit of these countries and
the surpluses in Asian economies. The US has kept the dollar weak and, as
a result, international markets have been awash with dollars.

Japan has seen a large-scale capital outflow into other countries. In
Europe, statistics show the capital outflow is also on the rise as euro
gets strong. It has also contributed to the global liquidity boom, Li
said. And most of the capital has flown into Asia, including China, Li
added.

Regarding capital inflow, Li suggested the holders of China's foreign
exchange should be diversified, allowing individuals and enterprises to
hold more of the reserves.

Although the central bank can sterilize foreign capital through issuing
bills, raising the banks' reserve requirement ratio or conducting
currency swaps, they can ease the pressure only temporarily, Li said.

Reforming the foreign exchange reserve management regime and allowing
individuals and enterprises to hold more foreign exchanges would reduce
the pressure on policymakers as they would need to sterilize much less
foreign currencies.

To thwart speculative money inflows, Xia Bin and Chen Daofu from the
Development Research Center suggested that policymakers should allow more
volatile yuan trading, making the currency's long-term trends
unpredictable.

"Authorities should allow the yuan to rise in a mixed tempo, sometimes
slowly and sometimes quickly, to completely break the possibility for the
market to predict the yuan's appreciation," they said in the report.

China also needs to raise its interest rate, because hot money holders
not only want to benefit from a revalued yuan, but profit from the rising
prices of assets. "The rising asset prices are closely related to our low
interest rate," the economists said.

(For more biz stories, please visit Industry Updates)

?? ?? 1?? 2?? ??

?? ?? 1?? 2?? ??

Chinese School