In the context of China’s bid for its currency to be included in the IMF’s Special Drawing Right (SDR) basket, the International Monetary Fund (IMF) seems to be dispensing poor policy advice to China with respect to its exchange rate and external capital account management. By pushing the Chinese policymakers to further liberalize their country’s exchange rate and to open up their capital account at this delicate juncture for both the Chinese and the global economies, the IMF risks not only heightening China’s present economic difficulties, but also undermining the global economic outlook.
Amid mounting evidence that China’s economy is now slowing and that its outsized credit market bubble is bursting, Chinese residents have been exporting capital abroad at an alarming rate. According to the country’s official international reserve data, over the past year. China experienced capital outflows in excess of $500 billion. Much of that outflow occurred in the third quarter of 2015 in the immediate aftermath of China’s surprise August decision to allow its currency to depreciate by around 2 percent.
Last week, in an effort to stimulate China’s flagging economy, the People’s Bank of China cut interest rates for the sixth time over the past year. By so doing, it further reduced the incentive for Chinese savers to keep money at home, particularly at a time when the Federal Reserve is mulling an interest rate hike and when doubts have arisen as to the stability of the Chinese currency.
Full text of this article is available at TheHill.com.
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