China has a hot new export market
turmoil the eyes of the world are on the
Shanghai Composite and on the daily
fixing of the remnant B sometimes that
doesn't make for pretty reading Martin
wolf is here to tell me his take on it
one possible solution that got put
forward in Davos Martin was that tighter
capital controls this was the idea from
Bank of Japan governor Haruhiko Kuroda
with this work is it a plan that can or
is this desperate measures I suspect a
bit of both I mean China still has
exchange controls it's not a fully
liberalized system it's moving glacially
I think appropriately to becoming a
fully liberalized system they could
tighten the controls at at the moment or
at least and even now for quite some
months they've been losing foreign
currency reserves at enormous rate
they've lost almost 700 billion dollars
in the last year and a half and even for
China which has four trillion dollars of
reserves so had at the beginning this is
an enormous amount so they can't really
continue to do so they're obviously
doing it to try and stop the exchange
rate from collapsing we all want it not
to collapse because it would great a big
deflationary shock for the world we
really don't need that right now
but on the other hand they really don't
want to continue like this so what are
the alternatives well basically the in
the short run the simplest thing is to
stop the the buying by Chinese people of
dollars and controls would do it
obviously then have to get into the
question of why are they buying dollars
part of it is straight capital flight I
think people are frightened about the
anti-corruption campaign part of it is a
lack of good investment opportunities as
the economy slows and they've been
investing far too much and part of it is
Chinese corporates trying to to redeem
debt which they contracted in dollars
and they now realize the dollars rising
that Remini be is falling getting more
expensive all the time and so this is
what's going on and some of that the
People's Bank could stop if they really
wanted to why is this of concern to the
Bank of Japan though is it the exporting
deflation angle that's their real
problem or do they worry about financial
market turmoil in and of itself I think
that it's both and I think that's true
for everybody
there's a lot of concern now pretty
obviously in the markets and among
policy makers about what's happening in
China but at least since last summer
when we had this or first bout of
turbulence it's pretty obvious that
China is slowing quite fast that the
authorities aren't completely in control
of this process and among other things
are they're not so closely linked
there's quite a bit of market market
turbulence being generated by China and
part of that is capital outflow and the
effects on the currency and they're
particularly concerned with the latter
because China is the world's largest
trading power it's the world's largest
exporter if the currency were to
collapse and money were really to flood
out because people will be desperate to
get out as they're losing the value of
their currency that could generate a lot
of turbulence in the world unpredictable
but the world is unbelievably delicate
of them as we can see so that's the last
thing anybody wants and you think what's
the message do you think tighter
controls would give out is it we've got
this situation under control
or is it we're running out of ideas both
I think the everybody understands that
the process of integrating the Chinese
economy into the world economy
particular on the financial side is
going to be a very complicated process
very difficult with lots of risks
associated with it and that's partly
because China so huge it's partly
because China has been separate from the
world economy on the financial side
pretty well completely and it's partly
because China's going through this huge
and complex transition to a liberalized
financial more deregulated economy in
theory without this giant investment
boom and if you have these three things
together you could easily imagine
because there's so much debt now in
China and there's so much uncertainty in
China that come very very destabilizing
I've got a sort of favorite number I
mean there are many other ways of
thinking about is the annual flow of
savings each year's savings in China is
about in translating to dollars is worth
nearly five trillion dollars it's almost
doubled u.s. savings yeah if that were
really allowed out those we could do to
the world so yes it is a bit of panic
and it is going to be bumpy and there
are going to be
processes of liberalisation and then
reversals I don't expect the full
integration of China if it happens there
happen to be to occur and to way into
the 2020s we probably got a decade like
this in front of us yeah and it'll be
interesting to see if there is a kind of
coalescence of views around this Bank of
Japan position Martin thank you very
much it's a pleasure