- Some donations to gay waitress who allegedly forged hate note refunded
- German President Joachim Gauck boycotting Sochi Olympics
- Dr. Ezekiel Emanuel: If you want to pay more for your doctor, you can under Obamacare
- Sen. Rand Paul: ‘I am seriously thinking about’ running for president in 2016
- Sleet, ice, deepfreeze hit large swath of U.S.
- ‘Welcome to the edge of freedom’: Biden’s boots touch down in DMZ
- Obama: Hole U.S. ‘digging out of’ requires billions more in unemployment benefits
- Obama’s regulatory agenda will cost U.S. economy $143B next year: report
- Patriot Act author on James Clapper: Fire, prosecute him
- Russia P.M. Medvedev: No amnesty for political prisoners
China’s financial repression
China's phenomenal rise since 1978 has resulted from economic liberalization, not monetary ease.
But China is still not a full-fledged market economy, and monetary policy is compromised by Beijing´s reluctance to let market forces determine interest and exchange rates.
In a world of mobile capital, using monetary policy to peg exchange rates makes it more difficult to control inflation. Real economic development requires stable money and economic freedom, which expand the range of choices open to individuals.
Inflation is now at a 12-year high. The consumer price index rose 8.7 percent in February, from a year ago, due primarily to higher food prices. The real threat to China´s long-run price stability, however, is not from the risk of higher food prices, or other increases in relative prices, but from excessive growth of money and credit.
By undervaluing the exchange rate and keeping real loan rates artificially low, China risks fueling inflation. Meanwhile, price controls designed to suppress inflation are distorting relative prices, creating shortages and breeding corruption.
Though China announced a major change in its exchange-rate regime in July 2005, and told the world it would henceforth manage its currency by pegging to a currency basket as opposed to the U.S. dollar, Congress has been impatient. Bipartisan legislation threatens to penalize China for "currency manipulation."
Presidential hopefuls Hillary Clinton and Barack Obama have joined the anti-China chorus and said they would co-sponsor a bill to treat the undervalued yuan as an actionable subsidy.
Congress should recognize it is in China´s own interest to let the yuan appreciate faster in order to avoid inflation. When the yuan´s value in dollars increases, it means the People's Bank of China (PBC) does not have to create as much domestic currency to buy dollars. In this way, money and credit growth can be tamed without administrative controls and without risking further inflation.
While the yuan has been allowed to appreciate by 18 percent against the dollar since 2005, China´s foreign exchange reserves have more than doubled from $819 billion to $1.8 trillion today. The PBC has "sterilized" capital inflows and kept the monetary base (currency held by the public plus bank reserves) from explosive growth.
In particular, the PBC has been able to restrict the growth of money and credit by selling bills to state-owned banks, increasing reserve requirements, rising loan rates and enforcing credit quotas. Beijing has supplemented those forms of financial repression by imposing price controls on foodstuffs and energy.
Using sterilization and administrative measures to implement monetary policy is far from optimal. China´s reluctance to let the yuan float means monetary policy cannot be devoted solely to preventing domestic price inflation. Indeed, that task becomes even more difficult as capital controls are relaxed or evaded, and as China´s trade sector grows and financial innovation occurs.
China needs a more transparent monetary policy aimed at achieving long-run price stability. The stop-go monetary policy of the 1980s and '90s is less severe today because the PBC has been able to slow the growth of money and credit, but only by flooding the balance sheets of state-owned banks with PBC bills, crowding out alternative investments, and imposing credit quotas.
Financial repression and price controls are denying China the opportunity to increase economic freedom and prosperity. Interfering with market prices - whether in the form of undervaluing the exchange rate, capping interest rates, or controlling the relative prices of products, services, and resources - weakens property rights, politicizes economic decisions, and leads to corruption. Those in government who administer the controls gain power, while the people lose wealth and freedom.
Using capital and exchange controls, credit quotas and price ceilings to substitute for a transparent monetary policy aimed at price stability is becoming more costly, as China´s economy grows and becomes more integrated with the global economy. The challenge for Chinese leaders will be to let go of the legacy of central planning and adhere to a market-based monetary policy that allows price flexibility while maintaining sound money and economic freedom.
James A. Dorn is a China specialist at the Cato Institute and editor of the Cato Journal.
- Obama: Hole U.S. 'digging out of' requires billions more in unemployment benefits
- Spike in battlefield deaths linked to restrictive rules of engagement
- PRUDEN: British press horrified as London's new mayor dares to proclaim the truth
- Bill OReilly reminds: Nelson Mandela was a communist
- 'Hunger Games' delivers Obama's message on income inequality
- Craigslist killers: Police say newlyweds stabbed man for thrills
- 'Dude, I'm dreading that I will have to go': Czech prime minister on Mandela funeral
- Dick Cheney: Family feud over gay marriage has been 'dealt with'
- Rush Limbaugh: Obama trying to make Mandela death about himself
- Sen. Rand Paul: Long-term unemployment benefits are disservice to workers
Independent voices from the The Washington Times Communities
Get in the middle of all the action inside and outside the boxing ring.
Opinion, analysis, and musings on politics, pop culture, reinvention, and the resultant flotsam and jetsam floating around the right-of-center quadrant of the Left Coast.
The cold hard truth about politics in America today and the state of this once great nation.
Find the latest news and happening that effect those in the Washington D.C., Northern Virginia and Maryland Metro region.
White House pets gone wild!