Also, China-driven increases in energy and raw material prices are now being reinforced by rising food prices, and are soon to be followed by rising prices of manufactured goods (see 2 below) so that cost-push inflation is being added to the domestic variety arising from a strong world economy over several years.
Little relief can be expected from the US Federal Reserve, and both the European Central Bank and the BoE are still in tightening mode. But non-financial business finances are fine.
2. Is the renminbi overvalued or undervalued?
China has exports of $1200bn, 40% of its gross domestic product (GDP) and 2.5% of the world’s, increasing at nearly 30% a year. That is displacing a huge quantity of other people’s business at this point. Its imports are 30% of its GDP and growing less than 20%, so incrementally it only offsets half the gain in exports. This is fundamental disequilibrium, and globally disruptive.
China must either massively revalue the renminbi or accept rapidly accelerating inflation as its economy overheats. The other alternative is import protection in Western economies – bad for them and for China. The renminbi is hugely undervalued.
3. What should be the role of the IMF/World Bank?
The IMF is an outdated institution that does more harm than good. The purpose for which it was created – supporting fixed exchange rates – no longer exists. It did huge damage in the Asian crisis. It supported the recent disgraceful Argentine debt self-forgiveness – the largest default in history. It should go.
The World Bank has a development role, where it can ensure value gets beyond client governments to the people – not an easy task, but even a discounted volume of the dollars may have good welfare effect if directed to the poorest.
4. Are sovereign wealth funds to be applauded or feared?
Sovereign wealth funds are deeply sub-optimal. China’s high savings rate, for example, arises partly because ordinary Chinese get negative real rates on their savings and are unable to diversify to overseas capital markets [the rules were eased slightly in August]. So they could well be about to lose more money on domestic stocks.
The correct solution is to permit individuals to export capital. They might well then feel more secure and save less, reducing the underlying problem. Channelling their savings through state-owned banks, via the People’s Bank of China, into a sovereign wealth fund will create understandable suspicions abroad, and lesser welfare for China.
5. Are emerging market crises a thing of the past?
If emerging markets accept floating exchange rates and keep some possibility to control inflows of short-term capital, their problems should be domestic rather than FX-related.