Second, pre-announced crises are a bit of an oxymoron. Surely market participants have factored in the dark scenario. While some may be imprudent and could be badly hurt if the adjustment picks up speed, most are keenly aware of the risks and are prepared.
We have been talking about a hard landing for about three years now: not only has it not happened (yet), but it has concentrated many minds on the ‘what if’ question.
2. Is the renminbi overvalued or undervalued?
Many able people have made calculations and produced estimates of renminbi overvaluation that ranges from 0% to 50%. This tells us a lot about how precise is our knowledge. Most of those who find a large overvaluation ask what appreciation would, in and by itself, eliminate the Chinese current account surplus. This amounts to assuming that the renminbi is overvalued and that the overvaluation is the only cause of the surplus. This assumption is unwarranted.
Among the many things that it ignores is the fact that the Chinese saving rate is huge. If savings explain half of the surplus, cut the estimate by half. Since savings could explain all of the surplus, the case for an overvaluation is very weak.
3. What should be the role of the IMF/World Bank?
Clearly, the World Bank has no business in attempting to solve macroeconomic imbalances, but the IMF cannot hide away. Since the issue is pitting some of its members against each other, it would be helpful if the IMF could provide an impartial analysis and help to resolve disagreements, but can it?
Unfortunately, the IMF is very politicised and it sits uncomfortably close to the US Congress, which has been quite unreasonable on this issue. So far, it has been very, very cautious, which may be all that it can do. The multilateral consultation process has delivered soothing warm water, a great diplomatic achievement but not a hint of a fair judgement.
4. Are sovereign wealth funds to be applauded or feared?
Many countries all over the world, not just in south-east Asia, have accumulated huge foreign exchange reserve stockpiles. One reason why is that they wish to avoid IMF conditionality in case of trouble. Another reason is that they have integrated themselves into world financial markets and need an insurance against sudden stops or panic withdrawals of funds.
The question is: How big an insurance premium should they shoulder? Obviously, the smaller, the better. This is why sovereign wealth funds are a good thing.
The main concern is that state investors may not respond to pure economic incentives. So far, large state investors – like Singapore’s GIC – have behaved like private investors but, as more states join the fray, there is no guarantee that this will always be the case. Russia, for example, is not Singapore.
5. Are emerging market crises a thing of the past?
Certainly not. Financial markets are inherently unstable, all of them. The advanced economies have built up deep markets with sophisticated regulation. That does not mean that crises there are ruled out, simply that crises are likely to be less frequent and, more importantly, with limited systemic consequences.
Emerging markets are not there, far from it. We have just lived through a blessed era nearly devoid of crises, but fine weather is ineluctably followed by a storm. Worse, the longer good times last, the more people become imprudent and make mistakes.