Growing Concern on Capital Outflow
Author： Source： Date：2018-01-09
China does face serious financial risks, but does not face Minsky Moment, our institutional characteristics make us fully capable of preventing such a financial crisis. At present, we have to ensure a decent rate of economic growth.
▪ A country to have a full-scale financial crisis has three characteristics: the collapse of asset prices of financial institutions, the depletion of money market liquidity, and the lack of capital to be replenished. If a country can stop itself from deteriorating in any of these three aspects, the financial crisis will not happen.
▪ What exactly the level of interest rate is. Our monetary policy this year has been moderate with some areas being strict, and banks have been sending us such signals. Taking into account China's current situation and its growth rate, I think it is appropriate not to raise the interest rate prematurely, we should maintain a relatively low interest rate.
▪ In terms of growth rate, some say we should not care the growth rate target at present, and just focus on the employment target. This is wrong. The growth goal is a guiding goal. We can develop our business activity plan based on the growth goal. This is necessary. 6.5% is not high. I doubt we would not achieve that this year, if we did not take some measures. We should pay more attention to the quality of growth and reduce the economic growth rate. Do not let China lose the momentum of economic growth.
▪ The most worrying problem is capital flight. We have strengthened the capital control, but such control may be too harsh, we can adjust it slightly in the opposite direction. The possibility of financial crisis in China has been greatly reduced, since we greatly curbed the capital flight by strengthening control and effectively avoid the depletion of domestic capital. This is a very important point.
▪ There are various definitions of capital flight. We define capital flight as a kind of capital outflow that is caused by certain negative impacts and may cause permanent damage to national welfare. Capital flight is a kind of capital outflow, but not equal to it. Capital outflow is justifiable in the statistics. For example, you should make contribution to the development of the motherland, but you prefer to spend money on studying abroad, and this is capital outflow, not capital flight.
▪ Capital flight and general capital flight are different in nature, so the treatment should be different accordingly. For capital outflow, we use macro-control policies, such as changing interest rate and exchange rate, to control it, generally speaking, we can control it properly. But for capital flight, these policies are useless. If a person wants to transfer his capital abroad, he would do everything he can, even if he lost 50% of his capital, there would be 50% left for him. To deal with capital flight, we must have a cross-border capital management system, which may be called capital control in a frank way. We can't curb capital flight indirectly.
▪ Over the past 30 years or so, China has achieved remarkable success in its foreign economic policies, which should never be forgotten. The achievements are the main tone. However, China's biggest problem is inertia, China is reluctant to make changes toward the things it is accustomed to and the practice which used to be successful, due to historical reasons and difficulties of policy adjustments. This has caused some unreasonable disequilibrium of balance of payments, leading to two gaps in the balance of payments and international investment positions. We have a long-term current account deficit in the balance of payments, and there is a huge gap between our accumulated current account surplus and overseas net asset growth. Based on the analysis of the two gaps in the balance of payments and international investment positions, it can be seen that China faced serious capital flight in recent years. The Chinese government has taken a series of measures to curb capital flight. This is completely correct. But the problem of capital flight still needs to be further solved with the efforts to deepen the reform of China's economic, financial and exchange rate system, since the current solution is just a temporary one rather than a permanent one.
▪ A country to have a full-scale financial crisis has three characteristics: the collapse of asset prices of financial institutions, the depletion of money market liquidity, and the lack of capital to be replenished. If a country can stop itself from deteriorating in any of these three aspects, the financial crisis will not happen.
▪ What exactly the level of interest rate is. Our monetary policy this year has been moderate with some areas being strict, and banks have been sending us such signals. Taking into account China's current situation and its growth rate, I think it is appropriate not to raise the interest rate prematurely, we should maintain a relatively low interest rate.
▪ In terms of growth rate, some say we should not care the growth rate target at present, and just focus on the employment target. This is wrong. The growth goal is a guiding goal. We can develop our business activity plan based on the growth goal. This is necessary. 6.5% is not high. I doubt we would not achieve that this year, if we did not take some measures. We should pay more attention to the quality of growth and reduce the economic growth rate. Do not let China lose the momentum of economic growth.
▪ The most worrying problem is capital flight. We have strengthened the capital control, but such control may be too harsh, we can adjust it slightly in the opposite direction. The possibility of financial crisis in China has been greatly reduced, since we greatly curbed the capital flight by strengthening control and effectively avoid the depletion of domestic capital. This is a very important point.
▪ There are various definitions of capital flight. We define capital flight as a kind of capital outflow that is caused by certain negative impacts and may cause permanent damage to national welfare. Capital flight is a kind of capital outflow, but not equal to it. Capital outflow is justifiable in the statistics. For example, you should make contribution to the development of the motherland, but you prefer to spend money on studying abroad, and this is capital outflow, not capital flight.
▪ Capital flight and general capital flight are different in nature, so the treatment should be different accordingly. For capital outflow, we use macro-control policies, such as changing interest rate and exchange rate, to control it, generally speaking, we can control it properly. But for capital flight, these policies are useless. If a person wants to transfer his capital abroad, he would do everything he can, even if he lost 50% of his capital, there would be 50% left for him. To deal with capital flight, we must have a cross-border capital management system, which may be called capital control in a frank way. We can't curb capital flight indirectly.
▪ Over the past 30 years or so, China has achieved remarkable success in its foreign economic policies, which should never be forgotten. The achievements are the main tone. However, China's biggest problem is inertia, China is reluctant to make changes toward the things it is accustomed to and the practice which used to be successful, due to historical reasons and difficulties of policy adjustments. This has caused some unreasonable disequilibrium of balance of payments, leading to two gaps in the balance of payments and international investment positions. We have a long-term current account deficit in the balance of payments, and there is a huge gap between our accumulated current account surplus and overseas net asset growth. Based on the analysis of the two gaps in the balance of payments and international investment positions, it can be seen that China faced serious capital flight in recent years. The Chinese government has taken a series of measures to curb capital flight. This is completely correct. But the problem of capital flight still needs to be further solved with the efforts to deepen the reform of China's economic, financial and exchange rate system, since the current solution is just a temporary one rather than a permanent one.
