THE past six months have been hard on the reputations of China’s economic managers. Their attempts to bring troublesome stockmarkets to heel border on slapstick. The uncertain handling of the country’s exchange rate, on the other hand, is no laughing matter. Unexpected wobbles in the value of China’s currency roil global markets. Yet no exchange-rate policy offers a sure and safe route forward.
Some see a resemblance in China’s predicament to the Asian financial crisis of the late 1990s. Then, fast-growing countries like Indonesia, South Korea and Thailand faced outflows of capital as investor sentiment flipped from bullish to bearish. Governments were forced to abandon currency pegs as their foreign-exchange reserves dwindled. Massive depreciations led to financial havoc, as asset prices tumbled and these countries’ enormous debts ballooned in dollar terms. Painful recessions ensued.
The lessons of the Asian crisis were not lost on China’s leaders, however. During its great boom, in the 2000s, China maintained tight capital controls, permitting foreign direct investment while eschewing “hot money”. The...Continue reading
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