No capital control of the RMB exchange rate may be a catastrophic collapse
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China’s recent tightening of capital account controls to limit capital outflows and avoid excessive devaluation of the RMB exchange rate is a correct move. Obviously, if China does not have the ability to control capital, then China will face enormous capital outflow pressure, catastrophic collapse of the RMB exchange rate, and a serious financial crisis. This proves that those Chinese economists who oppose China's cancellation of capital account control, such as Yu Yongding, are completely correct. The neoliberal economic policies that advocate capital account liberalization will only bring disaster to the Chinese economy. As Martin Wolf, chief economic commentator for the Financial Times, pointed out: "If China's capital account is fully open, then the Chinese government will lose control of its most effective economic leverage."
Knowing what has happened recently, you will understand that it is nothing new to impose pressure on a party to force a country to open its capital account and cause serious losses to its economy. China is not the first country to face this threat. The Russian and Southeast Asian countries that were forced to open their capital accounts rashly paid a heavy price: after 1992, the Russian economy suffered catastrophic losses, and in 1998 Southeast Asian countries suffered a severe economic crisis. Therefore, studying these crisis cases will help to understand the current risks faced by the RMB exchange rate and the serious harm to China's economy if China's current or premature implementation of capital account liberalization.
Maintaining capital controls by itself does not solve all the problems such as the RMB exchange rate. For example, should the central bank intervene in the foreign exchange market? What level should the reasonable RMB exchange rate be maintained? However, studying the serious economic crisis in East Asian countries and Russia that rashly implement capital account liberalization will understand that China is not right to promote capital account liberalization now, which is very important to the Chinese economy.
Before 1997, some developing economies in East Asia induced the liberalization of their international capital accounts, which meant the abolition of overseas capital control measures, and the cancellation of overseas capital control measures led to the emergence of East Asian developing economies in 1997. A large amount of capital outflows caused the catastrophic Asian financial crisis of the year. As Joseph Stiglitz, the Nobel laureate in economics and former chief economist at the World Bank, said:
“Excessive liberalization of capital and financial markets is likely to be the main cause of this crisis.â€
People have different views on whether the United States deliberately accelerated the arrival of the 1997 Asian financial crisis and blocked the economic development of the "Asian Four Little Dragons." But one thing is clear: in the event of a crisis, the United States will certainly support policies that cause the crisis to worsen and oppose initiatives aimed at mitigating the crisis.
Similarly, before the East Asian debt crisis, Russia’s economic “suicide†in 1992 was achieved by the squadrons of the Western Foreign Policy Power Group hostile to Russia and the oligarchy interest groups that gained wealth in Russia’s restoration of capitalism and the dissolution of the country. The International Monetary Fund, the World Bank and the non-patriotic economic groups in Russia have actively cooperated in this process. Interest groups in Russia and abroad collude with each other and carefully coordinate their policy objectives. In this regard, Russia’s international capital account liberalization played a crucial role, as it facilitated the transfer of huge amounts of money by the oligarchs outside Russia. As Stiglitz pointed out:
“The Russian government has continuously made huge loans from the International Monetary Fund, and the debt burden is getting heavier, and the oligarchs who have received generous gifts from the government continue to transfer huge amounts of money outside Russia.
Capital account liberalization is carried out in parallel with the overestimation of currency exchange rates and is intended to serve oligopoly groups.
For the people and the whole country, overestimating the currency exchange rate is a disaster, but for the emerging merchant class, overestimating the currency exchange rate means interest, because in this way, they can buy Mercedes-Benz cars, Chanel with less rubles. Handbags and delicious food imported from Italy. For those oligarchs who are trying to transfer funds abroad, overestimating the exchange rate also means benefit, because in this way, they can exchange more dollars for their rubles. â€
Even on the eve of Russia’s debt default and currency devaluation in 1998, the series of economic assistance projects organized and promoted by the International Monetary Fund and the World Bank, supported by the United States, were coordinated by Russian internal interest groups that used the “suicide†of their economies. The focus is on the economic sectors controlled by these interest groups. When talking about his experience at the World Bank, Stiglitz said:
“We feel that these oligarchs need to transfer their funds abroad for days or even weeks. In fact, they only used hours or days. The Russian government even allowed its currency exchange rate to appreciate. We all know that this means those oligarchs. We can exchange more roubles for more dollars... The International Monetary Fund has to face the reality that the huge loans they provide to Russia will appear in bank accounts in Cyprus and Switzerland in just a few days. In this case, the International Monetary Fund denies that this is the US dollar they provide... The International Monetary Fund has provided Russia with a large amount of dollars, and Russia has given these dollars to its own oligarchs, who have transferred these dollars abroad. Some of us joked that the International Monetary Fund simply sent the money directly to the bank accounts in Switzerland and Cyprus, so that wouldn’t it be more trouble-free?â€
In short, Russia can be induced to “suicideâ€, not only because of external forces, but also because some groups in Russia can make great profits from it, and these interest groups are also trying to weaken Russia’s external forces in a planned and systematic way. The object to be utilized. The US neoconservative forces and other hostile forces against China are also trying to use this method of dealing with Russia to deal with China.
The main part of this article is selected from the slogan "A big chess game?" - Analysis of China's New Destiny, published by Jiangsu Literature and Art Publishing House. (The author of this article: The former Director of the London Economic and Business Policy Department, is currently a Senior Research Fellow at the Chongyang Financial Research Institute of Renmin University of China.)