Nomura has an ambitious big-think analysis paper out on getting Asia’s strident recovery through the medium term, particularly via capital markets reform. Check the Long Room for the full report, by John Lllewellyn and Lavinia Santovetti.
One key, and rather topical, answer is appreciation, appreciation, appreciation. Of the renminbi, of course. Snippets from The Ascent of Asia:
Real per capita income is rising faster in China than practically anywhere else in the world, and this increase will inevitably find its way into the economy, in one way or another – either through faster domestic inflation or through appreciation of the renminbi…
Internationalisation of the RMB would in principle require allowing the free flow of capital and the adoption of a freely floating currency, with the market, rather than intervention by the authorities, determining the exchange rate. We judge that such a reform would boost capital flows into China in three ways:
First, the lifting of capital controls would spur greater capital flows into and out of China, as the authorities would need to allow a gradual relaxation for foreign and domestic investors.
Second, gradual RMB appreciation would likely boost capital inflows. Once the RMB has internationalised and become a hard currency, the People’s Bank of China would not be expected to intervene in the foreign exchange market as rigorously as it does now. One question is whether the authorities would let the currency appreciate substantially upon internationalisation: our judgement is that China’s policymakers would prefer a gradual, managed appreciation, given that a sharp appreciation of the RMB could hit exports, slow the pace of economic growth and create unemployment.
Third, financial liberalisation is likely to lead to at least some asset-price inflation, which would encourage further capital inflows.
On the other hand, this is a very different view of the future than the one that seems to be reigning in Beijing now. Chinese regulators are extremely wary of even a little asset-price inflation, as currently posed daily by Chinese property prices.
Still, if we’re talking financial liberalisation – it’s interesting to see Reuters report that Hong Kong regulators are pressing China to begin regular renminbi sovereign bond issues in its markets. Reuters adds that it’s a big market already. Indeed, Hong Kong corporations can already denominate their debt in renminbi, thanks to a pilot scheme introduced last year.
From small acorns…
Related links:
Renminbi ructions – to revalue or not to revalue? – FT Alphaville
The illusory China-selling TIC data – FT Alphaville
China’s metropoli bubbles fear - FT Alphaville
Consequences of a stronger renminbi begin to dawn on US – FT