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Chinese policymakers are facing a challenging dilemma with interest rates and Renminbi liberalization
According to a fresh batch of data for December 2013 released by SWIFT, the Renminbi is now in 8th place in transactions volumes tracked by the global payments system. While constituting a meager 1.12% of global transactions, the amount has risen 15% since October 2013. That translates into a swift four places jump giving some results to the Chinese authorities’ efforts to boost the currency’s global use.
Unfortunately that might come at a cost to the Chinese economy since we have observed a rather uneasy few weeks for local money market rates in the country. Aside from continuing appreciation of the Renminbi that is putting some pressure on exporters, the main risks are to the broad financial system of China.
PBOC Governor Zhou Xiaochuan is facing a dilemma – whether to risk further money markets turmoil or to act and tame the markets by risking future growth of the country’s economy as rates remain under strict government controls. Both choices are tough to make since the first option will likely lead to near term challenges, while the second exposes long term growth risks.
If the PBOC acts to reduce currently high short term interest rates pressures it will unleash further the dangerous dragon lurking in the country’s infamous shadow banking system. If it continues with its medium term interest rate liberalization strategy it will expose current financial system market players to higher debt burdens.
Both options will result in some pain (maybe a lot of it) – which medicine the PBOC chooses might determine the long term growth potential of the world’s second biggest economy. Financial liberalization brings along some risks, but staying in a tight government controlled environment is not a sustainable option for Chinese policymakers anymore.