Sunday, 29 December 2013

Selected Pickings from the ASSA/AEA 2014 Preliminary Programme

Like most of you, I won´t be in Philadelphia, on 3-5 January 2014, for the economists´ annual get-together. Which is a shame. The ASSA/AEA website looks interesting for readers of this ShiftingWealth blog, at least for some policy relevant contributions of which I copy-paste the abstracts below (highlights are mine):

1.       What's Natural? Key Macroeconomic Parameters after the Great Recession (E1)       
Natural Rate of Growth              
John Fernald (Federal Reserve Bank of San Francisco)
Charles I Jones (Stanford University)
What is the U.S. economy's underlying pace of growth in the aftermath of the Great Recession and subsequent slow recovery? Though the mid-2000s, there was considerable optimism about the contribution of information technology to longer-run productivity growth though, even then, growth in working-age population was forecast to slow. We explore the implications of simple growth models that assume technology growth is either exogenous or endogenous. Preliminary calibrations suggest that growth in GDP per worker is likely to exceed the relatively anemic 1973-1995 period because of continuing faster technology growth in producing equipment. But with much slower growth in working-age population, overall GDP could well underperform any 15-year period since the Great Depression.

2.       Exploration of New and Existing Macro Data for the Chinese Economy
The Quality of Chinese GDP Statistics 
Carsten Holz  (Stanford University)
The quality of China's official statistics is frequently being questioned. From the 1998 'wind of falsification' to China's output performance during the U.S. financial crisis, researchers and the media alike rarely trust Chinese official statistics. This paper reviews past and ongoing suspicions of Chinese GDP data and concludes that there is little (if any) evidence for falsification of Chinese GDP data or for systematic biases in the data. The paper furthermore asks the question of which specific national income accounts data China's National Bureau could possibly falsify without being detected, and provides two significant checks of such potential data falsification.

Chinese Capital Flight: Questions of Data and Policy   
Frank Gunter  (Lehigh University)
Since 1985, the foreign debt of the Peoples' Republic of China has increased at a greater rate then would be explained by changes in the country's current account, foreign direct investment and reserve holdings. This pattern is consistent with the large-scale outflow of financial capital, commonly referred to as capital flight. This study provides a range of estimates for capital flight from the PRC for the period 1984 through 2010 using both Cuddington's balance of payments and the more inclusive residual measures. These measures are adjusted to reflect the legitimate assets of the PRC banking industry, mis-invoicing of PRC trade with its major trading partners (especially Hong Kong), and the failure of official debt data to capture certain bank transactions. Based on these estimates, 2010 capital flight was about $201 billion while accumulated PRC capital flight since 1984 is approximately $2.1 trillion with over 50% of this total occurring in the most recent six years. Since this capital flight has occurred during a period of rapid economic growth, appreciating currency, and improved perception of political stability, the most likely cause is high transaction costs in China´s financial markets.

3.       Macro Policy and Financial Stability in the Age of Turbulence (B5)      

Shadow Banking and Credit Driven Growth in China    
Yan Liang (Willamette University)
Credit flow outside of traditional bank lending, or the "shadow banking", has quadrupled since 2008 and reached $3.2 trillion or 40 percent of GDP at the beginning of 2013 in China. The shadowing banking system is acclaimed by some commentators as a welcome supplement to bank lending, which increases access to credit for those that are shunned from the state‐dominated banking system. In addition, shadow banking institutions, such as trusts, and their issuance of wealth management products provide a viable venue for households to place their savings. However, the growth of the shadow banking may pose high risks for China's financial stability due to the lack of regulations and the opaque underlying assets of these wealth management products. Furthermore, a large share of shadow banking credit flows to the property market, leading to the overheating of property price. This paper will investigate the recent surge of shadow banking in China and analyze its impacts on China's financial stability and macroeconomic performance.

4.       Finance and Development/ International Finance (G2)

Finance and Growth: Time Series Evidence on Causality
Oana Peia (Université de Cergy-Pontoise)
Kasper Roszbach  (Sveriges Riksbank and University of Groningen)
This paper re-examines the empirical relationship between financial and economic development while (i) taking into account their dynamics and (ii) differentiating between stock market and banking sector development. We study the cointegration and causality between the real and the financial sector for 26 countries. Our time series analysis suggests that the evidence in support of a finance-led growth is weak once we take into account the dynamics of financial development and growth. We show that causality patterns depend on whether countries' financial development stems from the stock market or the banking sector. Stock market development tends to cause growth, while a reverse or bi-directional causality is present between banking sector development and output growth. We also bring evidence that causality patterns differ between market-based and bank-based economies suggesting that financial structure influences the causal direction between financial and economic development. Thus, the relation between financial and economic development is likely to be more complex than suggested in earlier studies.

5.       African Economic Growth and Development (O1)        

Analysis of Chinese Investment in the ECOWAS Region            
Jane Karonga  (United Nations)
The development landscape in ECOWAS is changing, with the emergence of partners from the South or the BRICS as they have become widely known. China has emerged as a salient source of investment in ECOWAS region, but questions remain on the impact and implications of that investment for growth and structural change in ECOWAS countries. This paper discusses trends in Chinese investment in the ECOWAS region, and analyzes its impact on trade, infrastructure, growth and structural change in member countries. It also reviews the investment policies of ECOWAS countries toward Chinese investors, and proposes mechanisms by which member countries can take full advantage of Chinese investment. The growing trade and investments in ECOWAS are often supported by grants or concessional loans from the Chinese government, as part of the country's "Going Global" strategy. This strongly enhanced engagement is partly the outcome of the increased economic role and power of China on the global stage, and partly the result of China's interest in Africa's robust natural resource base to fuel its surging economy The proposed paper is important because there is an ongoing debate on the impact of Chinese investment in Africa in general, and ECOWAS in particular. Some scholars argue that much of Chinese investment in Africa is directed toward energy and minerals. These are sectors with little or no linkages with the rest of the economy. Other analysts contend that Chinese investment in large-scale infrastructural projects such as roads, dams, and power plants helps spur growth and structural change. Chinese investment is also believed to be an important source of technology and skills for Africa. The paper hopes to contribute to the ongoing debate on Chinese investment in ECOWAS by using data-driven evidence, as well as fixed-effects panel regressions. Moreover, China's impact on African economies and indeed ECOWAS has started to reach beyond narrow infrastructure for-resources deals and now touches upon a wide array of sectors and development issues. For example, the creation of Chinese-operated Special Economic Zones in several ECOWAS countries has the potential to provide a remarkable boost to the manufacturing capacity of many ECOWAS countries. In this context, it is timely to take stock of China-ECOWAS relations and discuss in detail the opportunities and challenges for both sides.

 6.       Capital Controls and Macro-Prudential Policies (F4)    

 Capital Controls: Myth and Reality - A Portfolio Balance Approach      
Nicolas Magud (International Monetary Fund)
Kenneth Rogoff (Harvard University)
Carmen M. Reinhart (Harvard University)
The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success" and (iv) the empirical studies lack a common methodology-furthermore these are significantly "overweighted" by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to "standardize" the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing capital controls on short-term flows. We find that there should exist country-specific characteristics for capital controls to be effective. From this simple perspective, this rationalizes why some capital controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-capital control are conditional on the level of short-term capital flows.

Capital Controls or Macroprudential Regulation?         
Anton Korinek  (Johns Hopkins University and NBER)
Damiano Sandri  (International Monetary Fund)
This paper analyzes the role of capital controls and exchange rate intervention as an insurance device in emerging economies where financial markets are underdeveloped and factor mobility across sectors is imperfect. Emerging economies frequently experience large fluctuations in exchange rates, e.g. because of capital inflow surges and reversals or because of fluctuations in the prices of their main exports. Exchange rate fluctuations lead to significant redistributions between factor owners in the traded and non-traded sectors, especially workers and small firms that cannot easily move across sectors. Since these agents often have imperfect access to insurance markets, income fluctuations generate significant reductions in their welfare. Stabilizing the exchange rate via capital flow management measures acts as a second-best insurance device and substitutes for formal risk markets. We present evidence that many countries that have recently imposed capital controls or accumulated reserves were primarily motivated by concerns about redistributions between the tradable and non-tradable sectors rather than by the standard efficiency considerations emphasized in the existing literature. We also analyze how increased factor mobility or the introduction of new insurance mechanisms such as better social insurance systems reduce the need for capital flow management measures.

Friday, 13 December 2013

Europe and the IMF

Europe has traditionally stood for multilateralism and greatly benefited from a rules-based international economy.  This is at stake now. The multilateral system risks balkanisation if IFIs do not become representative – and fast! My remarks at a recent conference organised by the DIE/GDI, G24, FES and the Bretton Woods Project therefor focused on the stumbling blocks in Europe and Germany toward improved representation at the IMF in particular.

A fact check at the IMF Executive Directors and Voting Power page revealed that at end 2013 the two-thirds of the world population that lives in Asia commands just 20% of IMF voting rights (14% if Japan – which closely follows the US script - is excluded). This results from adding the IMF executive directorates led by Indonesia (3.93), China (3.81), Korea (3.62) and India (2.81). European countries, by contrast, collectively hold about 30 per cent of the votes on the board –so they have an effective blocking minority unless the supermajority threshold is reduced to 70% and below. Europe still runs 9/24 Executive Directors (including Switzerland, so 8 EU and 6 EZ), with each UK, France and Germany having one-country seats by right.

Interpreting democracy to mean one person one vote would suggest that it is this South China Sea-centred part of the world that gets to determine world leadership in global economic governance. Like it or not.

Europa can make room for Asia and gain clout at the Fund nonetheless. A move by the EU to single representation would have the advantage of improving global governance by increasing the involvement and thus the accountability of the emerging economies. Single EU (or euro zone) representation, if set on the same level as for the US (a little under 17 percent at the IMF) would carry more clout than the current sum of EU representatives (around 30 percent).

There have been some attempts by France and Germany to unblock the situation. In 1999, when Lafontaine and Strauss-Kahn were finance ministers, they sought to reduce US weight by combining their memberships in the International Monetary Fund into a single seat to bring more balance to an organization that both described as dominated by the United States. In 2010, Germany tried again and suggested another deal:  The US should give up its veto over important decisions in the International Monetary Fund in return for Europe accepting a smaller say. Currently important decisions require a supermajority of 85 per cent of votes, and the US has a 17 per cent share.

However, many EU governments remain strongly opposed to concrete steps: moving to a single representation would involve redistributing power within the European countries’ group. In particular, the larger countries would need to relinquish, at least on paper, part of the clout they currently wield, in their capacity as G7 members for example, whereas smaller countries who are not G7 members are even more fearful of losing clout to larger countries[1].

Just like for the Eurozone, the polity does not deliver the political solution it needs as countries jealously their national and budget sovereignty: Catch 22, in the words of Ulrike Guerot. A new bestselling book by Bonn University historian Dominic Geppert, insists on Europe´s “real strength”: diversity and democracy[2]. With such a Europe, do not expect too much for more representative IMF governance. It does not “make room”[3].

 What about Germany leading Europe into its ´successful decline´ at the Fund? In contrast to most of the countries in the IMF, Germany makes the central bank and its president, rather than the finance ministry and its minister, its principal national representative at the organization. Any situation in which this prerogative would be diluted could be expected to meet with strong resistance from the Bundesbank. More generally, the navel gazing in recent coalition talks, which were more on Mautgebühren than on  urgent Eurozone requirements point to a bad asymmetry: Europe looks to Germany, but Germany could not seem to care less.


[1] Pier Carlo Padoan, 2008, “Europe and Global Economic Governance”, EU Diplomacy Papers 2/2008, Bruges: College of Europe.
[2] Dominik Geppert, Ein Europa das es nicht gibt, Europa-Verlag, 2013. Translated: „A Europe That Does Not Exist“.
[3] As requested by DGAP director Eberhard Sandschneider in his excellent book „Der Erfolgreiche Abstieg Europas: Heute Macht abgeben, um morgen zu gewinnen“, Hanser, 2011. The title translates into „Europe´s Successful Decline. Relinquish Power Today, Win Tomorrow“.

Thursday, 28 November 2013

Emerging Markets: Was It All ´Nirvana´?

Several Project Syndicate authors have recently declared the end of the emerging market miracle. One example among others (Hausmann) is a former finance minister of Chile, Andres Velasco who recalls the former Yale development economist Carlos Diaz-Alejandro. The latter used to say that the combination of high commodity prices, low world interest rates, and abundant international liquidity would amount to economic nirvana for developing countries.

Indeed, many emerging markets submerged in 2013: Genius ecopainter Benn Steil (Council on Foreign Relations, CFR) coined the term Emerging Markets Taperitis in his highly recommendable CFR Geo-Graphics (28-10-2013). The currency, stock and bond price reaction to a cautious statement by Fed Chairman Ben Bernanke (22-3-2013) in some emerging markets had been swift. But the pain was not shared equally. As the top figure in the CFR Geo-Graphic shows, those countries hit hardest by taper-talk were those with large current-account deficits—Turkey, India, Indonesia, and Brazil. They were also large beneficiaries of ´taper-talk interruptus´ mid-September 2013, when the fed backed away from the March taper talk. These events clearly indicate that holding down portfolio inflows and imports is what emerging countries need. Mainstream advice against capital inflow controls, reiterated by the OECD´s Adrian Blundell-Wignall in the face of fresh evidence, remains irresponsible propaganda.   

The convergence process in favour of emerging countries has not only been based on monetary factors, however. As has been documented (here; and here; and also here) on this blog, it has been closely linked with China´s long rise[1]. While Hausmann and Velasco focus on Latin America, the lasting benefits of China´s rise have been obtained by Asian countries embedded in an increasingly China centric manufacturing value chain[2]. Have a look at the numbers from the OECD Latin American Economic Outlook 2014 (courtesy The Economist) to see where and where not there has been fundamental catch-up in terms of total factor productivity in Asia (yes) and Latin America (no). So the Hausmann-Velasco perspective boils down to Latin navel-gazing.

As for the future, much will depend on China´s future growth path. In a paper forthcoming at the Annual Economic Review in 2014[3], Storesletten and Zilibotti deal with the commonly held Acemoglu-Robinson view that China’s growth trajectory is unsustainable, in particular due to the persistence of a non-democratic institutional framework so that it would not escape an institution-driven middle-income trap.  The Acemoglu-Robinson view, to be sure, ignores the fact that non-democratic institutions can adapt under contestability.

China’s experience attests to the potency of experimentation in bringing about transformative change, even in a rigid authoritarian, bureaucratic environment, and regardless of strong political opposition. Though the impact of reform experiments varies between policy domains, China’s experimentation-based policy process has been essential to redefining basic policy parameters (Sebastian Heilmann, 2008)[4]. Empirical support for the thesis has been provided by Besley and Kudamatsu (2007)[5] who find that economic growth rates differ more substantially among autocracies than among democracies. This is illustrated in the Figure below which depicts the distribution of growth performance in autocracies and democracies that survive for five years or more.  Successful autocracies outperform democracies at the top of the distribution. The prerequisite: political institutions make political leaders accountable, or make their survival in office depend on their policy performance. This may explain the long rise of China as well as the survival of China´s politbureau.

The recent decisions of the Third Plenary Session of the 18th CPC Central Committee seem to have identified crucial reform policies that will feed growth going forward. Urbanization and financial reform will help further exploit productivity gains embedded in China´s rural-urban and firm-size duality. Easing finance constraints for SMEs will advance de facto privatization and shift resources to entrepreneurial firms obviating the need for part of corporate savings. Reforming land rights will help farmers through improved property rights and lower corruption. Household savings will come down as a result of loosening the decades-long one-child policy. There is still life in China´s convergence; do not bet on its imminent collapse. And as long as China flourishes, so will most emerging countries.

[1] In GIGA Focus Global 09/2013, I deal with China´s past and future rise at length (in German).
[2] Also African manufacturing starts to benefit via special economic zones, foreign direct investment, infrastructure and low-cost capital goods.
[3] Storesletten, Kjetil, und Fabrizio Zilibotti (2014), “China´s Great Convergence and Beyond”, Oslo/
Zürich, mimeo, Annual Economic Review.
[4] Heilmann, Sebastian (2008), “Policy Experimentation in China´s Economic Rise”, in: Studies in Comparative International Development, 43, 1, 1-26.
[5] Besley, Timothy, und Masayuki Kudamatsu (2007), “Making Autocracy Work”, CEPR Discussion Papers, 6371, London: Centre for Economic Policy Research.

Sunday, 20 October 2013

The Chinese Puzzle: Democratic Transition, Authoritarian Resilience, or Chaotic Breakdown?

Berlin is getting richer, and not necessarily less sexy. At least not if you are interested in smart debates on international economics and diplomacy. Think tanks keep popping up like mushrooms in these wet autumn days. The Stiftung Mercator is just now establishing the Mercator Private Institute for China Studies (MERICS), which will be directed by the political scientist and China expert Prof Sebastian Heilmann. Among other activities, Heilmann has been researching Adaptive Authoritarianism, a term which describes the performance of China´s Politbureau over the past 30 years pretty well.

At MERICS, I attended (with GDN´s Pierre Jacquet who happened to be in Berlin) a rich and dense meeting, dubbed the Berlin China Dispute that discussed the political (and hence economic) future of China´s political regime. Thomas Bagger, Minister Cabinet Head of the German Foreign Affairs, did a great job of moderating the dispute (yes, it does show when the moderator has a full grasp on what is to be debated!). The high-calibre Mercator event brought together three renowned international experts on China's political development who represented diverse and conflicting positions in the controversy about China's future political trajectory: Andrew J. Nathan, Professor of Political Science, Columbia University, and American Academy, Berlin; Minxin Pei, Director of the Keck Center for International and Strategic Studies, Claremont McKenna College; and Sebastian Heilmann.
During the past three decades, China's political system has managed to outlast most other variants of Communist Party rule and has overseen the fastest economic expansion in world history - a transformation that has brought with it not only greater wealth and global clout, but also growing income and regional inequality, severe ecological degradation, frequent popular protest and recently intensifying political-ideological contestation. What kind of political transformation will China's massive economic, social and technological transformation bring about in the near future?

Sebastian Heilmann started the opening salvo: It is not China that has collapsed – rather the China doom scenarios have collapsed (sic!). Unlike other authoritarian regimes, China has succeeded in pushing back interest groups, according to him. China has taken the Marxist approach: economic reform first, political reform follows. Just like Bert Brecht wrote in 1928 to Kurt Weill´s music in the Dreigroschenoper : "Erst kommt das Fressen, dann kommt die Moral." - Denn wovon lebt der Mensch?  (Food is the first thing, morals follow on. – What keeps manhood alive?). As China engineers its economy increasingly toward consumption, her external clout and leverage is bound to rise on the global scale – not least through higher merchandise and service imports.

Andrew Nathan tried to occupy the middle ground. He viewed China as a case of resilient authoritarianism and pointed in the list of explanations (which curiously missed out on the more than half billion people that have been released from extreme poverty over the last 30 years) to an effective repression apparatus. Nathan emphasized that the event of any breakdown of one-party rule in China had a nonlinear probability and would be potentially chaotic and disastrous. Nathan, however, also pointed to some interesting, underemphasized side effects of the sprawling media, in particular the social media, that are commonly merely (mis)perceived as a threat to the one-party rule. A proactive government, he argued, can also well use them for piecemeal reform as it is rapidly informed about public anger. By accommodating complaints popular in the social media, they can in principle be used by the rulers for authoritarian resilience - rather than lead to the erosion of political power.

Exiled Chinese academics based in the US often are among the sharpest regime critics; Yasheng Huang comes to mind[1] . So is the highly articulate Minxin Pei. According to him, the breakdown of the one-party regime is a high-probability event in the next ten year resulting of the following trends:

·         the narrowing of the social base underpinning the party (ever more ruled by ´bureaucrats´);

·         quantitative indicators of regime breakdown probability, especially China´s current and future per capita income level;  so China now belongs to a country group where ´democracy´ is the norm as only 29 ´non-democracies´ (half of them oil-rich) remain that are richer than China according to Freedom House classification;

·         average survival length of one-party rule is 70 years (with the Kuomintang's defeat, Mao Zedong established the People's Republic of China under CPC (Communist Party of China) rule on October 1, 1949);

·         and the population´s growing exclusion (in relative terms) from higher education.

What could trigger a regime breakdown? Prime candidate is financial liberalization which is feared to result in cascading, uncontrollable balance-sheet disruptions. It remains to be seen whether special zones such as Shanghai can experiment gradual reform in finance as it is hard to see how they can remain isolated from the rest of mainland China.

Pierre Jacquet[2] asked the panelists whether they believed in a teleological orientation of history, referring to the book Violence and Social Orders by North, Wallis and Weingast (Cambridge U Press, 2009).  The authors had defined development as the transition from a closed access social order in which the economy is closed and a small elite captures and redistributes rents to an open access social order; the latter being characterized by openness and competition in the economic realm and contestability through elections in the political realm in which the direction unambiguously goes toward competition both on the economic and political realms because both have to go together. Such Fukuyama-style end-of-history view is very relevant to the discussion of any Chinese "puzzle", and, with the exception of Heilmann, the others confirmed that they believed in this teleological vision. The difference between them was more a question about how the transition takes place: crisis for Pei, control and slow and delayed adjustment for Nathan; by contrast, learned agnosticism for Heilmann as we just don't know the direction that China will take while new models may emerge on the way.

Once again, there is no end of history. And I left the Berlin China Dispute with the suspicion nagging even deeper that political sciences, not economics, may be the queen of social sciences…

[1] See his recent Ted blog entry Why democracy still wins: A critique of Eric X. Li’s “A tale of two political systems”. I guess that anti-China views ´pay´ better in the US both than elsewhere and than do pro-China views.
[2] Special thanks to Pierre for having clarified that part oft he debate to me.

Wednesday, 21 August 2013

Is the Asian Market Slump Due to China´s Monetary Policy?

The prospect of the ebbing of easy liquidity has exposed many emerging market economies’ vulnerabilities this summer, with India and Indonesia as epicenters of recent currency, stock and bond market losses in Asia. Despite ongoing sharp correction in the asset markets of those countries, the short-term pain may not be over yet: When it rains, it pours in emerging markets. With foreign flows becoming scarce, inevitable and painful current account adjustment is underway, with interest rates rising, consumption and imports falling, and GDP growth rate decelerating.

Usually, the current travails in emerging markets are blamed on expectations of slowing open market purchases by the US Federal Reserve System. Lars Christensen, head of emerging market research at Danske Bank, however, blames China´s monetary tightening as at least as important as the expected US Fed ´tapering´.  I have myself, with former colleagues, pointed to the growing impact that China´s growth has exerted since the last decade on GDP growth in middle- and low-income countries[1], pointing to the growing raw material, trade and production links of increasingly China centric emerging countries. So I shall have a lot of sympathy for Lars Christensen´s earlier proposition that China has also grown into a monetary superpower in a Sino monetary transmission mechanism with the rest of Asia. China´s monetary tightening, however, can hardly explain the current slump in Asian markets, on closer inspection.

Graph 1: US 10y Treasuries, Futures

Source:, 20/08/2013


First, let us consider  the expected monetary stance in the US and in China. Graph 1 clearly shows that the market has formed expectations since May that the Fed would not continue open market purchases at the pace witnessed over the last years, partly fueled by Bernanke´s taper talk that month to US Congress. China´s monetary tightening, by contrast, occurred during late 2010 to early 2012 from when the Bank of China started to ease again[2]. Since then, minimum reserve requirements were repeatedly reduced. Further, the PBC reduced its benchmark deposit and loan rates in June 2012. In addition, the PBC has also used a mix of monetary policy instruments to appropriately increase market liquidity. Between Q1 2012 and Q2 2013, China´s M1 aggregates rose by more than 13%. Even considering huge time lags, the current turmoil of Asia stock and bond markets cannot be blamed on China´s monetary tightening prior to end 2011. Nor can the current drop in raw material prices, which is also related to rising bond yields in the US.


Second, both emerging bond markets (Graph 2) and equity outflows (Graph 3) from the emerging market space (to which China belongs) back to the safe heaven developed markets display a very close connection to the US 10y Treasuries futures prices displayed above in Graph 1. Virtually no time lag seems involved, confirming the validity of the 1990s literature on push (v pull) factors which had emphasized the importance of US interest rates for emerging-market flows[3].


Graph 2: SPDR Barclays Capital Emerging Market Local Bond ETF

Source:, 20/08/2013


Graph 3: Net Flows EM Equity Funds, 2013

Source:, 20/08/2013


End of story. But let´s go on, for the sake of learning.

Third, monetary transmission from China to Asian markets would imply, as correctly emphasized by Christensen, some sort of renminbi peg by the affected countries. Indeed, the ever closer integration of global value chains in Asia, with China replacing Japan as the major hub,  arguably creates  (and partly justifies) “Fear of Floating” more than anywhere else in the world. But closer inspection of the recent literature on effective (as opposed to merely proclaimed) currency regimes in Asia reveals that the two countries most affected by the current slump – India and Indonesia – did mostly not show a strong weight of the renminbi in their effective (trade weighted) exchange rates. Randall Henning[4] finds that during 2010-11 the Indonesian rupiah was strongly pegged to the US dollar. As for India, Cavoli and Rajan[5] find evidence of moving from a quasi-peg to the US dollar to more flexibility over recent years.

Cheap advice to the Asian victims of US monetary policy comes easy – from abroad. Most observers today recommend that the countries float (rather than impose outflow controls). This advice ignores the growing production and trade integration within Asia. It also ignores that those who suffer most these days were found to run the most flexible currency regimes among Asian peers.

To link Asia´s current asset market slump to China´s monetary stance is a red herring, perhaps an attempt to deflect responsibility from the US Fed for cyclical in- and outflows into emerging markets and return the blame to China. (In a way, a variation ofthe disapproved Bernanke hypothesis that the Asian saving glut caused globalimbalances in the past.)


[1] “The Renminbi and Poor-Country Growth”, The World Economy, Vol. 35, 2012.
[3] See, e.g., Eduardo Fernandez-Arias, „The new wave of private capital inflows: Push or pull?”, Journal of Development Economics, Volume 48, 1996.
[4] C. Randall Henning (2012), „Choice and Coercion in East Asian Exchange Rate Regimes”, Peterson International Institute Working Paper 12-15.
[5] T. Cavoli and R.S. Rajan (2013), „South Asian Exchange Rate Regimes: Fixed, Flexible or Something In-between?”, South Asia Economic Journal, Vol. 14, 2013.