This post is going to violate many priors around Chinese capital and currency controls. There’s a common belief from a layman’s perspective, especially in this sub, that China should liberalize capital markets and remove capital controls in order to prevent financial repression and integrate fairly into the global market. Doing so would be a colossal mistake. At this point, liberalizing capital, especially with regards to cross-border flows, would result in a massive flow of money out of Chinese markets. This would understandably depreciate the Yuan, **which will further boost Chinese exports at a time when other countries are attempting to protect their own industries**:
>…The limitation of capital flows is not just technically reminiscent of Bretton Woods, it also has about it the flavor of mid-century political economy. Beijing will tolerate and promote national wealth creation, but it does not grant to its bourgeoisie unlimited free disposal of its wealth, especially if that might destabilize the national balance of payments…
>…**Those calling for a revaluation of the yuan to redress China shock 2.0 do not, for obvious reasons, suggest that China should liberalize its balance of payments**.The suggestion is that it should maintain the existing system of controls but promote a revaluation of the currency. The political economy of that proposal is worth spelling out: A revaluation would, first and foremost, improve the terms of trade for Chinese consumers. It would encourage imports. It would also reduce exports and thus employment in export sectors. It would further squeeze export-orientated businesses. And, under the current circumstances, to make it work will also require robust exchange controls. **To push the currency up against the downward pressure of outbound capital flows, Beijing would need to tighten its grip on the Chinese bourgeoisie. Under current conditions, more financial repression is the unmistakeable implication of calling for revaluation**…
>…The fact that in the context of the China Shock 2.0 debate, we can seriously talk about the possibility of targeting an exchange rate for the yuan, suitable to rebalance the flow of trade, most especially in industrial goods, with a view to “fairness” and domestic social equilibrium in both exporting and importing countries, is a backhanded compliment to the increasing weight and influence of China’s model of economic management. As argued in a previous post, **it would be more convincing if it were combined with disciplining also of European capital, to actually deliver the investment and innovation necessary to drive modern economic growth**…
The rest of the article is about the AI boom, tax revenue, and other things motivating the Chinese system of capital controls, but ultimately that content is there to explain why these controls exist.
Otherwise_Young52201 on
Also. before the balance of payment hawks come in decrying the control of the CCP over the economy regardless of its role in moderating depreciation, your patron saint, Brad Setser, agrees with much of Adam Tooze’s article: [Another superb Tooze essay, on the centrality of financial repression — external and internal — to the Chinese model](https://xcancel.com/Brad_Setser/status/2072462418572083291#m)
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This post is going to violate many priors around Chinese capital and currency controls. There’s a common belief from a layman’s perspective, especially in this sub, that China should liberalize capital markets and remove capital controls in order to prevent financial repression and integrate fairly into the global market. Doing so would be a colossal mistake. At this point, liberalizing capital, especially with regards to cross-border flows, would result in a massive flow of money out of Chinese markets. This would understandably depreciate the Yuan, **which will further boost Chinese exports at a time when other countries are attempting to protect their own industries**:
>…The limitation of capital flows is not just technically reminiscent of Bretton Woods, it also has about it the flavor of mid-century political economy. Beijing will tolerate and promote national wealth creation, but it does not grant to its bourgeoisie unlimited free disposal of its wealth, especially if that might destabilize the national balance of payments…
>…**Those calling for a revaluation of the yuan to redress China shock 2.0 do not, for obvious reasons, suggest that China should liberalize its balance of payments**.The suggestion is that it should maintain the existing system of controls but promote a revaluation of the currency. The political economy of that proposal is worth spelling out: A revaluation would, first and foremost, improve the terms of trade for Chinese consumers. It would encourage imports. It would also reduce exports and thus employment in export sectors. It would further squeeze export-orientated businesses. And, under the current circumstances, to make it work will also require robust exchange controls. **To push the currency up against the downward pressure of outbound capital flows, Beijing would need to tighten its grip on the Chinese bourgeoisie. Under current conditions, more financial repression is the unmistakeable implication of calling for revaluation**…
>…The fact that in the context of the China Shock 2.0 debate, we can seriously talk about the possibility of targeting an exchange rate for the yuan, suitable to rebalance the flow of trade, most especially in industrial goods, with a view to “fairness” and domestic social equilibrium in both exporting and importing countries, is a backhanded compliment to the increasing weight and influence of China’s model of economic management. As argued in a previous post, **it would be more convincing if it were combined with disciplining also of European capital, to actually deliver the investment and innovation necessary to drive modern economic growth**…
The rest of the article is about the AI boom, tax revenue, and other things motivating the Chinese system of capital controls, but ultimately that content is there to explain why these controls exist.
Also. before the balance of payment hawks come in decrying the control of the CCP over the economy regardless of its role in moderating depreciation, your patron saint, Brad Setser, agrees with much of Adam Tooze’s article: [Another superb Tooze essay, on the centrality of financial repression — external and internal — to the Chinese model](https://xcancel.com/Brad_Setser/status/2072462418572083291#m)