–China Economic Growth Likely To Slow In The Near Term

By Yali N’Diaye

WASHINGTON (MNI) – While skepticism about the ability of Europe’s
leaders to address the debt crisis remains high, Dallas Federal Reserve
Bank President Richard Fisher Thursday cautioned against underestimating
their political will.

In remarks that mostly focused on China’s currency
internationalization and the implications, Fisher said growth in the
world’s second largest economy is likely to slow in the near term.

The combination of slower growth and the cooling of the real estate
market could lead a “large share” of loans made during the credit boom
— fueled by the Chinese government stimulus — to “turn bad,” he said
in a speech prepared for delivery to the 21st Century China Program at
the University of California, San Diego.

“And because these loans took place outside the view of regulators,
the effect of a sudden disruption in repayment is virtually impossible
to predict,” he warned.

China’s financial outlook is also threatened by “asset bubbles in
the real estate market and mounting local government debt,” Fisher said.

Fisher’s speech, titled “Implications of Renminbi
Internationalization for the U.S. and the Global Economy,” overall made
few remarks on China’s current macroeconomic conditions.

On the issue of the internationalization of the Chinese currency,
Fisher believes “China should accelerate changes to improve the quality
of domestic financial institutions before relaxing many of its capital
account restrictions.”

On the latter point, the liberalization of the capital account, the
outcome is “unclear,” he said.

He cautioned that “any policy shifts affecting China’s capital
account must recognize the current fragility of global financial
markets,” with the eurozone sovereign debt crisis having “resulted in
much uncertainty and volatility.”

“Should there be, say, a sudden and messy change in the
participants in the economic and monetary union, a chain reaction might
ensue that could result in some unpleasant responses,” Fisher said.

However, “We shouldn’t underestimate the political will among
Europe’s leaders to put in place measures that will ensure that the euro
comes through its present crisis.”

Other factors make the outcome of the capital account
liberalization unclear despite progress made in improving the financial
sector over the past two decades.

“China has undertaken significant steps to reform its banks,”
Fisher acknowledged. “However, many loans are still dictated by
administrative policy orders rather than by economic efficiency.”

“To increase banking sector efficiency, China should remove entry
barriers to allow domestic private banks to enter and equally compete
with state-owned banks,” he continued.

In the securities markets, the level of development lags that of
major financial markets, Fisher said, pointing to the low bond
liquidity as well as “relatively small and shallow” equity markets.

“In many areas of financial market depth and breadthforeign
exchange turnover, exchange-traded derivative contracts, funds
management assets, hedge fund assets and private equityChina trails not
only the United States, but also Britain, Japan, France, Germany and
Singapore,” Fisher said.

In addition to the need to improve the quality of its financial and
banking sectors, Fisher expects “China will adopt a posture of
gradualism when internationalizing its currency.”

The central banker reaffirmed the United States’ general view that
“In the long run, a fully convertible currency and flexible
exchange-rate regime are good for both China and the world economy.”

But while acknowledging China’s recent foreign exchange policy
reforms, Fisher said they are only “small steps in the right direction.”

That being said, “the determination of Chinese authorities to
promote the renminbi to the status of a global currency” should not be
underestimated, Fisher said.

Becoming a major currency, however, “will not happen overnight or
even within the next decade,” he said. “Besides, there is no reason for
the Chinese to rush their ambition,” he continued, arguing that the
right approach is often better than the quick approach.

Overall, the U.S. dollar “supremacy” is unlikely to be challenged
anytime soon by the creation of the euro or the rise of China as an
economic power, Fisher concluded.

But, “The privileges that status affords us will only be preserved
if our fiscal authorities learn to budget responsibly,” Fisher warned.

** MNI Washington Bureau: 202-371-2121 **

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