The untamed version of the Chinese currency has gone from a beacon of convertibility to a magnet for capital outflows. Beijing has a bad choice: Choke yuan liquidity in Hong Kong to kill speculation and China’s global dreams may suffer; or stoke it and be forced to devalue again.
Mining has slumped while housing has surged. The biggest challenge for new Prime Minister Malcolm Turnbull is a slowdown in GDP that is depressing everything from taxes to profits. He needs to embrace higher public deficits – even if that’s tough for a conservative.
Swelling local authority debt and falling revenue are acting as fiscal speed bumps. Cutting interest rates would risk sinking the yuan and hastening capital outflows. The central government may need to put its spare borrowing capacity to work to support public spending.
The Breakingviews Abenomics index perked up in July, as summer bonus payments boosted wages. But a muted recovery in consumption, weak manufacturing and slumping housing starts point to anaemic demand both at home and overseas. Expect calls for fiscal stimulus to grow louder.
Finance ministers and central bankers from large countries did not ask the United States to delay raising interest rates. They have no other plan to stop capital fleeing China and other emerging economies. That makes their pledge to resist “competitive devaluations” ring hollow.
Seventy years after World War Two, relations between Asia’s two biggest economies are in poor shape – as Beijing’s huge military parade shows. But trade, investment and tourism tell a different story. Japan’s economic success increasingly depends on China’s, and vice versa.
The finance minister has retracted a flawed plan to tax foreign fund managers’ past earnings. Jittery global markets may have hastened the truce. Settling similar disputes with Vodafone and Cairn would show the government is belatedly keeping its promise to end “tax terrorism”.
Not even the People’s Republic can go on cutting interest rates, keep the yuan stable, and allow capital to flow freely. It must choose two out of three. Huge foreign exchange reserves give Beijing some room to muddle through, but not enough to reverse self-fulfilling outflows.
Malaysia’s prime minister has ruled out a repeat of the country’s 1998 hot money curbs. But slumping Asian currencies suggest it’s too soon to be complacent. Raising interest rates could mean deep recessions. Some politicians might decide to prevent capital from leaving instead.
The deadly bombing of a shrine will scare off tourists whose numbers were up 29 pct this year. It’s another jolt to an economy already grappling with flat exports and weak private investment. Military rulers have been slow to boost public spending. That’s making things worse.