Relax, China has the economy under control
- By Yi Xianrong
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E-mail Beijing Review, January 12, 2016
Take China's real estate market, for another example. Despite the fact that some housing bubbles had burst across some cities several years ago, the rest of the country hasn't been affected. Investors should take note, realizing that some of the risks that China's economy faces only have regional impacts.
Being populated by 1.3 billion people, China's market potential outstrips that of any other country in the world. Also, thanks to differences in regional economic development, the Chinese market is elastic as well as versatile. Products can therefore be tailored to a variety of consumer groups--creating a unique development environment for Chinese enterprises that allows them to adapt to different economic cycles.
Taking those factors into consideration, it's likely that China's economy has the capability to weather any difficulties it may encounter. In the past few years, some institutions and investors throughout the international market predicted China's economy would face insurmountable problems. However, all of those predictions fell flat due to fundamental misinterpretations of the general market conditions at that time.
The other so-called risk is the steep fall of the yuan's exchange rate in 2016, as some investors have predicted. In the eyes of some international investors, a declining yuan exchange rate would cause a serious outflow of capital and send a negative signal concerning China's real economy. Should China's foreign exchange reserves dwindle rapidly, domestic assets' price bubbles will burst. That would purportedly result in the international market becoming skeptical of the effectiveness of the country's monetary and foreign exchange policies. In that case, the global economy would hit a wall.
The fluctuation of the yuan exchange rate is a potential risk. However, China's central bank is not likely to fix the yuan exchange rate once more. Instead, it is striving to ensure that the yuan floats in a free and flexible manner. At the same time, Chinese regulators are capable of properly controlling the exchange rate while simultaneously enhancing the elasticity of the yuan.
In a nutshell, when tackling issues involving the yuan's exchange rate, China will be able to play them by ear while analyzing the trend of the yuan's exchange rate in 2016.
Looking back at 2015, the China-led Asian Infrastructure Investment Bank (AIIB) and the New Development Bank of BRICS were established, and the yuan was included in the IMF's Special Drawing Rights basket, signifying China's growing influence. Looking forward to 2016, as the AIIB issues its first loans and China hosts the 2016 G20 summit, the country will contribute more to the improvement of the global governance system and its economic growth. In that sense, China will remain the engine of the global economy, rather than a source of risks.
This is an edited excerpt of an article written by Yi Xianrong, a professor at the School of Economics of Qingdao University, and published in National Business Daily
