China Must Choose: Defend Real Estate Prices or Exchange Rate

Discussion of the cost imposed by defending the currency and the housing market (via easy money) simultaneously. The case made here for several years is that existing inflation already calls for a major depreciation in the yuan, but further continuing the policy of easy money while defending the currency eventually leads to distortions which will force the PBoC's hand.

EO: 保房价还是保汇率这是个问题

First, there is a ceiling for home price increases. In the context of labor inflection point, easy money led to a rapid rise in second-tier cities housing prices will not only substantially increase labor costs, but also the houses will lose inhabitants, become an investors' game of bravery, residents in first and second-tier cities are gradually being washed out of the market, a family can not eat or drink for 10 years to buy a house, say there is no bubble is self-deception, but this situation is prevalent in a second-tier cities. After all, housing prices behind rise in proportion to the lack of income support. In future if the bubble continues to increase, the impact of which will rupture increases from the historical point of view the global economy, no country prices will only rise forever;

Second, with the steady implementation of SDR, RMB added along the way and policies, by expanding the overseas market is an inevitable trend of internationalization of the RMB is not reversible, the future gradual liberalization of cross-border capital flows are also the inevitable trend. Recent central bank vice governor Yi Gang, says that China decided to grant the United States 250 billion yuan RMB qualified foreign institutional investors (RQFII) amount. Recently, the central bank held a meeting to study the issue of commercial banks ordered to participate in the offshore foreign exchange market;

Third, the domestic and international markets artificially firewall isolation will continue to stimulate the property market and the exchange rate bubble. China's M2 growth rate of 13% annually for six years to make the broad money doubled, the currency issued will increase inflation, substantially reduced export competitiveness of enterprises in the RMB exchange rate unchanged. On the other hand, in the RMB exchange rate unchanged, there are a growing number of multinational enterprises funded through substantial acquisitions countries domestic credit assets, according to Dealogic, the first five months of this year, Chinese enterprises overseas mergers and acquisitions reached the scale $ 119 billion. Not only more than 2015 1,068 billion, also higher than the same period in 2014, more than twice. Large-scale overseas mergers and acquisitions will inevitably lead to dissatisfaction with China, the United States recently rejected it for various reasons, a number of Chinese companies to acquire US company merger, for now, the EU also has this tendency.

Since capital controls it is only a temporary measure, so the question is, in the gradual liberalization of cross-border capital flows and continuing internationalization of the RMB, bound to make a decision on monetary policy or exchange rate stability. In other words, pierce the housing bubble or the exchange rate bubble.

The author says there are two choices: the Japan model (defend the currency) or the Russian model (defend asset prices):

If you choose to pierce the housing bubble to ensure exchange rate stability, that is embarked in the late 1980s the Japanese model, the use of domestic monetary policy will be stretched. In order to ensure exchange rate stability and to prevent the outflow of capital, maintaining foreign exchange reserves, the central bank will have to tighten monetary policy, raising interest rates. Japanese experience, tightening monetary policy, the real estate market and the stock market will usher in a crash, real estate "to stock" campaign will also failed, followed by a drastic shrinkage of corporate, government, residents of assets, the bank's bad debt rate soared, the entire financial system is facing a huge impact. Exchange was saved, but the domestic economy to bear the costs too high.

If you choose to pierce the exchange rate bubble guarantee price stability, Russia is walking mode, while you maintain a slow appreciation of the yuan supplemented expectant management is a better strategy. Last year's "811" strategy adopted by the reform is the rapid devaluation of the renminbi in the short term, aimed not so rapid capital outflows, the RMB has depreciated in place, the risk in the short term can be quickly released. However, the implementation effect of view, the results are not ideal, but incurred at home and abroad will continue to depreciate the RMB consensus expectations, resulting in a rapid decline of foreign exchange reserves, stock market crash, the offshore renminbi exchange rate increased rapidly empty one, the central bank ultimately had to change ideas capital controls.