CHINA-ECONOMY: DEFLATION CRISIS?

 Yu Yongding, of the Chinese Academy of Social Sciences and currently a member of the National Planning Committee, has warned that Beijing risks a currency blow-up akin to Britain's traumatic ordeal in 1992, if it continues trying to defend its exchange rate peg amid a deepening deflation crisis. He says that China is caught in two concurrent "deflationary spirals" that are feeding on the other. A major devaluation and a blast of well-targeted fiscal stimulus will be needed to break out of the trap and recommended that China "must stop intervening on the exchange market" and "devalue by 15per cent". He added the government is making a serious mistake in trying to defend the yuan by burning through foreign exchange reserves,  already down to $3.2 trillion from $4 trillion in mid-2014. He warned that the slowdown in capital outlows in March may prove fleeting:   "Reserves will continue to fall until we devalue. Once we get towards $2 trillion the markets will start to panic. They won't believe that the government can control it any longer." He also said Beijing had been caught of-guard by the "relentless slowdown" over the past five years -- "In 2011 we thought the economy would stabilize, and we thought the same thing in 2012, and again in 2013, and it continued to slide." 

 






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