China will be unable to put an end to financial repression – Natixis

According to Patrick Artus, Research Analyst at Natixis, China is currently in a very clear situation of financial repression as the obstacles to capital outflows enable it to keep the savings of the Chinese in China, as interest rates are abnormally low relative to growth.

Key Quotes

“This generates global inefficiency, since the very high savings of the Chinese cannot finance investments in the rest of the world, and a de facto very high tax on the Chinese given the low return on their savings.”

“But it will be very difficult or even impossible to put an end to this situation of financial repression. If there was no longer any capital controls, the Chinese would invest their very high savings abroad, as we saw from 2014 to 2016 This would lead to capital outflows far in excess of China’s external surplus, which is small given the level of the national savings rate in China because of the abnormally high investment level.”

“The other possibility would be to raise interest rates sharply to keep the capital from leaving, but this would lead to a debt crisis. An end to financial repression in China would then lead to either a considerable fall in investments, or to a balance of payments crisis, or to a debt crisis.”