China: The dilemma of the impossible trinity – ANZ

By FXStreet FXStreet (Delhi) – Research Team at ANZ, suggests that putting aside ongoing equity market slides, some of the confusion and concern emanating out of China’s financial markets is due to the impossible trinity: a country cannot set interest rates, the exchange rate, and allow the free flow of capital across its borders; they must choose two out of three.

Key Quotes

“China has traditionally set the first two, with capital controls in place. However, authorities had expressed an intention to allow the market to have more of a say in determining the exchange rate, with the aim of internationalising the currency, and achieving “reserve currency” status, getting it into the IMF’s SDR basket.

However, it is fair to say policymakers appear to have gotten cold feet on the reform process, with accelerating pressure on foreign reserves as capital has flown the coop, and damage being done to sentiment by speculation that the currency adjustment might become disorderly.

Efforts have been made to clamp down on the channels by which capital is leaking out of the nation, intervention in the offshore yuan appears to have been large, and the daily currency fix has in recent days once again become remarkably stable. Market-oriented …read more

Source:: FX Street