From Bloomberg:
All of which raises a simple question: Why is Beijing working so hard to prop up the yuan and crack down on outward capital flows?
The common answer is that it fears the trade consequences of a declining yuan. But that's not it. Since the government devalued the yuan on Aug. 11, the combined value of imports and exports has fallen by only 8 percent, even as the value of the yuan has fallen 8 percent against the U.S. dollar. Any coming decline in the currency won't make much difference, given the weak global economy and the product mix China is buying and selling.
The real reason is that the government is concerned about the implications of further liberalizing. China's rickety banks, with delinquency rates of 30 percent, are receiving regular liquidity injections from the People's Bank of China. Money market rates have been rising, from under 2 percent this summer to above 2.3 percent in Shanghai today. Allowing international capital mobility could easily trigger larger withdrawals -- and hence liquidity crunches for banks already feeling the pinch of bad loans.
In other words, China is caught between trying to prop up a currency facing long-term decline and letting capital leave at will, risking a bank crisis.
