Financial integration and national autonomy: China and India

Abstract

The narrative as well as the analysis of deregulated finance in the global economy remain incomplete unless one relates to the surges as well as volatility in capital flows which are experienced by the emerging economies. An analysis as above needs to consider the implications of capital flows in those economies, especially in terms of the 'impossibility' of adopting monetary policies which benefit growth in the national economy. There is also a need to recognise the role of uncertainty and the related changes in market expectations in the (precautionary) accumulations of the large official reserves as are held by these countries. The consequences are found to affect the fabric of growth and distribution in these economies. Recent experiences of China and India, with their deregulated financial sectors, bear this out.Financial integration and free capital mobility, which are supposed to generate growth with stability in terms of the 'efficient markets' hypothesis, have failed, and not only in the advanced economies but also in the high-growth developing economies like India and China. Deregulated finance has led these countries to a state of compliance, where domestic goals of stability and development are sacrificed to make way for the globally sanctioned norms relating to free capital flows.With the global financial crisis and the spectre of recession haunting most advanced economies, issues as above in the high-growth economies in Asia have drawn much less attention than they deserve. This oversight leaves the analysis incomplete by ignoring the structural changes that result in these developing economies -which are of much relevance to the pattern of financialisation and turbulence in the global economy as a whole.

China's trilemma: monetary policy autonomy in an economy with a managed floating exchange rate

“…As the weighted sum of the three trilemma variables is equal to a constant, the analysis showed that the actual situation in China conforms with the trilemma hypothesis. Sen (2014) and Wu (2015) also found that the reality in China supported the hypothesis. In contrast, Angrick (2018) retested Wu's (2015) analysis with a different sample range and found that it was foreign exchange reserve losses rather than the adoption of the fixed exchange rate system that produced the corresponding restrictions on monetary policy autonomy.…”