The Olympics highlight China’s challenges. Get ready for more volatility.

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The Beijing Olympics logo.

The time of dreams

the Winter Olympics in Beijing offers a microcosm of challenges facing China – from geopolitical tensions as its role in the global economy evolves to a diplomatic boycott of the games by the United States over China’s human rights abuses against Uyghurs . The strict Covid restrictions also highlight the tightening of the state’s grip on society and the economy.

China is on a path to greater economic volatility and the world may need to prepare for a more aggressive China, according to economist Eswar Prasad, former China director of the International Monetary Fund and author of The future of money: how the digital revolution is transforming currencies and finance.In a conversation that included discussions of digital money, here, Barrons spoke with Prasad about why U.S. investors may be going through a tough time in China. An edited version of our discussion follows.

Barron’s: China has had a difficult year, with crackdowns on its internet and real estate sectors and a sluggish economy. How does he handle these challenges?

Esvar Prasad: China faces a set of interesting contradictions in its policy approach that will inevitably lead to a variety of stumbles and mishaps. For example, China recognizes that it needs a vibrant private sector to continue generating productivity and employment growth and innovation. [it views as] become too powerful economically and politically. Xi Jinping has made it clear that he sees a state-dominated economy as the preferable outcome. How China can reconcile the goal of greater state dominance over the economy and financial system, with a more vibrant and vibrant private sector, is going to be a challenge. Another challenge is how it can master the real estate sector, a crucial driver of the economy. growth and very important component of household wealth, without triggering financial and economic problems, especially at a time when growth is slowing.How have the challenges evolved since you led the China division of the IMF 20 years ago?

Many of the problems we identified then – the not-so-well-functioning banking system, problems with non-performing loans, and corporate and local government debt – have expanded over the past two decades. But China, with the exception of last year, has managed to maintain a decent pace of growth. China’s approach [lately] shows that it has reached a tipping point where problems can no longer be ignored, even if it comes at the cost of loss of short-term growth. From a long-term perspective, I’m encouraged. But his see-saw approach leads to more uncertainty, which will mean a cost for growth, much more volatility and short-to-medium term stumbles.What does this mean for investors in China?

China remains a relatively fast growing economy considering its size, with real growth likely of 4% to 5% over the next few years. Investors will need to be very selective about the sectors they invest in and adopt a very specific company-based approach. It’s going to be a tough market to resist, but also a little tough to take advantage of. [from].

There is a bipartisan push for a tougher stance against China. How do you see that playing out?

We will continue to see the US government trying to find ways to limit Chinese companies’ access to US markets and technology, and some attempts to limit the involvement of US financial firms in Chinese markets.

China wants a better local financial system to depend less on foreign capital and foreign sources of financing for its businesses. But it also recognizes that foreign financial companies can play a very important role in the development of the domestic financial market. It has been able to play this game to some degree simply because US and foreign financial firms continue to salivate at the thought of accessing Chinese financial markets. It is still a fast growing economy with huge latent demand for better financial services. American companies are fully aware of the political, financial and economic risks, but many find it too difficult to stay away from the Chinese market.What kinds of changes could be coming if President Xi wins a third term later this year?

In terms of domestic policy, Xi Jinping has clearly shown his stripes: he considers that the state must retain a very important role both in the financial markets and in the economy. On the global front, rather than trying to influence the rules of the game from within, she’s going to be much more assertive in putting forward her vision of how the world should be shaped. Especially in multilateral forums, China will make its soft power more and more visible and start to use its levers much more assertively.

Thank you Esvar.

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