If investors care for central bank independence, why does investment flow to China?

Manas Chakravarty has a nice piece in Mint:

Economic affairs secretary Subhash Chandra Garg’s tweet in reply to RBI deputy governor Viral Acharya’s hard-hitting speech was widely deplored, but he did have a valid question. To what extent are investors really bothered about central bank independence? If they are, what explains the flood of money that entered China, where the central bank doesn’t even pretend to be independent?

In fact, central bank independence has been in vogue only for the last 30 years. Not everybody is enamoured of it. Some academics have argued that rather than being truly independent, central banks have become handmaidens of international finance. Some have alleged central bankers pursue independence as a means of gaining power and prestige. Critics have said that the increasing emphasis on central bank independence is the result of the power of the financial sector to assert its interests, or the interests of creditors, over those of households and debtors, as inflation targeting results in the redistribution of real income from debtors to creditors. Fingers have been pointed to the rise in inequality in recent decades as a result of central bank policies that have led to huge gains for asset markets. In short, central bank independence is closely bound up with the rise to global pre-eminence of the financial sector.

…..let’s get back to the example of the Chinese central bank. It is unabashedly an arm of the Chinese state and the prime instrument of the government’s financial repression. It is partly because of its lack of independence that China is sitting on top of a volcanic mountain of debt, a mountain that now threatens to blow its top. However, foreign investors in China were not really bothered about the credibility of its central bank. They banked instead on the credibility of the Chinese government and its track record in managing extraordinary economic growth.

It is, therefore, an empirical matter whether investors repose confidence in the central bank or in the country’s government. In Turkey or Argentina, investors would no doubt prefer central bank independence. In China’s case, they seem to believe it doesn’t matter, as they rather ironically seem to have immense faith in the ability of the Chinese Communist Party to deliver the goods.

The question is: Is the Indian central bank or the Indian government more credible to the financial markets? Whom do they trust more?


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