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Whither De-Pegging?
The biggest topic in the upcoming week will undoubtedly be the escalating debate over whether the People's Bank of China (PBoC) will relent to Obama's persistent pleading, and in addition to de-pegging, allow the renminbi to appreciate against the dollar. The debate is simple: the US needs the dollar to hit the bottom of the currency stack post haste, and for that to happen, China's currency needs to appreciate. This is merely in keeping with the Fed's current strategy of inflating assets at all costs via monetary manipulation as both fiscal and "consumer" based attempts to increase prices have largely failed (record unemployment may be a lagging economic indicator but it is a very much coincident wage-deflation indicator). It is in this environment that the PBoC has been sending mixed signals, with a variation of the "party line" language in its Thursday release being read as a prompt that China is willing to play Russian Roulette with over 1 billion increasingly unhappy citizens in the biggest communism-capitalism experiment in history. Yet as the Telegraph pointed out today, there is absolutely no risk (so far) of any accelerating renminbi appreciation becoming the policy course for China. So for a slightly more than "soundbite" level evaluation of the pros and cons of "de-pegging", we present the following curious piece of fiction from none other than paperback experts Morgan Stanley, and specifically its Chief Asia strategist, the mellifluously named Qing Wang.
Introduction
We highlight in this research note the pros and cons of renminbi de-peg and appreciation in the format of a hypothetical debate between a policy advisor who defends the status quo and a fund manager who argues that the current arrangement is unsustainable.
A Conversation on the Renminbi
An overseas fund manager recently visited Beijing as part of his regular macro due diligence trip to China. He had a one-on-one meeting with an influential policy advisor from a local think tank, the purpose of which is to understand better the outlook for the renminbi exchange rate. The following is a dialogue between the policy advisor (or ‘Ms. P’) and the fund manager (or ‘Mr. M’):
Mr. M: Professor, thank you for sparing time to meet me. In the interest of time and if you do not mind, may I start with a question by showing you this chart (see Exhibit 1). The chart shows that since March this year, a number of currencies among emerging market (EM) economies have appreciated substantially against the USD. However, the renminbi is among a handful of EM currencies that did not appreciate against the USD, making it one of the weakest currencies in the EM space. Shouldn’t we expect the renminbi to appreciate soon?
Ms. P: I beg to disagree. Your observation is correct if one only focuses on the developments in the past 4-5 months. However, before I answer your question, I also would like to present a chart (see Exhibit 2). This chart shows the change in the exchange rates of the same set of EM economies between September 2008 – when the global financial crisis broke out – and March 2009 when the global economic and financial situation started to stabilize. This chart shows that the renminbi was the strongest EM currency, because it was the only EM currency that did not depreciate against the US dollar in the wake of the global financial turmoil.
I recall that, back then, many market observers predicted that the renminbi would depreciate against the USD by following the footsteps of other EM currencies. I believe that, had China allowed renminbi depreciation, the depreciation pressures on other EM currencies would have been even stronger.
Your observation that the renminbi is the weakest EM currency is valid only as far as the past 6-7 months is concerned. If we take a slightly longer view, examining the cumulative performance since the crisis (i.e., August 2008), the renminbi is still stronger than most other EM currencies.
Mr. M: These are fair points. However, when I suggest that the renminbi should appreciate, my arguments are based not only on the developments of the past few months but also on the fact that China has, and is expected to continue to have, large and persistent current account surpluses, which suggest that the renminbi is undervalued and should appreciate (see Exhibit 3). This is International Economics 101, isn’t it?
Ms. P: I do not disagree with you in principle. I think the large and persistent current account surpluses in China have reflected a structural saving-investment imbalance as well as an undervalued exchange rate. Renminbi appreciation should be part of the solution but not the only solution to reduce current account surpluses, especially given its structural nature. That said, from a policymaker’s perspective, any macroeconomic policy decision needs to take into account both the cyclical and structural conditions of the economy. While renminbi appreciation makes lots of sense in view of structurally high current account surpluses, the case for renminbi appreciation is far from compelling from a cyclical point of view.
In theory, currency appreciation helps dampen export growth and contain inflation pressures. The reality is that the Chinese economy is currently suffering deflation and a sharp decline in exports (see Exhibit 4). At the current juncture, it does not make any sense for the policymaker to take policy action that would serve to exacerbate either deflation or weak exports. This is Macroeconomic Policymaking 101, isn’t it?
Mr. M: I understand what you’re saying, but the current situation is not sustainable. The conditions for a renminbi appreciation will never be perfect; there will always be some sort of downside. I am afraid that the longer the necessary adjustment is postponed, the stronger the appreciation pressures will be.
Ms. P: Exchange rate adjustment is important, but I caution against over-emphasizing its role in rebalancing the economy. The experience in 1H09 is a case in point. China registered a current account surplus of US$134 billion in 1H09, a 30% decline compared to the level in same period in 2008. This is because while China’s exports declined by 25%Y in 1H09 due to a collapse in external demand, imports declined by only 21%Y, reflecting relatively strong domestic demand underpinned by aggressive policy stimulus. Both Morgan Stanley and consensus forecasts expect the current account surplus to shrink further in 2010, as a result of stronger import than export growth due to robust domestic demand but a tepid recovery in external demand (see Exhibit 3). If these forecasts were to materialize, it would suggest that the underlying external imbalances are improving towards a more sustainable situation. Don’t you agree?
Mr. M: Well, yes, but even according to these forecasts, China’s current account surplus would still be over 5% of GDP in 2010. As long as a current account surplus of this magnitude persists, the expectation of renminbi appreciation is bound to remain strong and will surely lead to significant ‘hot money’ inflows, which contribute to large and persistent FX reserve accumulation despite potentially narrowing current account surpluses (see Exhibit 5). And large FX reserve accumulation will constitute a major challenge to monetary policy implementation, namely the loss of monetary policy independence. Aren’t Chinese policymakers concerned?
Ms. P: You are absolutely right on this point. In fact, I think this is by far the strongest argument for a flexible exchange rate arrangement in China, which is a pre-condition to independent monetary policy according to the theory of the ‘Impossible Trinity’.
Mr. M: I am glad we finally agree on something. Indeed, for such a large economy as China, independent monetary policy is critical to domestic macroeconomic and financial stability. Isn’t this alone a sufficiently strong rationale for renminbi appreciation?
Ms. P: This is indeed a theoretically sound argument, but it has proven to be very difficult to implement in practice. For instance, while the renminbi was allowed to appreciate against the USD by over 20% between July 2005 and July 2008, it does not seem to me that the appreciation brought about any genuine monetary policy independence during that period. On the contrary, I would argue that persistent FX reserve accumulation, in part driven by strong appreciation expectations, has further complicated monetary policy execution. Do you not agree?
Mr. M: True. But I think it is precisely because the renminbi appreciation was too little and too slow to change expectations. A sufficiently large appreciation would generate two-way risks and thus impart meaningful flexibility to the exchange rate.
Ms. P: How much does the renminbi need to appreciate in order to generate two-way risks in the short run – 10%, 30% or 50%? Does anyone really know? As an expert in the internal capital market, do you believe that a 10% one-off revaluation of the renminbi could bring about meaningful two-way risks? Even if you can make a case that a 30% one-off revaluation will do the trick, do you think Chinese authorities – who are known for their hallmark gradualist approach reform – would take such a risk, given that a 30% revaluation of the exchange rate could potentially put many Chinese exporters out of business overnight? Also bear in mind that the exchange rate is not just a relative price between tradable and non-tradable goods but a type of asset price, and it could easily overshoot, as every other asset price does.
Mr. M: Your arguments make sense. However, as a market participant, I strongly believe that the government is unable to avoid a market-driven adjustment. It is inevitable. One cannot control everything. Something has to give. You seem to be suggesting that the ‘law of gravity’ does not apply to China. Am I missing something here?
Ms. P: Yes, something is indeed missing in our discussion, which has so far focused on the role of the renminbi nominal exchange rate. In theory, when a currency is considered to be undervalued and needs to appreciate, the exchange rate concept here is the real exchange rate, namely the nominal exchange rate between two currencies adjusted for the inflation rate differentials between the two economies. In practice, country A’s real exchange rate is estimated by calculating its real effective exchange rate (REER), which is defined as the trade-weighted nominal exchange rate against a currency basket – also called the nominal effective exchange rate (NEER) – adjusted for the inflation rate differentials between country A and its trading partner economies. A real appreciation of country A’s exchange rate can be achieved through the nominal appreciation of country A’s currency or by a higher inflation rate in country A than in its trading partner countries, or a combination of both.
I agree with you that ‘something has to give’. In this context, the ‘something’ would be a higher domestic inflation rate in China relative to other trading partner countries if the appreciation of the renminbi nominal exchange rate is slow.
Mr. M: Higher inflation in China? But China is suffering deflation now? It may take another 12-18 months before inflationary pressure emerges in China. Relying on higher inflation as part of the solution will be a long process.
Ms. P: This is where the point about cyclical versus structural conditions of the economy that I made earlier becomes relevant again. Renminbi appreciation in real terms is justified over the medium term, namely if appreciation of the nominal exchange rate is slow, inflation pressures will eventually show. In fact, I would advise that, in view of the high level of growth in China, the norm for annual inflation rate in China should be in the range of 4-6% instead of the 2-3% to which many Chinese seem to have become used to. However, the current cyclical condition of the economy dictates that there are deflationary pressures.
Mr. M: I think that the relatively low inflation in China largely reflects strong supply capacity and thus fierce competition in the downstream manufacturing sector. I doubt that this situation will change any time soon.
Ms. P: It also has to do with the low price of energy and natural resources, as well as low environmental costs. Deregulating these prices and making them reflect their true opportunity costs are the key. More generally, China needs to rationalize the relative price structure between energy and raw materials on the one hand and downstream manufactured goods on the other hand. While this relative price normalization is likely to cause broad-based inflation, I believe that this type of inflation is what China needs and, when it materializes, should be tolerated.
Mr. M: Inflationary pressures seem already to have been reflected in the upward pressures on asset prices.
Ms. P: The post-crisis asset price reflation is a global phenomenon. Indeed, preventing an asset price bubble will perhaps be a high policy priority. But conventional monetary policy tools are ill-suited for this task. I suggest that ‘containing financial leverage’ in the system be made a key policy objective with a view to minimizing systematic risks in the event of a bursting of the asset price bubble. This will entail strict mortgage rules for homebuyers, strict restrictions on margin trading in stock market, strict capital adequacy requirements for banks, asymmetric liberalization of external capital account controls that induce capital outflows and discourage capital inflows, and preventing a one-way bet on the renminbi exchange rate that would induce hot money inflows.
Mr. M: Professor, I appreciate the discussion and your answers to my questions. After hearing what you have to say, I now have a better understanding of the arguments in favor of the status quo. And I do see the validity of many of your arguments. At the same time, it seems to me that most of the points you have made are out of consideration of designing a course of policy action that serves the best interest of the Chinese economy itself. However, when it comes to exchange rates, it always involves more than one party. Other countries that are negatively impacted by China’s exchange rate policy would complain and call on China to change its current practice. Won’t these international peer pressures change the mind of Chinese policymakers?
Ms. P: A strong Chinese economy should help the global economic recovery. While I do not work for the government, I know the Chinese government’s position on this issue is that the choice of exchange rate regime is in the domain of a country’s sovereign decision. That said, you seem to be suggesting that there are now strong and broad-based international pressures on China to change its exchange rate policy. This is not my impression, however. For instance, while the last G7 statement singled out the renminbi and called for its appreciation, as it did in the past, recent statements issued by G20 have been completely silent on the exchange rate issue, let alone singling out the renminbi. As you know, the G20 has now replaced the G7 as the main international forum for discussing global policy coordination among major economies. Take a look at the recent trends of trade-weighted exchange rates (or NEER) for Russia, Brazil and Korea and compare them to that for China, and you should understand why G20’s position on this issue is much softer (see Exhibit 6).
As the expert, please correct me if I am wrong. I do not even think it is in the interest of the US to put pressure on China to allow the renminbi to de-peg from and appreciate against the US dollar at the current juncture when the US dollar is already under enormous downward pressure. Wouldn’t the perception that ‘even the Chinese are starting to abandon the US dollar’ cause more USD selling in the FX market?
Mr. M: Interesting observations. On your last point, the current views of the market seem divided: while some share your view, others actually believe that a strong renminbi will eventually help strengthen the US dollar.
Well, professor, I really appreciate your time and I certainly enjoyed the discussion and have learnt a lot. I hope to stay in touch. Please do let me know if you change your view.
Ms. P: I also greatly appreciate your sharing your view from your perspective of an international capital market participant. Understanding of the market is critical to formulating good policies. Best of luck with your investments.
Our Takeaways from This Dialogue
First, given the fact that the renminbi exchange rate is still a policy tool instead of a market-determined price variable, one needs to think more like a policymaker than a hedge fund manager to gauge the likelihood of a potential policy shift on the renminbi.
Second, we maintain our long-standing view that the current renminbi exchange rate arrangement will remain unchanged at least through mid-2010. While an exit from the current regime of a de facto peg against the USD may occur in 2H10, any subsequent renminbi appreciation against the USD will likely be modest and gradual.
Third, as we had predicted earlier, the relevant debate and speculation as to what would be an exit strategy for the renminbi has indeed emerged sooner rather than later. However, we continue to believe that an actual decision – be it an exit strategy or maintaining the status quo – is unlikely to be made and implemented until after the middle of next year.
Fourth, looking ahead, China is likely to repeat a situation similar to that during 2005-08, featuring strong expectations of renminbi appreciation, ‘hot money’ inflows, abundant external surplus-driven liquidity (as opposed to the current abundant liquidity due to loose monetary policy), and the attendant upward pressures on asset prices.
Last but not the least, we expect that the current policy stance will remain broadly unchanged towards year-end and turn neutral at the start of 2010 as the pace of new bank lending creation normalizes from about Rmb 10 trillion in 2009 to Rmb 7-8 trillion in 2010. Policy tightening in the form of RRR hike, base interest rate hike or renminbi appreciation is unlikely before mid-2010. If, however, excess liquidity stemming from large external balance of payment surpluses were to emerge earlier than expected, we would not rule out the possibility that the RRR hike cycle could start as early as the beginning of 2Q10.
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I saw "pegging" and got my hopes up for nothing.
Fiat system of paper money works until every country agree to respect each other and be "sound" international citizen and fiat money are kept in check by every CB on Earth.
Moment when one country trying to take advantage of the fiat system by endlessly printing and keeping currency low, system will start failing, and it will become just matter of time before everything fail..
China done it for about 10yrs and will continue to do it until it will be too late.
40y experiment with paper money coming to the end. We back to 6000 or so years of human history...
As usual old man Thomas Jefferson was right, :
The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals... it is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.
The end to American exceptionalism?
I think fiat currencies need to end as well.Not that there seems much chance of that happening.The pull to do what is best for the country vs the health of the world market is a fascinating meme.It lays the logical groundwork for one global fiat currency, with it's concomitant brutal framework.I wonder if sovereign interests will ultimately prevail and destroy the dollar.I have a feeling that if the dollar toilet papers too fast, the siren call for a global currency may be too hard for many to resist.Time will tell.
You mean DITHER-De Pegging?
The Chinese are still hard-core mercantilists, thus a de-peg while China has so much excess export capacity is unlikely. Forget the idea that domestic demand will take up the slack. Most of those factories make crap that Chinese have zero interest in purchasing.
In any event, if China were to completely liberalize and make CNY fully convertible for Chinese citizens, it's not clear whether it would appreciate or depreciate anyway. There is a lot of pent-up demand within China to get money out of the country. These people invented paper money, they know it always ends badly.
More accurate conversation:
Mr. M: Isn't it great to be one of the bosses?
Ms. P: Indeed. I get a particular kick out of pulling all kinds of bs out of my ass to justify what I do
Mr. M: Yes, I notice that you have a knack for it.
Ms. P: Yeah, generally I talk until people's eyes glaze over... by the time I'm done, they haven't learned anything, but they acknowledge that I'm the "expert" - you know it's important to be seen as the "expert" - especially in my position. Anyway, thanks for nodding along... hold on - write this one down "More generally, China needs to rationalize the relative price structure between energy and raw materials..."
Ms. P: Did you get that?
Mr. M: Sure did - you're REALLY REALLY SMART.
Ms. P: thanks
The Yuan would absolutely appreciate vs the USD if allowed to float. As time goes by, it's going to get more and more expensive to hold it down. Me thinks slowly but surely it'll rise.
"...we present the following curious piece of fiction from none other than paperback experts Morgan Stanley, and specifically its Chief Asia strategist, the mellifluously named Qing Wang."
Sometimes we need to speak an obvious truth because if not spoken and accepted, it isn't a truth. That may fly in the face of logic but it doesn't fly in the face of common and accepted practice.
Official lies (official is a relative term to mean "experts" as well) don't really need to make much sense or even withstand much scrutiny in order to be accepted as truth. They simply need to act as barriers to truth. If a group of people wish to collectively believe a lie, for all intents and purposes, the lie becomes a truth because the lie is accepted and acted upon as a truth.
This is the fundamental paradox most truth speakers fail to understand. To them, the truth is obvious and irrefutable. To those who practice information bias or herd mentality (usually because that's where the money is) truth is whatever the herd says it is for as long as the herd says it is.
This is also why people can dismiss ZH and other web sites with ad hominid attacks and other name calling and see nothing wrong with their methods. To them, the "truth" acts like mirrors, holy water and garlic on their souls and mind. It must be stamped out because it is contrary to conventional wisdom and the herd is always right because the herd determines what is truth. When the herd changes direction, the herd is again in alignment with the world of truth because that world is created by the herd. Perception is always reality to the majority.
This reminds me of something I've often thought about. Insanity is determined by the majority (or powerful minority) and then justified by science and law. Along the same lines, for thousands of years there were plenty of scientific and legal reasons to enslave various minorities. Slavery was desirable for a small minority who held power. Since the minority acted as a majority by way of their wealth and power, they determined what truth was. Science, religion and law quickly followed to justify the desired truth.
Sound like today's insanity. In fact, there still are plenty of reasons to own slaves today. We just don't call them slaves. Employee is a much more acceptable term for a (wage) slave, don't you think? The only difference between today and 200 years ago is the modern (wage) slave feeds and clothes him/herself. And because the (wage) slave believes the popular myth of freedom, the modern (wage) slave is so much more productive than if he/she were lashed with a whip.
Control the mind and the body will quickly follow.
"None are so hopelessly enslaved as those who falsely believe they are free."
J. W. von Goethe
excellent!
Good post, but, to be fair, slavery doesn't exist unless you are physically restrained from removing yourself from your situation.
I appreciate the feedback and at first blush, what you say sounds reasonable. But a closer look shows that the slaves of the 1800's south (and Rome and Egypt and Greece) outnumbered the white population two to one and could have removed themselves at any time.
They did not because slavery is first and foremost a mental conditioning and a (social) state of mind and only secondarily a physical condition. After the mental and physical conditioning is done, all it takes are occasional refresher courses of whippings and hangings to keep the slaves (mentally) in line.
The same mentality applies to battered spouses. They can leave at any time but the vast majority do not. Why? There are complex co-dependent relationships between the abuser and the abused, the slave master and the slave. And it's never as simple as just walking away.
Yes, in practice, it can feel the same - for a battered spouse or an employee with a bad job, and what appears to be no other option (co-dependency). But I still think there is a distinction between that, and government sanctioned slavery, wherein, a slaveowner could "call the cops" to enforce their position if they want... something that abusive men, and overbearing bosses cannot do.
Freedom comes only when you have nothing to lose. With respects to Janis Joplin.
very insightful
Wow...One of the most eloquent "go pound sand" remarks I have read and very informative from a global perspective.
China has a well thought out long term plan and will not bend over for speculators. It will be using inflation (I read this as internal development/ infrastructure projects. There is also a huge opportunity in environmental sciences to help them here. i.e pollution controls) to keep pace with US money printing and keeping a floor on the dollar.
To the US, China says get your house in order, they already know that the Japan method doesn't work and are not going to help you.
To investors, short term China will take your "hot money" to help create inflation, then we will inflate away your returns to stabilize our economy.
China has stated that G7 is now irrelevant, G20 is where decisions will be made. The world stage is changing faster than you think and you need to look elsewhere than New York or London.
That being said, I believe that their is room in their calculations for a small revaluation of 5-10%. There would be a risk to their economy that could be hedged against with say a 600-800 tonne purchase of non tungsten gold.
So Spanish Inquisition, the leadership of China is all-knowing, all-seeing, faultless, and without peer or error.
Sounds like something printed in the little red book or something the Vatican would say.
Yes - and when their serfs, I mean subjects, I mean citizens are "ready" - the leadership might deign to let them have SOME OF the fruits of their labor.
If you live in the US, you are a serf and don't know it yet. With derivitives, the government has you on the hook for well over a million dollars (and those are old numbers). You get to pay for the fruits of the US governments labor, which is to enrich their friends.
http://zerohedge.blogspot.com/2009/04/observations-on-us-debt.html
Much is being made of the dollar carry trade these days. Where can one find an approximation of the number of dollars being borrowed as part of this trade? Is there a better resource than the Fed Flow of Funds report at http://federalreserve.gov/releases/z1/Current/ ? If this is the key report, and the dollar carry trade really went nuts in the 3rd quarter (which would seem to be the case given the near-perfect inverse correlation between DXY and domestic stocks starting in June) then we should see increases in a few numbers in that report. Specifically, domestic financial sector borrowings and foreign borrowings should spike. The next release is 12/10/09. Bated breath, gents.
Try as a starting point:
http://www.bis.org/statistics/bankstats.htm
There is a users guide on this page. Table 2a is omnibus...
Parsing out any carry trade is unclear. Where does the line get unblurred between carry trade and reserve currency positions?
Where does the line get unblurred between carry trade and reserve currency positions?
I am wondering the same thing. Thanks for the link. It might help with parsing out USD carry to review past reports at http://www.bis.org/publ/qtrpdf/r_qt0909.htm to see what the numbers looked like for yen borrowings when BOJ dropped rates to zero and the yen carry went into full force. When I get a minute, I'll see if I can find anything useful.
Even though I think that things are looking very, very Japanified in the US, the existence of a robust dollar carry trade is uncertain. Non-local currency debt is dollar denominated by creditor preference as much as debtors.
The only clear carry-type situations are in dollar-denominated developed country debt. There are some examples of it, but no huge volumes yet.
Can someone explain, in simple terms that a dope like me can understand, what benefit to China accrues if they do decide to "float" their currency?
I mean, were I them I'd look at the basket-cases that are all the other "float" currencies around the world and pretty much decide the last thing I'd want to do is jump into that cesspool. So, what am I missing? That Barack is going to say "pretty please" this time?
There's no economic gain to them to appreciate the currency. but this isn't economics, it's politics, specifically foreign policy, and the US Adminsitration may have enough power to make their lives difficult with protectionist policies, turning up the human rights rhetoric, etc. China has to decide how much of the US jawboning on this issue is bluster, and how much of it should be taken seriously. Whatever the final outcome, China still plans its economy as well as it's foreign policy, and monetary policy is a political tool as much an economic tool. They're not willing to sacrific a long-term advantage (if there is one) for a short-term economic gain. Or so it seems to me.
Thanks Fischer - that makes sense.
Wargaming out the "protectionist" game certainly goes down some pretty scary alleyways (for everyone involved), no? Rising prices and product scarcity in the US, coupled with nobody for China to whom to sell their crap. Yeah, that will end well.
Another political problem not mentioned here: As the RMB goes down it's also going down against all of the other developing world suppliers such as Africa, poorer parts of SEAsia and SAmerica. When those economies get tons of cheap Chinese goods dumped on their markets the clamour for protectionism and political pressure on China will be deafening.
There are also economic benefits to China in allowing the RMB to appreciate - they can afford goods easier from overseas, things which are not easily supplied in China. Resources become cheaper to purchase. And most importantly for the long run it enriches the population of Chinese people, the majority of which remain desperately poor.
Unfortunately China has no intention whatsoever to allow its currency to rise vis the USD. If it did, a large chunk of the SOEs would go bankrupt, the export economy would be smashed and the short term changes would be hard. However long-term the benefits would be massive, no reliance on outside demand - no need to run a trade surplus, potenitally can mount a challenge for reserve currency status, massive enrichment of the Chinese people, escape of the Japanese-export-liquidity trap.
At the moment China is behaving like Nigeria, rather than a middle income country with the worlds third largest economy that it actually is.
Japan allowed its currency to appreciate after Plaza in 1985, then had a humoungous ral estate and assets bubble from which it never recovered. After japan, Vampire Squids, paperback experts MS, rest of Wall Street and Uncle Sugar went on to screw SE Asia which had fully floating currencies, and they had the Asian Financial crisis.
ZH and much of the american populace, while crying out against Wall Street and its puppet US/UK governments from their crime against the american middle class, are however all for the same banksters repeating it on other countries in Asia Latin America and Africa. Is it because we need company for our wretched and miserable state today? Or because whenever Wall Street and the US government feel threatened by internal anger and revolt, it would resort to the oldest political trick of diversion - find a way to induce the population to channel their anger to external enemies?
So the MSM fed the american public such rubbish as: "the japanese were evil mercantilists who protected their industries and dithered and failed to print money fast enough to get out of their deflation", "Iraq had massive amounts of weapons of mass destruction and Al Qaeda is hiding there", "corruption and nepotism in SE Asia was responsible for the Asian financial crisis", "American banks are too big to fail and so taxpayers should bail them out, and allow their gezillion dollar bonuses to retain the best brains". The next two of course are: "Iran has nuclear weapons, lets take it down and install a new Shah", "China threatens our jobs and they created the mess on our financial system because they saved too much".
Americans have been truly been enslaved mentally when even an enlightened blog such as ZH succumb to more diversion from the real issues.
What about the point at which China's economic hand is forced? What's going to happen if (when) the market for Chinese goods dries up with the purchasing power of the USD? Sure the Chinese could follow the dollar all the way down to financial ruin by trying to save their export market but they gotta be smarter than that. One of the reasons there's such a small domestic market for Chinese goods in China is because the majority can't afford them. In the event that China can't find another suitable outlet for its goods I'm thinking it's more likely that eventually China reaches the "oh shit" point and removes the peg which would allow more Chinese to actually afford the things they make there. Taken with a gargantuan production capacity surpluses left over from the good ol' days of American consumerism and a jump in value of the currency you'd get a significant drop in prices and suddenly the Chinese consumer has a much stronger incentive to buy. Good luck making up completely for the shortfall left over from the Americans but sooner or later they might not have a choice.
Sure, capital goods are not perfectly convertible from one use to the other but with next to no intellectual property law and redonkulous amounts of available labour how hard can it be to retool factories that are already producing capital/consumer goods for Americans to produce capital/consumer goods for Chinese? Hell the CCP would probably even subsidize it, put some more meat on the GDP's bones.
What am I missing here?
Tyler D: Yet as the Telegraph pointed out today, there is absolutely no risk (so far) of any accelerating renminbi appreciation becoming the policy course for China.
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There absolutely is some risk the Chinese will let the renmimbi appreciate. If there is a middle class backlash against free trade that causes a trade war, the Chinese could easily decide to let the renminbi appreciate. If that happens, they have to switch to growing through internal consumptions and they could easily move money from dollars to other things. In that case, they could also dump dollars as a form of economic warfare.
Forget the other EM currencies. Far more than any other EM fiatscos, the renminbi's relative strength is determined only in relation to the dollar and in proportion to the past, present and future successes (or failures) of its export-centric economy in terms of shipments to the world's biggest market for Chinese goods, the US. For now, China and US are merged into Chimerica. Allowing its exports to become more expensive vis a vis the reserve currency of the world would be sheer madness from their perspective. China and US are on the same elevator, going up and down, mostly down right now. Just as US export strengths have atrophied, for reason of performing our roles of borrowing and consuming in the Chimerica symbiosis, so too Chinese domestic demand has remained stunted and dysfunctional, so as to foster producing and selling, and the economic benefits that flow therefrom. To permit and encourage its citizens to consume mightily, enough to create a thriving internal demand sufficient to counter the crash of US consumer demand is not only counter-cultural to a significant degree, but would foster an unprecedented degree of political freedom, and that to the Chinese totalarians is a bad risk as compared to mere economic dislocation and privation - in fact, better the peasants not do so well, than to do too well, is the economic calculus employed in Beijing by those who would retain power. I think the Chinese stand pat, and hold the line for now - peg to the dollar stays. They may threaten otherwise to see if the US can be shaken into fiscal responsibility, but that would be remarkable if it occurred. If we are headed down the rat hole towards an uncertain end, the Chinese are going with us for now.