About a year ago we warned that in a world devoid of bond vigilantes, long emasculated by the Fed's relentless attempt to bring inflation back or go bust trying, the only forces left willing to stand up to Bernanke are the Brent Vigilantes TM [14], who succeed in crushing every recent reflation attempt whenever Brent reaches $130 or above (and US gas at the pump rises above $3.80) yet which are rather leery and susceptible to the CME's surprise margin-hike counterattacks, and of course China, the same China which every other lemming said last summer would scramble to join the global reflation except for us, as we made it very clear that all hopes of an RRR or interest rate cut are unfounded. Because all the inflation that China (did not) need would be exported to it courtesy of Bernanke and Company's deliberate and now open-ended printing. For a long time China kept its mouth shut, however, when Japan also joined in this pathological central bank pumping, China may have just had enough. As the WSJ reports,"The president of China's giant sovereign-wealth fund warned Japan against using its neighbors as a "garbage bin" by deliberately devaluing the yen, joining growing international griping about a potential currency war."
Perhaps more important than what is said, is what was unsaid, which is that as the animosity between China and Japan accelerates, this time shifting from purely territorial and political demands, Japan will continue to have no access to the China import market which accounts for over 20% of all Japanese exports. This also means that while the country imports commodity inflation and as the bulk of the Japanese citizens suffer under the weight of a collapsing economy, where the soaring Nikkei only benefits 1%, the conflict with China will get worse by the month: "In unusually strong language, Gao Xiqing, president of China Investment Corp., echoed alarms from Latin America to Europe that the new Japanese government is aiming to boost its exports at other countries' expense via a weaker currency—allegations often leveled at China itself by the U.S. and others."
More from the WSJ on the seemingly endless conflict [15]between China and Japan:
Mr. Gao also expressed skepticism about the prospects of the world economy despite the recent surge in global stock markets, citing persistent structural problems and uncertainties over financial regulations. "Overall, we hold a cautious view of the [global] economy," he said.
He noted that regulators in countries including the U.K. have toughened their oversight of financial institutions and limited bankers' bonuses. "People are not sure about the long-term repercussions of those measures," Mr. Gao said.
With about $500 billion in assets under management, CIC is the world's fifth-largest sovereign fund. It was founded by the Chinese government in 2007 to seek better returns for China's mammoth currency reserves, which had typically been parked in low-yielding securities such as U.S. Treasurys. Chinese leaders have singled out better management of China's $3.3 trillion in foreign-exchange reserves, the world's largest, as a priority for the financial sector.
In the past few years, CIC has significantly reduced its holdings of public securities and accelerated a push into longer-term investments as the fund seeks to shield itself from short-term market swings. The fund's target is to have 51% of its portfolio in alternative assets such as private equity, real estate and infrastructure and the rest in public securities, Mr. Gao said.
However before Japan gets worried that China is only targeting its monetary policies, the truth is that China really is against every other G-7 nation doing just this. And if CIC's Gao was the bad cop focused on Japan, it was China's incoming premier who just did his worse cop impression. Via Bloomberg [16]:
China doesn’t approve of excessively loose monetary policies by other nations, according to a senior government adviser who wrote a book with Li Keqiang, the country’s incoming premier.
“We have already taken a position on this before and China doesn’t approve of some countries’ overly accommodative monetary policy,” Li Yining, 82, a Peking University professor and delegate to China’s top advisory body, said at a briefing in Beijing today when asked about Japan’s recent easing. “This is an act of transferring the crisis to others.”
The remarks may reflect official displeasure over the yen’s depreciation amid Japanese Prime Minister Shinzo Abe’s campaign for more monetary easing to fight deflation. China is “fully prepared” for a currency war should one happen, central bank Deputy Governor Yi Gang said March 1, according to the official Xinhua News Agency.
China can take steps to counter the effects of other nations’ monetary policies such as expediting industrial upgrading and boosting indigenous innovation, Li said, without mentioning Japan in his response. “Given the size of our foreign exchange reserves, we will continue to go out and invest overseas and import more from abroad,” Li said.
Yi said that in terms of monetary policies and other mechanisms, China “will take into full account the quantitative easing policies implemented by central banks of foreign countries,” Xinhua reported March 2.
Speaking in Beijing yesterday, Yi reiterated that he hopes monetary authorities worldwide will adhere to the Group of 20 consensus and avoid currency wars, which “will have no winners.” Finance ministers and central bankers from G-20 nations meeting in Moscow last month sharpened their stance against governments trying to influence exchange rates as they sought to tame speculation of tit-for-tat competitive devaluations.
Leaving aside the hypocrisy that if indeed China is so concerned about soaring inflation, that it could simply hike its currency, oh wait, it can't because it is pegged to the most serial offender of all - the USD, what is becoming clear is that as Chinese inflation is set to take off any minute (the real inflation, not the reported one), the days of global "open-ended easing" are now numbered, because while the distraction of "growth" in the US and Europe may have fooled some people, some of the time, absent China - the world's most important marginal economy - going all in in credit creation, and thus "growth", global GDP will not rise. And the longer Bernanke and Co., create hot money which finds its way almost instantly into Chinese real estate and keep Chinese property prices soaring, the shorter the time until China finally says "no more" and forces the G-7 to pull the plug on the global reflation which at this rate will lead to the same social instability that rocked China in early 2011.
As for China entering the currency wars - perhaps in a world hypnotized by the endless nightly algo-driven risk levitation, in which nothing can ever go wrong again, this may be just the cathartic event so very needed to get some true price discovery in what has become a global experiment in reflexive asset-price fixing, which is then expected to feedback into the underlying economy: a process which has failed for four years in a row, and is why the central banks are getting so desperate, they have collectively now gone all in.