A very good sentence

by on September 6, 2015 at 8:23 pm in Economics | Permalink

First, central banks don’t spend $150 billion every three weeks, or about $200 billion a month, to support a currency that is close to appropriately valued.

That is from Christopher Balding.  Here is more:

Second, if you look at a list of major currencies and their move against the dollar over the past year, China is the extreme outlier in that the RMB has only dropped 2% compared to most currencies which have lost 10-30%.  If China is even on the low end of a fall relative to the US dollar, it would need to drop at least 10% and a middle of the pack fall would require it to drop about 20%.

Ladies and gentlemen, lay your bets…

1 derek September 6, 2015 at 8:45 pm

$200 billion buys a hell of alot of property in Vancouver. Yes, it will stop, but not as long as there are nest eggs of powerful people at risk.

2 Jan September 6, 2015 at 9:44 pm

Why do they want to stash their money in a more communist place than China?

3 derek September 6, 2015 at 10:45 pm

They don’t shoot short sellers in Vancouver.

4 Chris September 8, 2015 at 1:14 am

^ +1

5 Nathan W September 7, 2015 at 12:00 am

There`s nothing Communist about Canada. For that matter, China has hardly qualified as communist for quite some time either.

6 jb September 7, 2015 at 12:21 pm

Canada==socialist healthcare
canada== speech police.
Nothing communist about it? really?

7 Nathan W September 8, 2015 at 12:18 am

There is public health care. OK.

State ownership in the petroleum industry (25% of Petro Canada) ended in the 1990s. Electricity was been broadly deregulated. The government is broadly absent in almost every area of business.

Enjoy your free market health care. The USA spends more on health care than any country on the planet, regardless of the measure used, and achieve worse average results than almost every other wealthy country on almost every measure. Public health care makes sense, and aside from that Canada is very much not “communist”.

Speech police? You can say what you want as long as you’re not endorsing violence. Of course the ideological puritans on both left and right like to tell people how to speak, but thinking people have always told these types to shove it up their a**. Or what, are you feeling like your “right to discriminate” and “right to be hateful” is being shouted out by social changes?

8 Chris September 8, 2015 at 1:16 am

“Of course the ideological puritans on both left and right like to tell people how to speak, but thinking people have always told these types to shove it up their a**.” Hat tip

9 jorgensen September 7, 2015 at 12:34 pm

Right. The Chinese are not repatriating the proceeds. It seems more likely that we are seeing massive capital flight from China with the government selling treasuries, the dollar proceeds going to wealthy Chinese individuals who in turn are personally buying western assets (including treasuries).

10 Dan in philly September 6, 2015 at 8:48 pm

I’m pretty scared. Who knows what the world will be like if the RMB actually devalues a lot.

11 E. Harding September 6, 2015 at 8:56 pm

Probably better, because China would experience some monetary stimulus to help it with its debt problem and weak NGDP.

12 Handle September 6, 2015 at 9:08 pm

The flipside of that coin is that it’s awfully hard to rebalance towards more consumption when you just kicked your savers in the teeth with regards to the purchasing power of their deposits.

13 E. Harding September 6, 2015 at 9:38 pm

Wouldn’t that discourage investment more than consumption?

14 Nathan W September 7, 2015 at 5:27 am

Good investors don’t cry over spilt milk and treat every day as a new “now” from which to assess their position.

Consumers who lose 20% of their milk have 20% less money to spend.

That having been said, most goods sold in China are made in China, so a change in exchange rates doesn’t mean very much.

It would make industrial investment more expensive if they are importing capital goods.

15 Harun September 7, 2015 at 12:04 am

Let me guess, you are not involved in manufacturing.

Its very much not fun when prices go down lower and lower as Chinese competitors offer up crazy below cost pricing.

Now they get an additional discount. Joy.

16 Harun September 7, 2015 at 12:06 am

I will also note I have around $12,000 in RMB account that I was supposed to get out in April, but had to cancel a trip….looks like I will lose some on that, too. Well, lose some of the gains. IIRC, I bought at around 7 or 8.

17 Peldrigal September 7, 2015 at 8:19 am

It could have been worse: they could have been Euros

18 E. Harding September 7, 2015 at 12:13 am

In the long run (about a year) that won’t matter, as the Chinese competitors will raise prices back up again. Look at Belarus. It has perhaps the fastest-depreciating currency ever, but that still doesn’t mean the rapid depreciation serves as anything but a little oil to grease the Belorussian export economy. It certainly doesn’t power it.

19 Jack Hagan September 7, 2015 at 12:13 pm

The bloom is off that rose. Their items are crap. After years of buying their garbage theft is actually down because the thieves cannot sell stolen Chinese goods. Lol.

20 E. Harding September 6, 2015 at 8:54 pm

What was the trend of Yuan appreciation from 1980 to today?

21 derek September 6, 2015 at 9:37 pm

Trend? What Balding is taking about is a 20% adjustment within a very short period of time.

What are the short term effects? A 20% increase in the process of imported commodities. A very fast unwinding of yuan-usd positions. In the longer term the lower value of the currency gives an advantage as an exporter, but in the short term anyone holding Chinese currency is 20% poorer. Not a good situation where the banks are fragile and already getting liquidity injections, exposed to enormous bad and underperforming debt. And who will they sell to?

It comes down to politics. There is a rough ride ahead no matter what. Probably a multi year downturn that seems to characterize financial recessions. Done well, a bunch of junk could be mucked out of the economy, a rationalization oflots of legal and regulatory and government systems, the state enterprises shrunk, and a cleanup in the private sector. Shooting short sellers doesn’t seem to indicate the maturity necessary to make something good out of the mess, and is really a bad marketing campaign to get people to invest in your economy.

Get out before losing your shirt leads to enough trouble. Get out before losing your head leads to political turmoil and a stampede to the exits.

22 E. Harding September 6, 2015 at 9:39 pm

I’m not seeing any evidence for it. The other China (Taiwan) only depreciated 8% against the $.

23 Harun September 7, 2015 at 12:07 am

Taiwan isn’t having a financial crisis, is it?

But weaker RMB will mean fewer PRC tourists.

24 E. Harding September 7, 2015 at 12:15 am

Ah, but Taiwan did experience a massive devaluation against the in 1997. I don’t think it suffered a recession that year.

25 Daniel in VA September 6, 2015 at 9:47 pm

“In the short term anyone holding Chinese currency is 20% poorer. Not a good situation where the banks are fragile and already getting liquidity injections”

Again, this doesn’t make sense to me. It’s not like the bank’s liabilities get 20% bigger unless they were borrowing in foreign currency. It seems like it could even help them out.

26 derek September 6, 2015 at 11:02 pm

Cash flow. There are lots of dodgy loans, that is what overcapacity and liquidity injections mean. The bank has cash flow requirements as well, and a loan becomes a default after how many days? 90? What does that do to a bank?

In the medium to long term a devalued currency is probably a good thing for China, and can reinvigorate their export manufacturing economy that has driven their growth. So why are these Chinese authorities spending inordinate amounts supporting the currency? Either they have some strange notion of omnipotence as communists, or they have an indication that the bottom could fall out of they don’t maintain an illusion of stability. They are backing margin loans to keep the stock market inflated as well. They also know that their economy is large enough that a downturn will have cascading effects on the world economy, who happen to be the consumers that they need to fuel their recovery.

27 The Original D September 7, 2015 at 9:30 pm

Be fearful when others are greedy and greedy when others are fearful.

28 duxie September 6, 2015 at 9:09 pm

Select Max for the time scale https://finance.yahoo.com/echarts?s=CNYUSD%3DX#{%22range%22:%22max%22,%22allowChartStacking%22:true}

29 B Cole September 6, 2015 at 11:47 pm

Yes, China, by pegging to the US dollar, has embraced the passively tight monetary policy of the US Federal Reserve.

Gadzooks, let the yuan depreciate, help it on its way. The People’s Bank of China needs to fight tooth-and-nail against becoming Westernized. Let’s see, 30 years of 10% annually compounded growth, and you now want to run a tight central bank like the Federal Reserve? Why? Some theories? What about your great track record?

When the US stopped malinvesting after WWII, our economy boomed. Boomed some more. Then boomed right through the 1960s. Switching from investment to consumption is a positive, not a negative.

The People’s Bank of China needs to think growth, growth, growth, growth. Only a couple hundred million people in China want to urbanize and get jobs.

Would not hurt the Fed either to get over its hysterical prissiness about inflation. The years 1982 through 2007, a 25-year period, saw growth just north of 3%, and inflation just south. So now a ceiling of 2% is a good idea? Why?

A theory somewhere? What about the track record?

30 Nathan W September 7, 2015 at 12:04 am

Arguably, it was all that investment that enabled the rapid growth in later years.

Same goes for China. It didn`t grow very fast under Mao, but the presence of transportation and electricity infrastructure no doubt was a big factor in enabling market growth once the rules changed to allow market activities.

31 Harun September 7, 2015 at 12:09 am

Actually, a lot of the highways were built well after Mao.

Shenzhen was just a fishing village.

32 Nathan W September 7, 2015 at 5:31 am

True, but there was existing transportation infrastructure, albeit much less than today, at the time that the household responsibility system came into place (roughly around 1984 and the few years after) and the time that communes were encouraged to compete in specialized areas of industrial production (1980s). Absent the existing transportation and electricity infrastructure, industrial explosion and trade would have been impossible.

The argument is that communist development didn’t do much for GDP, but it created basic infrastructure which was critical in making possible the rapid growth which followed opening up.

33 E. Harding September 7, 2015 at 12:18 am

Little infrastructure was built under Mao. More important was the establishment of firm government control across the country, as well as the end of rural banditry.

34 Brian Donohue September 7, 2015 at 12:15 am

10% fall vs. dollar over next six months. Not a huge deal in the context of the rise vs. the dollar over the past several years.

35 Tom Warner September 7, 2015 at 1:47 am

Obviously it was a mistake to track the dollar up against most of the rest of the world’s currencies. But having done that they find themselves in a trap, unable to depreciate without causing a panic. Chinese savers are accustomed to a currency that only appreciates, and at least many of them to valuing their net worth in dollar terms.

36 Nathan W September 7, 2015 at 5:39 am

I don’t think very many Chinese savers pay very much attention to what their money is worth in USD, unless they are so fantastically rich as to be eyeing real estate investments overseas.

However, some foreign speculators bought lots of RMB because it was assumed that the currency was undervalued (a favourite explanation for the US trade deficit with China) and could only go up.

Broadly, I don’t think many Chinese economic actors are very concerned at all about the exchange value of the RMB, unless they are in the export business or buying industrial equipment. (Those who purchase luxury goods might not mind either, because they can brag about the even more exorbitant sums they spend on their badges of wealth.)

37 Tom Warner September 7, 2015 at 6:12 pm

Well, I don’t claim to have polling data in front of me, but when a 3% depreciation against the dollar sets off a lot of local currency selling, that’s a sign that savers are thinking about the returns on their local currency savings in dollar terms.

Reserves dropped by $94b in August, while the dollar weakened by 1.6%. So China probably spent at least $110b of reserves in August. That’s a pace of about an eighth of GDP. By comparison Russia was spending reserves at a pace of about a sixth of its pre-devaluation GDP at peak, and ended up devaluing >50%.

Of course China’s not in nearly as bad a situation. But anyway my bet is on a >10% yuan devaluation.


38 Ricardo September 8, 2015 at 6:22 am

All it shows is that most people expect the Yuan to be devalued again and so those with the ability are selling their Yuan and, thus, hastening the inevitable. Elites who vacation, shop and gamble in the U.S., Hong Kong or Macau (the latter two peg their currencies to the USD) will be hurting but it’s not clear to what extent everyone else will be hurt on net. Chinese will pay more for imports but a depreciation will make exports more competitive and, if it fends off a severe recession, will provide savers with better domestic investment opportunities than they would have otherwise.

39 rayward September 7, 2015 at 8:03 am

Doesn’t the devaluation say as much, or more, about the world economy than China’s (i.e., didn’t the emphasis on investment over consumption expose China to potential weaknesses in the world economy)? Is China more dependent on the world economy than the world economy is dependent on China? Will China turn inward in response to the damage done to China’s economy as a result of weaknesses in the world economy? Is malinvestment worse than low or no investment? Did the high level of inequality in China contribute to the financial crisis in China? Did the high level of inequality in the U.S. contribute to the financial crisis in 2007-09? Will the high level of inequality in the U.S. today contribute to another financial crisis? Does the high level of inequality in the U.S. contribute to the low level of investment in infrastructure and productive capital in the U.S.? With the high level of inequality in China, would China emphasize investment, or malinvestment, if markets rather than the government were a greater factor in determining the level of investment? Is the equilibrium level of investment low when inequality is high (or stated another way, is the equilibrium rate of return on capital low when inequality is high)? Is China the Hedgehog and the U.S. the Fox?

40 ThomasH September 7, 2015 at 10:40 am

The question is, why would the Chinese government wish to prevent a fall in the exchange rate? Capital outflow is probably a better use of Chinese savings than more internal investment at this point in time, especially since most Chinese investors have little exposure to foreign non-Chinese risk and are now well diversified..

41 Chris September 8, 2015 at 1:36 am

I think it may be a signal to growing political/economic instability.

42 Jack Hagan September 7, 2015 at 12:18 pm

End game in sight now. “Liar loan” vote buying scam collapse was turned into a world wide gigantic depression because of the massive abuse of fiat money. By EVERYONE. The printing press’s job is over, now it’s time for the REAL correction. Hold on tight, this is going to hurt.

43 Ashby September 7, 2015 at 6:09 pm

If a great many contracts are denominated in dollars, a rising dollar may require extensive renegotiation of existing contracts. In the oil and gas biz this is occurring. I’m told a bigger problem are all the corrupt local officials.

If many investors are “all in” with leverage, a modest fall in the market may wipe them out. If short selling is illegal, no one makes money on the way down and recovery may be more difficult.

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