What Henny Sender says about China

by on September 8, 2015 at 2:03 am in Economics | Permalink

“It is neither the sell-off in Chinese stocks nor weakness in the currency that matters most,” notes George Saravelos, a currency strategist in London with Deutsche Bank. “It is what is happening to China’s FX reserves and what this means for global liquidity. The People’s Bank of China’s actions are equivalent to an unwind of QE or, in other words, Quantitative Tightening.”

The FT story is here.  Another way to put it is that a weaker Chinese currency will mean stronger currencies elsewhere and thus net deflationary pressure.

1 E. Harding September 8, 2015 at 2:28 am

“Another way to put it is that a weaker Chinese currency will mean stronger currencies elsewhere and thus net deflationary pressure.”

-Whaaa? That’s BS. Unless the Chinese are all gonna sell their yuans for dollars, a weaker Chinese currency will mean net inflationary pressure, as the yuan is the currency unit of the world’s largest economy. Also, Chinese devaluation may lead to some more competitive devaluation in the rest of Asia, causing inflationary pressures abroad. Also, as the U.S. has a trade deficit with China, Chinese devaluation will cause more dollars to be kept here due to lower dollar prices for Chinese goods, leading to inflationary pressures in the world’s second-largest economy. It’s not like there’s an explosion of debt-creation going on in the U.S. with looking to borrow money from China- interest rates are too close to the ZLB!

Yes, QT is a very bad and stupid thing for China to do.

2 E. Harding September 8, 2015 at 2:34 am

Seriously, from where could Tyler get such a stupid idea? So a strongly appreciating yuan will lead to net inflationary pressure? That’s laughable!

3 Ray Lopez September 8, 2015 at 11:08 am

@E. Harding – you’re not thinking it through my man…think like a chess player. Convince yourself that TC is right…then work backwards, like a retrograde chess puzzle. You’re a smart fella and can figure it out, no?

4 gab September 8, 2015 at 12:25 pm

I don’t believe China has the world’s largest economy if we’re measuring GDP.

5 E. Harding September 8, 2015 at 5:21 pm

Yes it does.

6 gab September 8, 2015 at 6:23 pm

I’m curious how you’ve found that out. I’m looking at World GDP 2014 and the chart I’m looking at shows the US well ahead of Chinese GDP for 2014. By over 50%.

Is that incorrect or am I not looking at the correct source?

7 E. Harding September 8, 2015 at 7:08 pm
8 TallDave September 9, 2015 at 2:38 pm

Your browser history is mildly interesting (I also enjoy SMBC) but doesn’t really support your claim. This might be better:

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

9 TallDave September 9, 2015 at 2:35 pm

a weaker Chinese currency will mean net inflationary pressure, as the yuan is the currency unit of the world’s largest economy.

Even if China was 90% of the global economy, a weaker Chinese currency would still be deflationary for the other 10%, even if on average it was inflationary.

10 Cloud September 8, 2015 at 3:55 am

Actually, her name is Henny Sender (I myself always typo Henry all the time also~ )

11 Axa September 8, 2015 at 5:36 am

Alternative source for the article: http://www.cnbc.com/2015/09/06/as-chinas-economy-slows-declining-foreign-reserves-are-a-concern.html

Sounds reasonable, the mountain of foreign reserves is not really a “mountain” if it’s supported by currency controls.

12 baconbacon September 8, 2015 at 8:39 am

This doesn’t make sense to me-

““It is what is happening to China’s FX reserves and what this means for global liquidity. The People’s Bank of China’s actions are equivalent to an unwind of QE or, in other words, Quantitative Tightening.” – See more at: http://marginalrevolution.com/marginalrevolution/2015/09/what-henry-sender-says-about-china.html#comments

If China sells off its FX reserves we get tightening in terms of Yuan and loosening in terms of everything they sell.

13 derek September 8, 2015 at 9:29 am

Yes, that is the situation now. But if they stop the buying up of Yuan then there is $90 billion or so less per month of liquidity. QE by the Fed was somewhere less than $50 billion per month.

Their whole policy implementation over the last few months looks suspiciously like a scheme to allow the connected to cash out before the whole thing falls apart.

14 baconbacon September 8, 2015 at 11:36 am

A reduction in liquidity (or in this case a reduction in the rate of increases is liquidity) only has a substantial effect if there isn’t “enough”. Just like increasing the minimum wage shouldn’t have a large effect if it is still below the “reserve wage”. There is little evidence that we are close to a liquidity crunch (famous last words, but the coming crunch in China is likely to be a solvency crunch) and much evidence of excess global liquidity (trillions in excess reserves in the US).

15 Scott Sumner September 8, 2015 at 10:34 am

I don’t follow how the final sentence in the post is “another way of putting it.” The quoted passage talks of monetary tightening. It’ true that one can have steps taken to tighten monetary policy against a backdrop of yuan depreciation, but that tightening tends to limit the depreciation. The tightening is deflationary, but not because a falling yuan is deflationary, rather because it prevents the yuan from falling as much as it otherwise would. Or am I missing something here?

16 Ray Lopez September 8, 2015 at 11:11 am

I doubt you’re missing something Scott, as you have many eyes. I’ll let somebody more enlightened than me comment…

17 Tom Warner September 8, 2015 at 4:20 pm

The net deflationary pressure he means is everywhere else but China, because if China devalues its goods become cheaper for others. But I hope Tyler isn’t becoming afflicted with that special form of madness in which falling import prices are deemed to be problematic for the importer.

18 Tom Warner September 8, 2015 at 2:16 pm

I wrote on this yesterday: given the 1.6% drop in the DXY index during August, the actual spend of FX reserves was closer to $110b. That’s a very big number, around an eighth of monthly GDP, not so relatively far behind the pace at which Russia was spending reserves at the peak in December 2014.

Re: “quantitative tightening”, keep in mind it’s being balanced by liquidity injections and RRR cuts.

http://www.globalizedblog.com/2015/09/chinas-pace-of-spending-reserves-is.html

19 radical_centrist September 8, 2015 at 10:07 pm

oh, the horrors—deflation….the very idea that the american working class might get the opportunity to pay less for something…this is an OUTRAGE!

20 Axa September 9, 2015 at 6:58 am

Haha, if all prices go down…..why labor price would follow a different trend?

21 TallDave September 9, 2015 at 2:30 pm

The Great Depression wasn’t so bad if you had a job.

22 ThomasH September 8, 2015 at 11:16 pm

“Another way to put it is that a weaker Chinese currency will mean stronger currencies elsewhere and thus net deflationary pressure.”

Does this not depend on how monetary authorities react? Does this create any new challenges to a monetary authority perusing PL or NGDPL targeting?

23 TallDave September 9, 2015 at 2:29 pm

Watch the reserves.

China may do the smart thing and let the yuan float, and accept whatever capital flight ensues gracefully. That could start to put them on a path out of middle income,

OTOH, they’ll probably opt for even more intervention.

24 Miko September 11, 2015 at 2:07 am

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25 V September 16, 2015 at 10:39 am

China has to devalue because it has become too expensive vs other countries and the government needs to keep printing money to pay for everything because the tax system is unable to support all the massive projects necessary to keep the economy going.

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