Round Of Applause For China – Exiting The Currency War They Had Started
Humour me as I try and piece this all together.
China started this currency war game in 1995 when they pegged their currency to the USD. That lasted for 10 years. During that time, they exported deflation to the world on their cheap goods and became a manufacturing powerhouse. Foreign capital poured in to exploit the low cost production which became a competitive necessity for western companies seeking to reduce costs which worked out well and for China to accumulate massive surpluses as foreign deficits grew.
Not a bad deal which was the Japanese model since they rebuilt themselves from the great war, till they grew too rich from it. China, too, grew rich and richer as their economy took off, employment was created, assets inflated and wealth was created.
Exported deflation, cheap Chinese goods, and so the great bond boom continued in the US to run a 30 year course.
Now we have the 3 global powers – US, EU and Japan (UK and Australia too), all in a hurry to weaken their currencies, to keep rates low so as to create employment and growth.
The difference this time round is that they are sitting on a pile of debt and not foreign capital to do that. We can safely ignore the foreign capital components as a significantly small share of the pie. And one of the secondary reasons for encouraging asset reflation/inflation/bubble, is that their debts look smaller at the same time.
Easy example of Japan turning around in a year. Really ? Not quite when you realise that their profits come mainly from the weaker currency that they report their earnings in. Toyota may benefit but Nissan did not, because you cannot force anyone to buy a Nissan just because it is cheap.
China sees this and decides they have had enough. It is time to exit and having the stronger currency is the upper hand these days, making it cheaper for them to buy out their foreign rivals’ assets, gold and bitcoins.
Here is an interesting view on how the Chinese distrust of their own currency has led to bitcoin premiums in China. Yet, gold and bitcoins will be even cheaper with a strong CNY.
Is there a similarity here ? Between Japan and America in the 80’s ? No time to speculate on that.
Well, they are running for the exit now, expanding the CNY trading band 2 days ago to allow for more strength and comments out of the vice president of the PBoC yesterday.
“The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.” http://www.businessweek.com/news/2013-11-20/pboc-says-no-longer-in-china-s-favor-to-boost-record-reserves
It is alright to be the only kid on the block but when there is a crowd it is better to run for safety especially when you are a single government that is there to stay. It is easier for the rest because you can just serve out your term and pass the buck to the next chap who would be president or the Fed chair. And the final buck just usually ends in tears, mad scrambles for the exit, loss of confidence and hyperinflation comes last.
That sounds improbably impossible for the 3 super powers because there would be no where to run to between them. But we do note that the banks are starting to differentiate between safe EMs and others.
And that is the part my tiny brain cannot get around.