The following post is by Dealbreaker reader and commenter Infinite Guest.
To a nation of savers, to a growing economy, and to the general well-being of central planners, inflation poses a bigger threat than unemployment. Ahead of China’s 12th Five Year Plan, due out soon, Chinese foreign direct investment is booming; the pace of bilateral currency swap agreements quickens; China has reduced the duration of her foreign holdings; a regional currency fund using yen, yuan and won in place of dollars has been established; and there is finally a nascent foreign market for Chinese debt. Simultaneously, productivity gains are slowing, resulting in wage stagnation and growing income disparity; energy consumption is rising, pushing Chinese toward becoming a net importer; and real estate is overvalued. All of which suggests, unfortunately for the West, that the Chinese are serious about floating their currency. But first, they have to manage its revaluation.
Most fundamentals favor a stronger Yuan. A floating Yuan is another matter, however. Western experts are quick to point out that China is an autocratic technocracy whose leadership would not gladly surrender their prerogative to the whim of the capital markets. That argument ought to be mitigated by three manifest realities. First, unpegging the Yuan gives China more independence, not less. Second, China will intervene whenever it likes. Third, Hong Kong is literally in China’s corner.
In both Europe and America, we tend to assume that free markets exist, that free countries exist, that the two are categorically good to have and that they work best together. From those assumptions, we have convinced ourselves to assume that alignment with the dollar is also categorically good — well, not for Europe, and maybe not even good for Japan, but good for everyone else, at least. This despite repeated reminders throughout the developing world that a dollar peg is a de facto master-slave dialectic, in which the American business cycle is definitely not the slave. A stronger yuan, while it would directly affect the current account, does not necessarily have any impact on the balance of trade: net yuan outflows associated with China’s foreign investments, replace (possibly) declining exports. A truly floating yuan, likewise, would only correct that part of China’s trade surplus that is actually a monetary phenomenon. The real challenge is for China to earn a better return on its investments, denominated in yuan, than she pays on her external debt.
I doubt there is any need to elaborate on China’s freedom to intervene in foreign currency markets. They already have the reserves, the domestic banking system and the relationships in place to do so at their discretion. A floating yuan doesn’t change that. When other countries complain, as they inevitably will, it’s worth remembering that no one has any moral high ground in the arena of currency intervention.
Hong Kong, of course, is a special case. Hong Kong is always a special case. To China, Hong Kong is a safety valve, a shield, a conduit and a laboratory. While the world’s attention is fixed on the unfixing of the Yuan, the Hong Kong dollar remains within its own narrow band. A useless currency, it may yet come in handy as a tool for Beijing, if only to buffer the declining value of China’s dollar-denominated holdings. Already allied with Japan, already opportunistically playing Europe against America, and increasingly well-positioned to drive a wedge between Germany and the rest of Europe, China has nothing to fear from a floating yuan. All values being relative, even the residual volatility of a (mostly) freely-traded yuan does not pose a significant threat to China’s economic and social stability, but rather, to ours.
wtf?
very wordy, if you were pitching me I would be confused or asleep…
wait, what?
Based, on the liberal use of the comma, as punctuation, throughout this piece, I rename thee, “Infinite Comma.”
now this is some ‘serious journalism’
-infinite bro
@4 made me laugh.
At least it’s not a Kouwe piece. Did that tool actually ever write anything?
@4 – the commas work better if you read it aloud in an overdone Captain Kirk style.
What’s with the NPR piece?
@7 – I always ignore commas and all other punctuation.
- Christopher Walken
Tits or GTFO. Fail. Try again plebian.
I have no comprehension of what I just read. I feel like there were a dozen vuvuzelas blowing at me while reading that.
Two word review: “Shit sandwich.”
Unfixing of the Yuan is a Total Frat Move
take it off the front page!
@11 – I was tempted to leave the Billy Madison quote…”at no point in your incoherent rambling…” but I figured it was unnecessary. Fuckin vuvuzelas…
This is actually tolerable if you read it in cookie monster’s voice.
In Soviet Russia, this post no good you.
@11 you mean a dozen vulvas, no?
It’s really easy. Pretend Faulkner wrote it and it’s from the point of view of a Southerner with Down’s Syndrome. Makes sense then.
This is like Rodmen & Renshaw material.
- Jefferies Analyst
@1 FTW!
-Guy who notes that “FTW” is an anagram for “WTF”
I’m actually going to respond to the post in my comment, so if you don’t want to read an actual response, just skip over this. It’s not funny, I promise.
To say that inflation matters more than unemployment is historically and theoretically false. Unemployment and inflation have an inverse relationship (see Phillips Curve, Macro Econ 101). As unemployment rises, inflation declines (as measured by wage rates or CPI) and vice versa, which makes sense because the velocity of money slows when unemployment increases, assuming money supply is held constant. The two hold the same importance, as once affects the other, in the intermediate to long term. So while in the short term, inflation may be an issue at times of high unemployment, this has been a fairly narrow amount of time in the grand scheme of things (stagflation in the 70s). Unemployment ultimately represents excess capacity that can be utilized at lower costs, and it depends more on the cost of PP&E capital relative to the cost of human capital.
Moving onto the prospects of a more volatile or appreciating Yuan, I also have to disagree, at least in the near-to-intermediate term. Once again unemployment is a key factor. The United States and China have a healthy margin right now built into capacity utilization rates before inflation becomes an issue in production, across most industries. So long as unemployment remains high and there is sufficient spare capacity, the value of the Yuan won’t matter except for significantly large moves, which China will not allow in the short-to-intermediate term. That’s because, should the relative cost of producing in China increase, we can produce domestically, or in Mexico, etc at lower costs. As for volatility, that is also less of an issue, because the final “menu” price is less affected by volatile currencies. It may be more problematic for an investor, but there are ways they could hedge away that exposure.
In the long term, it may become an issue, but then again, look at what happened when the cost of production was too high in the United States. We began importing the cheap labor costs from China by moving production overseas. Should the Yuan appreciate in the long term into equilibrium, the cost of production will rise, relative to the United States. So most likely, multi-national companies will start moving operations to countries other than China, thus reducing wage pressures, and putting downward pressure on the cost of capital.
the content was unexpected, but reading the article was probably worth my time.
DB commenters are only hurting themselves by limiting “acceptable” posts to those Bess authored.
chlorophyl? more like…borophyl! right?!
@7′s comment made me laugh (I even tried to do a Capt. Kirk version…) and @19 had an excellent Faulkner reference albeit missing a note about Faulkner being generally drunk.
Anonymous HF guy. I didn’t know what he was talking about either but at least that was my own damn fault.
@22 the Philips curve has not held since the 70s
@27
yes/no; in short-run Philips curve still holds (Friedman, Phelps), and New Keynesians like to utilize similar wage/inflation relationship in DSGE models
@27 usually when people cite econ 101, it’s because that’s as far as they got.
http://nobelprize.org/nobel_prizes/economics/laureates/1976/friedman-lecture.pdf
too, long; didn’t, read
Is this Dealbreaker or ZeroHedge…I’m confused.
@31 too far man, you went too far
trolls, this was a good change in post type
“The pace of bilateral currency swap agreements quickens” – but remains extremely limited.
“China has reduced the duration of her foreign holdings” – because we’re in a low-interest rate environment and everyone and their brother expects rates to rise in the next 36 months.
“A regional currency fund using yen, yeah, and won in place of dollars has been established” – a very specious statement. A regional currency fund was established to facilitate trade within the region. Dollars would never, ever be used for such a fund, and it represents a tiny, miniscule portion of their overall holdings.
“Productivity gains are slowing, pushing Chinese [sic] toward becoming a net importer” – the rate of productivity gains are, in fact, slowing, but on the heels of DECADES of extremely high rates, and said rates remain very high, relative to the rest of the world. This rate slowing is not what’s pushing China towards being a net importer, rather the rise of the middle class and shift from a poor, agrarian to an urbanized society with discretionary income is what’s pushing China toward becoming a consumer-based, net importing economy.
“and real estate is overvalued” – show me proof. China’s raised bank reserve requirements several times to slow the rapid pace of loan growth to help cool the real estate price boom, but that in and of itself is not proof of real estate being overvalued.
“Most fundamentals favor a stronger Yuan” – is that even remotely defensible? Who’s fundamentals? What fundamentals?
And in closing, they let the Yuan float within a 50 bps band. Hooray.
Wait, so i should buy gold?
the “pulling the peg” title made me think that there was going to be a masturbation punch line somewhere in all of that mess
@34 show me proof that Chevy Chase is funny. People laugh at him when he’s in movies but that’s not proof.
@35, no – obviously shorting pork bellies is the right call here. also go long Chinese prostis
SUCK
Dealbreaker breaking in a new writer. While a bit long for DB, any focus on China is probably a worthwhile read.
@40: agree with the comment re article with focus on China, especially on a day like today when the trolls are out in force to comment on silly stories like the hottest girls in IR.
I believe this is a guest writer who usually brings interesting insight about emerging markets. Because his posts are not snarky, the trolls who feel compelled to comment ruin any attempt at an adult-level discussion.
@41/40 – we have tried adult level discussions here before…epic fail. I advise you read the article for your own edification and enjoyment then move on. any subsequent post requiring more than 5 seconds of thought will be taken to task by the peanut gallery.
now…how about those futures?
Welcome to the China Club…. Ching Chang Chow
Comma, Schmomma,
Unclefucker, Pigfucker
@42 Perhaps, but the only way this website will continue to pull in traffic and advertisers is to have some balance. A balance will also magnify Bess Levin’s posts–every comedian needs a straight man.
China, btw, should be of interest to everyone. The strikes [Honda], the rise in mental illness [killing of school children],the politics [the "gifting" of nuclear reactors to Pakistan], and so on and so forth, are intriguing. Can China control its immense population, provide economic stability to its citizens, and play a large role in international politics? For example, if as Infinite Guest suggests that the cost of production increases to a point where it will become less expensive to produce elsewhere, then how will China react with a large unemployment rate? Where will China “find” employment for those displaced? Financial Services? Currently, is China just a giant Detroit?
I am sure you can think of more important questions, but do you really think comments 1-21, 24-25. 30-31, and 35-38 do anything other than distract from the post? Why does DB post this type of story if they actually believe, as you do, that it is too “adult-level” or serious for their audience? The story on “IR Dimes” was the correct post for the above-mentioned comments.
I wish DB would do more of this type of thing.
Are the Chinese IR chicks hot?
@45 – Jeff Matthews has an interesting blog post on the demographic situation in China (although the startling stat he throws out has no citation).
@15/OOOHHHHYEEEAAAHHHH (i know i spelled it wrong)
luckily for you and everyone else, I routinely give into my temptaions.
Mr. Infinite, what you’ve just said is one of the most insanely idiotic things I have ever heard. At no point in your rambling, incoherent response were you even close to anything that could be considered a rational thought. Everyone in this room is now dumber for having listened to it. I award you no points, and may God have mercy on your soul.
While I generally revert to shitting on any post that takes longer to read than my ADD riddled 12 year old attention span can take, this was actually an interesting read. I don’t necessarily agree with it, but well thought out. I don’t mind a post like this every so often, it’s nice to see a truly opinion piece that’s well supported albeit written with a horrible rythm/flow (semi colons, even when used correctly are not your friend all the time…treat them like a whore, use them once in a while and send them packing they ruin your home life if they come around too much)
@45 I have the feeling you’re new around here
@34 Nicely done, Mr. Mackey.
This is really poor analysis. He’s worried about inflation when we’re in the midst of our largest deflation in the last 100 years. China China China… it’s still only 6% of the global economy while the US and EU combined are almost 50%.