China and the WORLD (revisited)...

China and the WORLD...

Blind faith in the economic policies of the developed-world has landed China in trouble as far as debt and housing-bubble in the economy are in focus. By more and more easing through government bonds purchases China wants to lower interest-rate on public-debt to spend more on infrastructure, but by not lowering interest rate directly it wants to keep housing bubble and private-debt in check. Nonetheless the objective behind easing has been the devaluation of the yuan, everybody knows it. Chinese have relentlessly applied loose monetary-policy and think that it is a panacea for all ailments, but in not a less developed economy with supply-constraints, still, more money supply will always increase overheating and price-bubbles near full-employment. The economy has gone through many currency-re-denominations which is used to avoid too much increase in inflation and loss in the value of money, but, lately, it has also learnt to increase money-supply and depreciate the home-currency, and, give exports, employment and growth a push. The money from easing is flowing out of the economy after quantitative-easing which is responsible for higher interest-rates for the economy. Nevertheless, in the absence of capital-flight to abroad the money would have positively affected the scale of ability of banks to sell credit at lower interest-rate will increase. Higher capital inflows of foreign-investment (dollars and euros) have kept the yuan under pressure to appreciate, but PBOC is buying more and more dollars to keep the yuan depreciated. So at one place domestic capital is flowing out and at the other, in form of foreign-capital is flowing in. Not much difference. There is a considerable trade-off between the gains from domestic monetary-policy and foreign-exchange-rate-policy, however the whole idea is to keep yuan devaluated which means more export competitiveness and growth in the face of slowing domestic-demand because of overheating and high interest rates. Economists are right when they lecture China on concentrating on domestic-demand. China is trying to cash foreign demand at the expense of domestic-demand when its own expansionary monetary-policy and depreciation is inviting overheating in the domestic economy. To avoid this it needs tightening, and, not easing to avoid inflation and bubbles. More money-supply and inflation will hurt domestic value of yuan and demand within the economy.

Chinese will benefit from a strong yuan and not dollar... A weak yuan will pour money out... China decide it wants money in or out... Yuan has more uses in China... multiplier will be bigger in terms of wages and income and demand... good for the global economy... China is also exchanging money out side China... Dollar is strong, which is coming in and weak yuan is going out... Therefore China is exchanging less money for more money...China is too much ambitious, but it does not want yuan to compete dollar... only for the sake of exports and employment which is good... But, it should (now) drop accumulating dollar reserves because it own huge demand for dollar has made the greenback soar too much, and for others too ... Yuan should buy more dollar and not the otherway...

China’s economic expansion of the last three decades has come to a point where employment and productivity could not increase with the pace realized during the boom. An economy swings between boom and busts due to increase in money-supply and inflation and deflation/disinflation. Monetary-policy cycle of expansion and tightening decide the level of employment and trade-cycles. Expansion turns the boom and tightening turns the burst. Every economy goes through booms and bursts. However, the length of trade cycles might vary from time to time and country to country, but it may also affect other countries through trade. Moreover, the economy is also on the knife-edge which means when the policy-makers try to reduce inflation and growth it would lower them more than expected and when they choose to increase both, they increase them more than expected. It is true that the economy goes through boom and bust over a period of time. Booms can go as long as employment increase, but after full-employment inflation increases which reduces domestic demand. Depreciation increases exports, but at the cost of domestic demand. Higher inflation would lower real wages. Full-employment may increase supply to a level, but productivity may be increased through more investment in innovation, but it is a natural process of mind and may or may not happen at once. China is boxed by full-employment but if it manages to increase productivity it might continue expanding at a higher growth-rate. If more money supply increases productivity and wages then the expansion is justified, however if it increases inflation and wages it would reduce competitiveness. China is trying devaluation of currency for competitiveness when full-employment and higher wages are working against it...

Chinese policy-makers are arguing that inflation is not evident so far and that all the easing and rate-cuts are justified because it is not cutting real wages and domestic demand, but as long as inflation does not increase it would not increase nominal exchange-rate and demand for exports, and, buying foreign reserves and devaluing the domestic-currency would also increase inflation and inflation expectation but with a lag, whenever money-supply is increased it increases expected inflation (unless you are in the liquidity-trap) which is observable in the recent data. Higher inflation expectations show that spending is not a problem in China when the labour market is almost cleared; unemployment is close to 5-percent so it is true that the economy is so far stable, but it now needs to change its approach to stimulate the economy. China is moving away from an investment led model to a domestic demand driven economy because external situation is more or less out of an economy’s control and creates uncertainty. It now needs to concentrate on increasing domestic consumption which would also increase external demand by increasing imports; income in the trading partners’ economy would go up. China might stop seeking depreciation and inflation, also the other way, but work on increasing real wages and exchange rate by committing lower prices. Lower prices could also increase export competitiveness. It would increase exports demand by lowering prices and it would also increase imports because real wages would appreciate... and, it may also increase domestic demand by increasing real wages. It probably looks good from all the sides... in depreciation exports go up, but imports and incomes go down, it is contractionary... Lower prices would release domestic demand and also demand for exports. This is based on the argument that lower prices increase demand, domestic and external both and higher prices although help exports via the exchange rate but reduces domestic demand and imports. It is true that lower prices are more expansionary. No one knows better than China that lower prices increase demand; depreciation or external-devaluation also lowers prices relative to the nominal exchange rate. To achieve this China needs to lower inflation and inflation expectation, and the conventional way of doing this is to increase interest-rate by tightening money-supply. More money-supply after full-employment would increase wage cost, because labour is scarce, and inflation thereby lowering demand. China might change its ideology because its domestic demand may help improve external demand which is also good for its exports.

Chinese policy makers say that there are no inflationary-pressures in the economy when credible international reputed economists say that the economy has achieved full-employment and requires tightening to avoid overheating to retain competitiveness by controlling inflation and wages, which is not true... Food inflation in China is around 7.5% (high) enough to demand wage-hikes... After full-employment the market competes for labour by offering higher wages... Too much higher wages would erode China's competitiveness by increasing wage-cost and prices... More money-supply with inflation in food would increase wage demand and reduce competitiveness... Tightening might be required to maintain inflation and wage-demand to increase competitiveness...

China wants to avoid capital-outflow and real-estate bubble... No doubt, it has reduced the bubble-fear by a consistent monetary-policy since 2010, which deflated it, but high interest-rates, later, choked demand which is the reason behind falling growth-rate... If China wants to increase its growth-rate it must reduce interest rates, but capital outflow, in search of higher returns would reduce investment in the economy, more in favour of the US dollar, but Chinese have already overinvested in the US and US dollars... More, Chinese money in the US will not reward them because the US is already capital rich... The desire for higher interest-rates in the US (probably) would not materialise because the US interest-rates are already rock-bottom and the economy is going through the liquidity-trap, means interest-rates will remain where they are for an indefinite period... So, Chinese money-flowing in US may not be rewarded as expected anytime soon... Moreover, when Chinese money flows to the US, it means more money-supply, lower interest-rates and a depreciating US dollar... The whole point is that the time is not right for investment in the US economy or Chinese money will have to wait longer for better dollar and interest-rates...  China is falling in to inflation again and again, means it also needs to improve supply-side (like INDIA) so that inflation remains under control and bubbles deflated... INDIA and China are almost on the same page as far inflation is concerned...

Just like loose monetary-policy, loose fiscal-Policy too is responsible for currency de-debasing... If we are going to follow China then we will have to go through currency re-denomination every-time inflation is too high... Too much inflation debases the currency and people start carrying large volumes of money which is unnecessary, therefore, countries apply currency-re-denomination which reduces the volumes of notes and makes the new currency re-denomination stronger, the new currency will be stronger. Higher re-denomination indicates loss in the value of money… But, the logic is, if everything’s’ value grows as time passes and investments we make also grow, then why the value of money decreases as the time passes… The trend across the developed countries is that their population rate of growth are contracting which means less demand for their products and they are now too much dependent on exports for growth, therefore, we can conclude that as the time will pass supply will eventually outstrip demand and prices will start falling, in one word- deflation, as we have experienced in Japan, the US and many parts of Europe… Therefore, the pattern we are observing is that prices will fall as the economy will grow and supply improves… But, prices can not fall below the lowest denomination of any currency and in this situation if we want more demand we can choose to increase the real value of money, a rise in real wages, incomes and profits… by applying a lower re-denomination of the currency... But, in lower re-denomination the old currency becomes stronger and the value of money increases…

The highest denomination is rmb 100 which is near to the $100 highest denomination in the US but people hold five-times more cash in China than in the US. It means money supply is higher in China than the US. High money-supply means a weaker currency. It (China) has kept money-supply high in order to gain from  cheap currency and cheap exports. This is what the US objects "an artificially low exchange rate and low value of money to gain advantage from cheap exports." China is expected to overtake the US in 2018, so by that standard we can expect the rmb-dollar exchange to equalize near that period. Meanwhile we are going to witness an appreciation in rmb during this period and a debate to include rmb as a reserve currency like dollar. Chinese interest rate are lower than the Indian rates it means it is opting for a loose monetary policy to gain advantage in exports even when its main trading partners are facing recession and weak demand. If China wants rmb to get the status of reserve currency it needs to let its currency float near to the value of dollar.

We know that rising wages will be detrimental for Chinese competitiveness but good for domestic consumption. China has absorbed all the surplus labour and has reached its limits of expansion and cannot expand without raising wages. I think China will continue to use depreciation as a tool to retain its competitiveness. There are two things to achieve competitiveness either devaluation or depreciation. The former is materialized when the market cut wages to achieve competitiveness in foreign trade and the latter is done with a view to achieve cheap currency and generate demand. I think we will see the Chinese economy slowly turning to domestic demand after cashing three decades of foreign demand…

Any currency should appreciate in the long run and moreover its domestic value must also increase because marginal utility starts declining after reaching a height therefore prices start falling. So in the long-run we have increasing returns from money supply because prices start falling as every economy falls in deflation after a boom period. And, it makes sense why prices start falling in the long run because demand equals supply and after a point supply exceeds demand and prices start falling. We call it deflation and as an example we have Japan and the US… They are trying to avoid a deflation but it is natural for prices to fall in the log-run, as have been said before, and we can make use of deflation too to increase real wages and income (any type of wealth) by floating a lower denomination of a currency. So far China has used higher denomination means Yuan to Renmibi but now it has to move from Renmibi to Yuan. Money-supply wise more Yuan and less Renmibi in circulation. That would increase real value of the Chinese Currency. It seems logical that the domestic value of a currency should also appreciate in the long-run and not like the way it is executed in the real life. We choose higher redenomination when we should go down, I mean lower denomination. We are progressing therefore value of money must also increase…

IMF is backing China for devaluing the yuan when it aspires to be a SDR currency. A currency the IMF and others will use to forward loans for countries in need. IMF is saying that devaluing yuan is a step in that direction. But, a reserve currency status is likely to increase yuan’s demand; therefore it should appreciate, and not depreciate. Dollar’s reserve currency status makes it strong. Actually, China wants to stop sagging growth rate by increasing export-competitiveness, but at the cost of domestic-demand by cutting real-wages with inflation. Does it sound good or any way better (?) when you are favouring foreign-demand against the domestic demand. This does not sound (too) good to go about it. In a way the Chinese are taking money from domestic-consumers and giving it to foreigners. The downward-nominal-rigidity makes wages hard to cut, but it is always easier to cut on real wages by increasing inflation in order to make the economy competitive. The economy is experiencing deflation which means low relative demand or high supply. To overcome this situation Chinese might try to increase demand by increasing real-wages by lowering the price-level which is also likely to increase export-competitiveness. Using lose money-supply in a low unemployment country, and higher wages and inflation will make you globally uncompetitive. Economists know that a reserve-currency status and strong yuan will depreciate dollar and help US’ exports...

I do not know why we are giving so much importance to China’s illegitimate moves on the currency front. Economics and any other stream of knowledge do not talk about absolute actions because they are not simply of any use. For instance, if there would be only one country in this world its decisions would not affect the others, simply because there is no other country. It is the relative significance of actions that matters in any realm of knowledge and Economics is no exception. No single country in this World can dictate the terms to others and exploit Economics to feed its ambitions, without their consent. And, the author is sure it is not possible. I can not believe an economy like States that has almost ruled the modern World, most of its part, is so frightened by China. China’s history is full is currency redenomination to balance inflation and there is no doubt that it has resorted heavily to it, throughout its history. The Chinese currency manipulation can be, simply, offset by retaliatory adjustments in exchange–rates, and affecting money supply and inflation is not just the single way of doing it. It can easily be done on the paper; means America can deliberately depreciate its currency without affecting its credibility, too much. It will certainly augment it productivity and competitiveness, and the ones that are holding its currency in the expectations of profit, may not profit from a stronger currency, but the quantity they will be getting will be sufficient, at least we can expect that. But, i’am nearly sure it will emerge as a stronger currency, later too, if we rely on economic fundamentals, that follow a process. But, if not controlled another 2008 is not too far. This time i expect a food-grain market kind of control for the money-market.

Analysts used to say that market was bit expensive therefore the current crash might be an opportunity to invest more in equities. The market today in INDIA has shown a similar trend by recovering 400 points, the next-day of the crash. The rout in China might make INDIA a beneficiary in terms of receiving capital because it is the fastest growing economy with sound fiscal and monetary conditions. Capital flight from one country to the other also takes time. Capital will flow in. The same trend also supports the above point that INDIA will be at the capital receiving end. In the same line the expected delay in increase in US rates due to below target inflation and the slowdown in China will also save INDIA from capital flight. We might expect it to be the major recipient of capital of the current global slowdown US, Europe, Japan and now China. INDIA’s story is based on the domestic consumption, insulated from slowdown in exports; therefore we can expect it to be relatively stable.  The whole argument between Keynes and Pigou was about the self-correction feature of the market-mechanism. Keynes said deviation from full-employment might be corrected by government expenditure. However, Pigou said lower prices will help the economy achieve demand and full-employment, again. In China both monetary and fiscal policy is under the communist regime. Attempt to restore growth might work against the market-mechanism. More money and wage inflation may erode economy’s competitiveness...

Shadow-banking in China reminds me of the US... Shadow banking showed a lot of potential to boost credit used for inflating housing prices in the US... We (in China) are expecting more inflation down the line which means nominal prices will diverge from real prices and would inflate bubble. Recently economists have started to think of bubbles as normal during boom... they have become common... We can not conceive a boom without a bubble... It means it has to happen… If the economy will grow it will produce bubbles… Brakes on credit, especially through shadow banking because they are loosely regulated, away from normal-banks, are difficult and not easy to apply. Shadow-banks are out of regulation. We can not control them too much. But the system in China is a bit different from the US. It is not a market economy… a communist regime… which can directly control prices by directly fixing them… different from demand-supply adjustments in a market-economy… they are very serious in controlling prices to tame inflation… However, China historically has seen a few currency-redenominations due to too high inflation. Which means historically they have relied on a loose monetary policy. But during the communist system China has become more serious for price-stability to contain real wages for the proletariat…

The stock-market crash in China in January was the second-time since the tremors in August (2015) are felt across the globe and there is a disagreement among the analysts over some fundamental problem in the economy and that is it signalling a longer correction (?) which might put the World in a low demand and growth spiral and INDIA is not an exception. Mainly it is a disagreement about the unemployment in the economy which determines the level of the problem. But from that point of view the economy is doing well because the policy-makers have kept pouring money-supply to achieve full-employment but rising wages are making the economy lose competitiveness which is a bigger headache. Chinese economy is largely an exports oriented economy and much of its growth rate is attributed to its high current account surplus. China is worried about its competitiveness which it is trying to gain by depreciation or devaluation which would trigger depreciation and out flow from emerging markets, including China. Falling exports and devaluation through easing and higher interest rate in the US has resulted in the outflows from emerging markets which has created shocks over the globe when the chain is, my exports are your imports and my imports are your exports. Income in one country is also decided by the income in the other country. China is mingled so well with other countries through trade that a recession in China would slow down everyone. China’s share in world trade is huge. A disturbance in the Chinese exports would affect Chinese people income and imports. China mainly assembles imports into exports and it might slowdown when Chinese exports become uncompetitive because of full-employment and higher wages. Moreover slowing in the working age population is pointed as the economy’s long-run problem. And, more money-supply after full-employment would worsen the situation because the market would compete to attract labour offering higher wages. However, debt situation and over-supply in the housing market also need to be controlled for which tightening is the remedy and not easing. More and more money-supply after full-employment may continue to increase debt and over-supply stoking fears of reinforcing bubble and perpetuate a correction. People may default on their obligations when debt goes over and start selling assets because of fear of loss. Speculation should be checked. The correction would entail falling prices but that would be uncontrolled. Nonetheless, if the fall in the price level has to be controlled then the monetary-policy may tighten in a controlled way. Chinese unemployment is lower than 5-percent and it may increase its competitiveness by tolerating a little higher unemployment and lowering the prices. Higher unemployment might help reduce wage-pressure by reducing some demand but it must be controlled and data dependent. The economy must try to avoid extremes, excessive inflation or excessive deflation. Lower prices also make the exchange rate favourable and would help demand. The central-banks choose between inflation and unemployment as required. Economies in recession are targeting higher inflation delaying the objective of price-stability and over-heating economies with bubble fear might try to tolerate higher unemployment by increasing credit cost, and diffuse the bubbles delaying the full-employment objective. Both lower demand in the economy by increasing inflation and by reducing employment. Unemployment benefits might help contain the necessities.  Trade-cycles are imminent, but the central banks job is to regulate the cycles with consistent interest-rate movements, a credible monetary-policy with control.

It is just a coincidence that China may slowdown at a time when INDIA is expanding which might affect its trade ambitions and growth rate. Recessions are the time for spending and boom is a time to consolidate, might be a good-rule to go forward...

Chinese economy is run for the Commune pride not people... Its not a democracy... Loss in happiness...