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...
