2018-01-07

Zaijian Renminbi Internationlization

Bloomberg: China’s Foreign Reserves Extend Rising Streak Amid Capital Curbs
China’s foreign-exchange reserves posted an 11th straight monthly increase, capping a year of recovery amid tighter capital controls, a stronger yuan and resilient economic growth.

The reserves climbed $20.7 billion to $3.14 trillion in December, according to a People’s Bank of China statement on Sunday, compared with a $3.13 trillion median estimate in a Bloomberg survey. That brought the full-year increase to $129 billion.
Japan launched QE back in 2001. It was supposed to be temporary, but is ongoing to this day. The Federal Reserve began quantitative easing during the 2008/9 financial crisis. It stopped in 2014 and began reversing course in 2017. We will know in the next recession if it was a temporary solution or a generational policy as it became in Japan. China began capital controls in 2015 and has tightened them throughout the past two years, including an escalating crackdown on Bitcoin.

Over the past year, reserves increased from a low of $3.0 trillion to $3.14 trillion last month, a rise of $140 billion. Turning around capital flows was like turning the Titanic in the sense that it takes time to accelerate, but we can pinpoint exactly when things turned around for China. It was the moment the global economy and commodity prices turned around: February 2016. The month China flooded its economy with new credit and the rumored Shanghai Agreement was made.
There's a lot for China bulls and bulls in general to like. China saved the day again, it reversed its outflow problem, it boosted global growth*.

On the other hand, a 50,000-ft view of the situation shows Chinese reserves peaked in June 2014. The U.S. dollar rally began at the end of June 2014. The entire move in Chinese reserves lines up with the movement in the U.S. dollar index.
China may be responsible for breaking the trends in February 2016, but it did so at a very high cost: credit creation worth trillions of USD and a major reversal of yuan internationalization. Over the past 11 months, reserves increased by less than 2 months of peak outflows (Nov 15-Jan 16). Assuming the next crisis is larger (as is typically the case), we'll see one month of outflows reverse all of these gains.

I still expect a major yuan devaluation. Given China's use of capital controls and the deteriorating trade relations, China will wait for a crisis to cry uncle and revalue the yuan. I don't see signs of a reversal in the global economy yet, only a shift towards the high-end of post-2008 growth rates. China bought a lot of time with their actions, we're going on 2 years and market volatility has collapsed to all-time lows. Equity markets are at new highs, the S&P 500 at its most overbought in history.
If the U.S. dollar weakens, then China's currency problems ease considerably. If the dollar instead strengthens, China will need even tighter capital controls to prevent outflows.

No comments:

Post a Comment