Bloomberg: US resilience - problem Chinese leader wishes he had

Bloomberg has published an opinion piece arguing that cracking down on traders won’t tackle the root cause of the yuan’s swoon. Caliber.Az reprints the article.

It may only be a slight exaggeration to say that the biggest economic surprise of 2023 has been the resilience of the US. The widely anticipated American recession keeps being shelved. For all of China’s broadsides at Western capitalism, that’s a problem Xi Jinping would love to have.  

China’s wilting recovery is the flipside of US commercial strength. Strong data keeps coming out of Washington and talk of rate cuts by the Federal Reserve has faded. In China, the discussion is dominated by dismay with the expansion, for which there were such high hopes when Covid Zero ended late last year. Calls for more stimulus are proliferating. Even Chinese consumers are showing signs of fatigue. 

Yes, China recently cut a series of interest rates. While applauded as a good start, these reductions were modest by global standards. The absence of a broader package of measures to follow has soured investors on Chinese assets. The currency, the yuan, is one of the worst performers in Asia this quarter, down about 5% against the dollar. Only the Malaysian ringgit and the yen are doing worse. Chinese stocks have taken some hits.   

The weakening yuan has got authorities’ attention. The People’s Bank of China still plays a significant role in the market almost two decades after a hard peg to the greenback was scrapped. The bank this week guided the starting point for daily trading higher. Christopher Wong, a strategist at Oversea-Chinese Banking Corp. in Singapore, saw the shift in so-called “fixing” as indicative of official concern. Authorities aren’t trying to reverse moves, but cushion the pace of decline. Despite speculation about the significance of 7.25 yuan to the dollar, this kind of intervention is rarely about absolute levels.

Beijing has other ways to make life uncomfortable for sellers. The PBOC could reduce the level of foreign-exchange deposits banks need to set aside as reserves.

The central bank took such a step in September when the economy was faltering under the weight of Covid Zero. The idea is to increase the supply of foreign currencies, thereby making it more appealing to buy the yuan.

It's worth just standing back and noting that nine months on, China’s economy has reopened and the Fed has paused, for at least a month. The pandemic and a dollar rampage, driven by rapid Fed tightening, are no longer props for local underperformance. How to stimulate the economy when interest rates are low, inflation is languishing near zero and the housing industry is in poor health?

Some form of quantitative easing, a dramatic expansion of the PBOC's balance sheet for the purposes of giving activity a boost and staving off deflation, comes to mind.

At first glance, it seems unlikely. Wasn't this a child of disaster, such as when the Fed embarked on QE from late 2008, or when the European Central Bank deployed it during the euro region’s debt crisis? More recently, a broad range of developed economies instigated it during the initial stages of the pandemic. Let's not forget Japan’s pioneering of zero rates and money printing a generation ago.  

QE does have a public-relations problem. The burst of inflation that characterized 2022 is often traced to easy money outliving its welcome. Gita Gopinath, first deputy managing director of the International Monetary Fund, says timing is everything. She told the ECB’s summer retreat this week that QE is nice to have in your repertoire. You also have to know when to quit. 

“There should be more wariness of using QE — and accompanying it with forward guidance promising low policy rates — when employment has largely recovered and inflation remains only modestly below target,” Gopinath said. “Maintaining QE in such circumstances increases the risk that the economy will overheat and that policy will be forced into a sharp U-turn.”  

There should be no shame in at least canvassing options. In 2003, five years before Lehman Brothers Holdings Inc. failed, Fed officials began laying the ground for a new direction — should it have been needed then. The Fed warned of a small, but potentially far-reaching, chance of a major fall in inflation.

“We wanted to shut down the possibility of corrosive deflation; we were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address,” former Fed boss Alan Greenspan wrote in his memoir The Age of Turbulence: Adventures in a New World. 

China remains in fear of too much stimulus. That’s a legacy of 2008, when it helped lift the world economy out of recession, but saddled many local companies with vast debts. At a recent Nomura conference in Singapore, questions from the audience focused on the health of China’s recovery, what the Federal Open Market Committee would do at its June meeting, and even whether falling birthrates and rising instances of divorce were a concern. One question struck me: Why doesn’t the PBOC just do a large scale QE like the rest of the world?

It wasn’t directly addressed by the panelists on stage, and it may not be exactly the right approach for China. But at least let’s have a discussion free of stigma. Cracking down on traders won’t tackle the root cause of the yuan’s swoon. The recovery is at risk.