1/7
Because RMB is a managed currency, whether or not it rises depends on the PBoC, but if rising expectations cause significant continued inflow into RMB, there are basically three ways, or some combination, in which the PBoC can react.
ft.com/content/b9991e…
Because RMB is a managed currency, whether or not it rises depends on the PBoC, but if rising expectations cause significant continued inflow into RMB, there are basically three ways, or some combination, in which the PBoC can react.
ft.com/content/b9991e…
2/7
First, it can allow RMB to rise, which would be good for Chinese rebalancing but bad for China’s manufacturers. It would mean slower growth, but there are very few ways in which rebalancing does not lead to slower growth.
First, it can allow RMB to rise, which would be good for Chinese rebalancing but bad for China’s manufacturers. It would mean slower growth, but there are very few ways in which rebalancing does not lead to slower growth.
3/7
Second, the PBoC can intervene directly to prevent RMB from rising, in which case we will see domestic monetary expansion and probably more debt and more asset price increases. This would lead in the short term to faster GDP growth, but it would worsen the imbalances...
Second, the PBoC can intervene directly to prevent RMB from rising, in which case we will see domestic monetary expansion and probably more debt and more asset price increases. This would lead in the short term to faster GDP growth, but it would worsen the imbalances...
4/7
and make China’s ultimate adjustment more difficult.
Finally, state banks can intervene instead of the PBoC, in which case they’ll be forced to absorb the negative carry. If their dollar purchases are funded by the PBoC, which so far seems to be the case, the monetary...
and make China’s ultimate adjustment more difficult.
Finally, state banks can intervene instead of the PBoC, in which case they’ll be forced to absorb the negative carry. If their dollar purchases are funded by the PBoC, which so far seems to be the case, the monetary...
5/7
impact will be similar to that of PBoC intervention. If not, the result will probably be an increase in domestic interest rates.
Each of these response is likely further to increase short-term capital inflows. The longer-term problem is that these are likely to be...
impact will be similar to that of PBoC intervention. If not, the result will probably be an increase in domestic interest rates.
Each of these response is likely further to increase short-term capital inflows. The longer-term problem is that these are likely to be...
6/7
highly self-reinforcing, both on the way in and on the way out.
For now I would be an aggressive buyer of Chinese government bonds. The total amount of foreign capital in the Chinese bond markets is still pretty small (around 3% of the total) and it is heavily...
highly self-reinforcing, both on the way in and on the way out.
For now I would be an aggressive buyer of Chinese government bonds. The total amount of foreign capital in the Chinese bond markets is still pretty small (around 3% of the total) and it is heavily...
7/7
concentrated in top quality government bonds, so for now the risk of disruptive outflows is low, while the expected returns are much higher than the alternatives abroad.
concentrated in top quality government bonds, so for now the risk of disruptive outflows is low, while the expected returns are much higher than the alternatives abroad.
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