Very interesting article. After many years in which it promised "steadily" to promote the internationalization of the RMB, China's Central Committee now says, in an outline for the next five-year plan, that it will do so "steadily and prudently".


This may seem like a minor adjustment, and some in China are insisting that it is, and that "China still has to go ahead. If you think China will be conservative or even stop the process of yuan internationalisation, you are wrong.”

But in fact I think what it really means is that there is much greater recognition within Beijing that internationalizing the RMB isn't just the equivalent of waving a bigger flag more vigorously. It entails real costs, not least of which is losing control over...

the ability to impose financial stability on a domestic financial and bankings system that is in terrible shape.

Although the banking system has terrible assets and badly-structured liabilities, as long as China's financial system is largely closed, its regulators can...

nonetheless protect the system from the risk of crisis by restructuring liabilities when and how it likes.

But the more the system opens up, and the greater the international participation, the harder that becomes. This is why I have argued for well over a decade that...

all this talk about the inevitable internationalization of the RMB mostly comes from people who simply don't understand what that means. An international currency creates real risks that a highly managed and centralized political system will have trouble accepting.

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More from @michaelxpettis

22 Nov

The fierce debate continues in Beijing between those who are more worried by rising debt and those more worried by slowing growth. Among the former, two weeks ago Lou Jiwei said it was time to study an orderly exit of loose monetary policies...


while PBoC Vice Governor Liu Guoqiang warned of tighter monetary policy “sooner or later”. Now, among the latter, we have Liu Shangxi saying “As to whether [the PBOC] should exit its monetary stimulus, I think it’s not the right time, not even for a marginal tightening.”

I don’t know how this eventually plays out, but I suspect that given the surge in debt this year and the recent scare in the bond markets, the former will have the upper hand. That is why I disagree with the expectations of most analysts, who seem to be expecting...
Read 10 tweets
19 Nov

Good article by @anjani_trivedi on what the recent bond defaults tell us about growing credit stresses within China. Those of us who have been watching this game for a long time know that every time we get some similar disruption in the credit...


markets, we all get very worried that this is the time in which "it" could happen.

But we have always to remember three things. First, it is very unlikely that this will be the time "it" happens. Any default large enough to convince investors that default risk is...

a real risk will also cause a disruptive and chaotic repricing of markets. Regulators know this must eventually happen, but it is always easy to justify postponing it a little longer, and they still retain the credibility and firepower to do so.
Read 8 tweets
19 Nov

The State Council will unveil new measures "to prompt its consumers to buy more, as the prominent restraint on the country's economic development lies in consumption."

Yet again Beijing proposes to rebalance demand by "upgrading" consumption.


But of course that isn't how you rebalance demand. Only income transfers can do that. Some of the proposed measures will help a little, indirectly, to the extent that they subsidize consumption (e.g. lower gasoline prices, more efficient online delivery, etc.). This...

works by effectively transferring income from governments and businesses to households.

Most of the proposed measures, however, will have no net impact at all. They will mainly increase some forms of consumption at the expense of others. Until the household share of...
Read 4 tweets
19 Nov

Trump’s former chief economic adviser Gary Cohn is quoted here as saying that he does not think the trade tariffs that the Trump administration imposed on China worked because the US has continued to experience record trade deficits.


He’s right: they don’t work. Tariffs might work in a world in which trade imbalances are driven by differential production costs or manufacturing advantages. In a world in which trade imbalances are driven primarily by savings and income imbalances, however, all they...

can do is divert trade, raise costs, and shift a country’s bilateral imbalances without changing its overall imbalances.

We must either engineer a new kind of trade agreement among countries that explicitly deals with these savings and income balances, or prevent...
Read 4 tweets
18 Nov

Businesses will complain that this will cause them to lose competitiveness in international trade, and they might be partly right, but I hope Rengo nonetheless succeeds fully. Japan suffers from low consumption, part of the cost of which is...


borne by Japanese businesses, in the form of slower growth, and part by its trading partners, in the form of higher trade deficits and rising debt. Raising Japanese wages would mean more domestic consumption, which means more domestic business investment...

and, ultimately, more and better growth.

While it would be more effective if the increase in wages were coordinated across all major economies, or if there were steps taken to prevent the benefits from flowing abroad, even without either, higher Japanese wages would...
Read 5 tweets
18 Nov

For nearly two years I've argued that we were going to see substantial increases in portfolio and FDI inflows into China, and so we are – to the point where I suspect that the PBoC is now wrestling with currency-appreciation concerns and with...


indirect currency intervention. This will probably continue well into next year, and I don't think we need to worry too much about the risks to financial stability until total portfolio inflows begin to approach roughly half (from roughly 20% today) of the sum of...

PBoC reserves and dollars held by state banks.

What I found especially interesting in this article was that "in 2019, China’s outbound FDI was $77bn, less than half the level in 2017". Outbound FDI had probably dropped substantially because of concerns about...
Read 4 tweets

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