I don't have a view on whether or not the PBoC will lower the benchmark LPR rate, but it is worth considering the systemic implications. Lower lending rates will certainly provide relief to borrowers, but they also mean either...

scmp.com/economy/china-… via @SCMPNews
less profit for the banks (and so a greater cost ultimately in recapitalizing them) or, if matched with lower deposit rates, a reduction in household income (the reverse of rebalancing).
The point is that for all the foolish talk about debt for sovereign issuers of their own currency having no cost, the truth is always that what matters is whether an increase in debt directly or indirectly sets off a corresponding increase in economic...
production, in which case the debt can in principle be serviced by the increase in output. If not, the debt must effectively be serviced by real transfers, and changing the interest rate mainly changes the direction of the transfers.
Higher interest rates means net borrowers must absorb a larger share of the costs, whereas lower interest rates means net savers must bear a larger share.

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More from @michaelxpettis

21 Jul
Xinhua: "Shanghai's Pudong to take lead in China's socialist modernization," whatever that is (I suspect it will involve finding new reasons to justify investment).

The article says that by 2050, Pudong, a part of Shanghai, "is expected to become an important urban area that is highly attractive, creative, competitive and influential globally, a global model of urban governance and a shining pearl of a great modern socialist country."
This sounds a bit like a return to the Shanghai of the late 19th and early 20th centuries (although obviously under a very different political and institutional set-up) when it was one of the main "international concessions" in China and a global center...
Read 4 tweets
21 Jul
"Ultimately, the goal should be faster, safer and cheaper payment systems, available to all."

Yes, perhaps, but faster and cheaper payments systems, especially if they are cross-border or cross-currency payment...

ft.com/content/7a93fb… via @FinancialTimes
systems, also make the equivalent of "bank runs" far more efficient and with potentially much wider participation. In the past fleeing capital – whether from countries, banks, shadow banks, or other leveraged entities – tended to be limited to...
institutions and very wealthy individuals because the cost of exit varied inversely with transaction size. As the cost drops to zero, this means that less sophisticated retail investors can participate much more actively in generating panics.
Read 4 tweets
20 Jul
I'm not an expert on the Vietnamese economy, and I welcome any corrections and advice, but I think US concerns about Vietnamese trade imbalances may be substantially overstated.

wsj.com/articles/u-s-t… via @WSJ
Vietnam has been running a bilateral trade surplus with the US of roughly 20% of its GDP for the past few years, but while this is incredibly high, its trade surplus with the world overall is much lower, roughly 3% of the country's GDP over the past few years.
Policies or conditions that lead to trade imbalances in any country – the US, Vietnam, or anywhere else – can only be expressed in the overall trade balance, and never in terms of bilateral balances. This has two important implications.
Read 13 tweets
20 Jul
The Ministry of Commerce has chosen four of China's top five cities, plus Tianjin, to "take the lead in developing international consumption centers". According to the MoC spokesperson, "building international consumption center cities will help...

foster new platforms for both internal and external circulation to reinforce each other."

I have no idea what this means except that it seems, once again, that the only way Beijing knows how to boost consumption is...
by boosting production and having a part of the revenues trickle down into consumption. Of course that cannot help rebalance the economy, and while it may boost external circulation, it does not boost internal circulation.
Read 4 tweets
19 Jul
Good article and a much-needed corrective to the idea that a digital RMB will translate into a a greater international role for the currency. As PKU's very smart Huang Yiping points out: "But there will be speculators...

scmp.com/economy/china-… via @SCMPNews
who might also use the technology to do things very fast. The main concern is that, if you don’t do this properly, there could be significant financial risks or even a financial crisis.”
Eliminating capital controls (which is the minimum required if the RMB is to become an international currency) at the same time Beijing causes transaction costs to collapse and transaction efficiency to surge could be one of the worst things...
Read 5 tweets
19 Jul
In this piece the author makes a series of very common mistakes about debt – in this case Chinese debt – when he says: "But most of that debt is owed by state-owned enterprises to state-owned banks – which can be thought of as two entries...

on opposing sides of the same balance sheet. If a lot of that were to turn 'bad', which is by no means impossible, then the ensuing 'crisis' could be solved by writing it off, and then re-capitalising the state-owned banks...
by drawing down on the foreign exchange reserves of the People’s Bank of China."

"China", he continues, "has actually done this twice before, in the late 1990s as part of the state-owned enterprise reforms pushed through by then-Premier Zhu Rongji, and again...
Read 24 tweets

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