FX Trading – China-tunistic
It may look like China is acting civil in responding to the rest of the world’s fingers pointed squarely their lead role in an imbalanced global economy. After all, the yuan has strengthened versus the dollar in the last couple days; China has been hiking bank reserve requirements and raising interest rates … with unusual frequency.
Why so sudden?
Maybe China is acknowledging that yes there are major risks to its economy because of growing excesses, inefficiency and a lop-sided growth model – it was just reported that China’s trade surplus widened again in October. Or maybe they just want to play nice ahead of this coming G20 gathering in Korea so they can say, “See, we have been taking action!” Though recent history and typical behavior from Chinese officials tell us they don’t really care what others think.
And not that they should.
But most agree that China, if they don’t take sufficient measures, is on a crash course that could end badly in the next few years. Maybe it makes sense for them to behave a bit more civil now. But no matter to us – it’s up to them.
What China’s newfound acceptance for economic stop-loss policies may actually indicate, or simply confirm, is China’s opportunistic nature … as evident in these two headlines from Reuters:
PBOC advisor US QE irresponsible, loose money policy to lead to weak USD Rts
China Dagong Global Credit downgrades US credit rating on QE – China press.
First, we’ve got a Chinese downgrade of the US’s credit rating based on the Federal Reserve’s quantitative easing. Now this is not to argue the merit of the US’s credit rating, but it does add credence to the other headline which shakes a finger at the US for being irresponsible.
Surely most Chinese, especially those content with the way of the dragon, look for any opportunity to one-up the US. And just to make Chinese superiority all the more clear, they have gone ahead with appeasing the global crowd by doing all this stuff they have been told numerous times must be done. This way China appears responsible while the US appears irresponsible.
Is the US irresponsible? That’s irrelevant as Chinese responsibility is concerned.
So is China responsible? Well, they’re hoping it looks that way, but ad hominem shots at
the US don’t make a difference in the answer to that question. Despite what the US
does, is China responsible or irresponsible?
Unfortunately, the latest actions taken to stem speculation, reduce loan growth and
keep a lid on an economic growth trajectory (which could imitate the boom-bust model
if left unchecked) are not enough. More must be done to seal the responsibility deal. In
fact, China’s latest actions are better characterized as reactions. Not until China takes
some initiative at rebalancing its growth model between exports and investment and
domestic consumption can they be considered responsible.
Perhaps China is hoping that their reactions will be enough to carry them through this
period of G20 consternation and global economic mediocrity. Perhaps their hope is that
if the global economy can keep making strides, and market sentiment can further
stabilize, then they will be able to go back to the way of life that yielded them the
second largest economy in the world, before the pesky collapse in global demand so
rudely interrupted them.
There currently seems to be a political hurdle that permits reaction but deflects action.
Fortifying a domestic consumer means empowering a Chinese middle class. Empowering
a Chinese middle class means relinquishing centralized power and accepting a more
market-led economy. This of course would impact the entire flow of power and money
in the country.
China is perhaps the #1 influence on global risk appetite. If they find a way to keep it
together then asset markets should keep chugging along. But if they start huffing and
puffing because they haven’t fully adapted to the new normal (subpar global growth and
low interest rates for years to come), then there’s bound to be a huge change in risk
Is China responsible? Not yet. Opportunistic? As ever.
China isn’t dumb. It’ll be surprising if the G20 even uses the words yuan or renminbi this
time around …