IMO an excellent analysis AC. The only question I would ask is: "where do eurodollars come into this scenario?" After all they represent the highest volume dollars in circulation not under the control of the Fed. Does China utilise the eurodollar market? I know little about China, except that it is a 'communist' (ie totalitarian) country with capitalistic characteristics. Perhaps my understanding is incomplete?
Thanks. Unfortunately the PBoC doesn't share its investment strategies publicly, so your question regarding their participation in the eurodollar market is hard to answer.
As to your second question, did the process of selecting the recent US Democratic Party candidate strike you as "democratic"? How about the UK's so-called Conservatives' de facto rabid promotion of mass immigration? Is anything about this even remotely "conservative"? The lesson here: Don't trust labels. The current Chinese leadership definitely contains some people with leftist ideas, but in comparison with the West, China is not very communist. More the other way around. Check out: https://austrianchina.substack.com/p/top-10-myths-about-china-part-2
I don't see that reference. I do see: "...the following large nations use a Primary Dealer system – Canada, the European Union, Hong Kong, the USA, Ireland, Japan, India and China." But this is basically just saying that China also uses such a system, no?
1) Whenever the PBoC (=the People's Bank of China, the central bank) decides to implement a revaluation, it tends to first depreciate the yuan a little bit to scare off speculators. In this case, something along those lines already took place shortly after the "liberation day" announcement, with the exchange rate sagging from around 7.3 to the USD to almost 7.4. Could that be repeated? Definitely.
2) The offshore yuan (CNH) is a separate currency which is not pegged exactly 1:1 to the onshore yuan (CNY). It tends to fluctuate a tiny bit more, especially overnight. However, it rarely drifts more than, say, 0.4% away from the CNY rate. In exceptional circumstances that could of course change, but for speculation purposes the only other choice is probably buying "RMB" futures on the CME.
I would intuitively think that, in order for China to offset the hurdles (i.e. tariffs) being imposed by the US, their best bet would be to DEvalue the yuan, so Chinese goods remain somewhat competitive...the revaluation of the yuan on top of the tariffs imposed by the US would result in China pricing itself out of the global market...no?
Why not devalue the yuan? A fair objection and obviously an important question to answer. The problem with this logic is that there is insufficient capacity in the rest of the world to replace Chinese production. And that's just on the macroeconomic level. On the microeconomic level there are plenty of markets where there is literally no alternative at all to Chinese production. So the Chinese government need not worry about its producers being priced out of the global market. Chinese producers can't be priced out because in most cases, they set the price. The primary factor keeping global prices low is the competition between them INSIDE China.
Remember, much of global trade is not in finished goods; at least as many unfinished goods (aka "intermediate" goods) are traded as finished goods. This is why external tariffs ultimately do little to improve the competitiveness of domestic companies. On the contrary, increased prices for production inputs from China mainly serve to make the production of manufacturers located in tariff countries uncompetitive on the global market.
In order to offset a 245% tariff, the yuan would need to be devalued from 7.3 currently to around 25:1 to the dollar, a move which would cause chaos in China and all around the world. Since devaluing to, say, 10:1 accomplishes nothing other than proving Bessent's point, why bother? Moreover, such a move could lead to retaliatory actions from countries other than the United States. It might well also lead to competitive devaluations all around Asia. Finally, devaluing would amount to China paying the tariffs, which would be hard to square with the “China will not kneel” narrative. That doesn't mean it can't happen, but it does seem rather unlikely.
A tough question - if such a book exists, it would be a mouthful, to put it mildly. Moreover, things are always changing, which makes creating a snapshot even more challenging. Unfortunately the short answer is that at the moment nothing comes to mind, but if one comes to mind, we'll share it here.
This is insightful, Looking at the market moves and sentiment of the Tech sectors of both the US and China is also a good gauge that captures the sentiment well of “The Crux of the Issue: US Dollar Overvaluation and Yuan Undervaluation”.
IMO an excellent analysis AC. The only question I would ask is: "where do eurodollars come into this scenario?" After all they represent the highest volume dollars in circulation not under the control of the Fed. Does China utilise the eurodollar market? I know little about China, except that it is a 'communist' (ie totalitarian) country with capitalistic characteristics. Perhaps my understanding is incomplete?
Thanks. Unfortunately the PBoC doesn't share its investment strategies publicly, so your question regarding their participation in the eurodollar market is hard to answer.
As to your second question, did the process of selecting the recent US Democratic Party candidate strike you as "democratic"? How about the UK's so-called Conservatives' de facto rabid promotion of mass immigration? Is anything about this even remotely "conservative"? The lesson here: Don't trust labels. The current Chinese leadership definitely contains some people with leftist ideas, but in comparison with the West, China is not very communist. More the other way around. Check out: https://austrianchina.substack.com/p/top-10-myths-about-china-part-2
Thank you AC - and I agree. Being in SA - with my encouraging the GNU to abandon the West and run with the BRICS+ is falling on deaf ears today - but maybe tomorrow these ignorant politicians will wake up! https://austrianpeter.substack.com/p/sa-global-south-strategy-sa-needs?r=hhrlz&utm_campaign=post&utm_medium=web&triedRedirect=true
Oh AC BTW - BOOM has answered by question about China buying as a primary dealer beneficiary: https://boomfinanceandeconomics.substack.com/p/boom-apologises-lets-look-at-qe-quantitative?utm_source=post-email-title&publication_id=1608567&post_id=162178071&utm_campaign=email-post-title&isFreemail=true&r=hhrlz&triedRedirect=true&utm_medium=email
I don't see that reference. I do see: "...the following large nations use a Primary Dealer system – Canada, the European Union, Hong Kong, the USA, Ireland, Japan, India and China." But this is basically just saying that China also uses such a system, no?
Yes true AC - I think I read it wrong - my bad!
Two notes:
1) Whenever the PBoC (=the People's Bank of China, the central bank) decides to implement a revaluation, it tends to first depreciate the yuan a little bit to scare off speculators. In this case, something along those lines already took place shortly after the "liberation day" announcement, with the exchange rate sagging from around 7.3 to the USD to almost 7.4. Could that be repeated? Definitely.
2) The offshore yuan (CNH) is a separate currency which is not pegged exactly 1:1 to the onshore yuan (CNY). It tends to fluctuate a tiny bit more, especially overnight. However, it rarely drifts more than, say, 0.4% away from the CNY rate. In exceptional circumstances that could of course change, but for speculation purposes the only other choice is probably buying "RMB" futures on the CME.
I would intuitively think that, in order for China to offset the hurdles (i.e. tariffs) being imposed by the US, their best bet would be to DEvalue the yuan, so Chinese goods remain somewhat competitive...the revaluation of the yuan on top of the tariffs imposed by the US would result in China pricing itself out of the global market...no?
Why not devalue the yuan? A fair objection and obviously an important question to answer. The problem with this logic is that there is insufficient capacity in the rest of the world to replace Chinese production. And that's just on the macroeconomic level. On the microeconomic level there are plenty of markets where there is literally no alternative at all to Chinese production. So the Chinese government need not worry about its producers being priced out of the global market. Chinese producers can't be priced out because in most cases, they set the price. The primary factor keeping global prices low is the competition between them INSIDE China.
Remember, much of global trade is not in finished goods; at least as many unfinished goods (aka "intermediate" goods) are traded as finished goods. This is why external tariffs ultimately do little to improve the competitiveness of domestic companies. On the contrary, increased prices for production inputs from China mainly serve to make the production of manufacturers located in tariff countries uncompetitive on the global market.
In order to offset a 245% tariff, the yuan would need to be devalued from 7.3 currently to around 25:1 to the dollar, a move which would cause chaos in China and all around the world. Since devaluing to, say, 10:1 accomplishes nothing other than proving Bessent's point, why bother? Moreover, such a move could lead to retaliatory actions from countries other than the United States. It might well also lead to competitive devaluations all around Asia. Finally, devaluing would amount to China paying the tariffs, which would be hard to square with the “China will not kneel” narrative. That doesn't mean it can't happen, but it does seem rather unlikely.
What books do you recommend to understand the Chinese economy?
A tough question - if such a book exists, it would be a mouthful, to put it mildly. Moreover, things are always changing, which makes creating a snapshot even more challenging. Unfortunately the short answer is that at the moment nothing comes to mind, but if one comes to mind, we'll share it here.
Though it's missing the last 3 years, this article probably offers as good of an overview as anything else out there:
https://austrianchina.substack.com/p/lamenting-chinas-2021-cancel-culture
As for the current state of the Chinese economy, the two part series we published in the summer of 2023 is a good place to start. Part 1 is here:
https://austrianchina.substack.com/p/chinas-economy-the-good-the-bad-and-the-ugly-pt1
This is insightful, Looking at the market moves and sentiment of the Tech sectors of both the US and China is also a good gauge that captures the sentiment well of “The Crux of the Issue: US Dollar Overvaluation and Yuan Undervaluation”.