News today in the US print edition of the Wall Street Journal: China looks at taxing foreign currencies. The article reports that foreign currency reserves fell a modest $28.6bn in March, down from a decline of $99.5bn in February. Total foreign currency reserves are around $3.2tn, down from around $4tn.
This might seem a lot but it’s not. The Forex market, a large financial market, claims it’s average daily trading volume is more than $3.2 trillion. And that was in 2014. The key is to what degree does the market believe the number itself, and to what degree does the market believe the reserve is insufficient to protect the currency value compared to other currencies.
This point and the resulting currency exchange is as important, maybe more important, than the dollar exchange rate. The Federal Reserve operates as lender of last resort and as reserve currency, has “exorbitant privileges”. The PBOC can also print yuan but that would just encourage the market to penalize the holders of it Witt speculative attacks. And more interestingly as the dollar goes up in value (it’s currently taking a pause from its inexorable rise) money flows from Asia to US and puts pressure on the yuan.
So keep a close eye on the monthly reported Chinese foreign exchange reserves…. But if that wasn’t enough, check out Martin Wolf’s column in today’s US print edition of the Financial Times: China’s struggle for a new normal. It seems Mr. Wolf attended the recent China Development Forum where the new 5 year plan was reviewed and signed off.
Mr. Wolf nicely summarizes the four major challenges China faces:
- How to transform its economy from being manufacturer/debt driven to services and consumer driven
- How to manage the slowdown in growth and sustain a soft landing
- How to manage its interface with the rest of the world
- How to manage its domestic political evolution
I love the article but for end and conclusion. Me. Wolf does not explore the likelihood of success or failure by the Chinese leadership. He simply ends by suggesting the recent success with these four challenges suggest there is hope. I think we should be a lot more sanguine.
No nation, developed or otherwise, has managed such a transformation. Worse, our so called developed nations cannot even manage what we have right now, so our collective leaders know little of anything to draw in for inspiration. Third there is no white knight or pending growth engine waiting to hide all the dirt. Lastly, many of the debt triggers that ratcheted up just before the last crash are ratcheting up again. Central Banks have been pumping out economies for longer than they should have due to the vacuous nature of our so called political elite and their lack of effective policy.
China might not cause the next slow down or recession, but we can’t be far away from it. China won’t help; they may just join in the mess.