Category Archives: Capital Controls

Politics and Spin Over Observation

The March 30th US print edition of the Wall Street Journal carried an Opinion piece titled, “Britain’s Monetary ‘Stimulus’ Has Fed the Pension Crisis“. The article highlights the plight of many firms whose pension funds are under water and how persistently low interest rates have crippled the chances to grow the returns on a number of investment vehicles. This is due to the widening gap between the value of assets and liabilities. The article happens to highlight this plight in conjunction with true fight in Britain over a venerable old British firm, GKN, who has impressively damaging pension liability any suitor needs to accommodate.

The real point of the article however is not really about GKN. It is that the Bank of England recently published a paper that argued its loose monetary policy and massive quantitative easing were in fact good for us. The argument of the report is that things would have been much worse, therefor whatever we have must be better. This is a strange argument. Much research has been published that correlated near-zero interest rates and QE with debt and credit price distortions, record-levels of M&A, record-levels of stock buy-backs, Stu only low capital investment levels, low productivity, and to top it all off, increased inequality. To be fair, if you didn’t watch the news and all those around you, the Bank of England report might be credible. If we had had a real crash, the pain might have been worse for a while, but the economy would have recovered as fast as other recessions due to the lack of credit and debit distortions.

The article closes on a useful warning and observations. Old firms with such large pension obligations and short-falls are suffering from a double-whammy. Such firms have to divert funds to stem the pension fund blessing that might otherwise have helped source the needed growth in the future to pay for those persons. Even if central banks had not kept rates so low for so long and stuff they investor-classes pockets with cheap money, such firms might still be in trouble-or anyway.

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The Incredible Shrinking Chinese FX Reserve

See: China capital outflow pressure persists.
Good news: Chinese reported foreign exchange reserves reversed recent direction and recovered in March and April.

Bad news: The falling dollar, triggered by the US Federal reserve’s no stationary interest rate policy, helps stem the flow.

Even worse news: If you take account of updated valuation of the dollar since its slide began, the actual flow of funds from China’s FX reserve did continue to contract: by $54bn.

At some point this year the Fed will raise rates again. The dollar’s fall will halt; it most likely will rise in value and with, that great big sucking sound will again reverberate around the world. Capital will flow towards the stronger dollar, the yuan and various assorted emerging markets will come under strain and China will again, in earnest, use its FX reserve to slow the yuan’s fall.  

Add to this the current moribund state of the global economy and their can only be one outcome: ongoing imbalances across major economies and no sign of the necessary collaboration to regenerate growth.

On a Knife Edge: US Interest Rates and the Saving of the Global Economy

I like Greg Ip – a journalist who writes for the Wall Street Journal. I read his column whenever I have the newspaper in hand and his views and understanding of the economy seems to align quite well with mine, most of the time. But this morning I read his piece in the US print edition of the Wall Street Journal, called As Dollar Falls, Global Economy Perks Up (Thanks, Fed).

The article states factually, and shows graphically, how a rising dollar (a phenomena since early 2014) has, for the most part, been a hindrance to the world economy. As the Fed signaled hints of its first rate rise, it’s “lift-off” resulted in a great sucking sound from emerging markets as capital changed direction from high risk markets to the save haven of the US. If interest rates were to rise, better be there on the ground to attract the (slightly) juicer returns. And when we say capital, we are talking of billions of dollars a day in deregulated capital flows. This harmed local currencies, reduced confidence, and generally has been a pain for those emerging markets.  

Once the US interest rate “lift-off” actually started, and the Fed announced an expectation that rates would rise steadily through the year (2016), the strength of the dollar increased and the capital flows toward the US notched up in 2015. Trouble was brewing global as the US economy seemed to be doing quite well when the rest of the world was looking a bit pesky. This, to me, looked like Yellen’s Roosevelt Moment, in reference to the time in 1933 when Roosevelt basically stuck two fingers up at the global economy, torpedoed the World Economic Conference, and took the dollar out of what had been until then, an agreed exchange rate structure.  Any attempt at cooperation to save the global economy was gone.  The US walked off the stage.

What is most interesting since that first rate rise is that Yellen passed the Roosevelt test. The “lift-off” has been much less of a “take-off” and more of a “hold”. Rates have not raised any more, and so the dollar’s rise in value has halted, indeed, it has started to fall. As such capital is again flowing back to towards emerging markets and so stability in the exchange rate and capital flow patterns has begun to emerge. But here is the conundrum that is building: The US economy is certainly not creasing, it is showing fleeting signs of improvement. Should inflation show any hint of an increase, as commodity price falls drop out of the inflation calculation, all talk will again turn to the continued “take-off” as in “vertical movement. That will then reverse capital flows once again, and very sharply. Once inflation kicks in, the Fed will have a devil of a time coping with its pressures due to the unreal level of quantitative easing it has dropped onto the economy. So while Yellen may have passed her initial and most important Roosevelt Moment, she has quite a few similar moments ahead. And we are not playing here with just the US economy – we are playing with the whole shootin’ match!

China’s Debt Binge Headed for the Rocks – and the Global Economy with it

Pictures are more powerful than words, in many cases.  The Economist this week had a graph that presented the cycle of private non-financial sector credit as a % of GDP for a number of countries.  The chart was in the article, Free Exchange: Red Ink Rising – China cannot escape the economic reckoning that a debt binge brings.  The article, and chart, highlight how for countries such as Japan, Thailand (and the Asian financial crisis of the late 1990s), US (sub-prime crisis of 2007) and Spain, all things that go up (such as debt) have to come down.  The chart worryingly shows how China’s debt binge has been in the making for a long time, and has accelerated since 2008.  The real issue is when and how to unwind the debt without unhinging the world economy and killing off growth.  Few countries have been able to do so at such high levels of debt – that’s the problem.

And as if that was not enough, last Wednesday’s US print edition of the Financial Times carried an article that again highlighted the IMF’s misplaced clarion calls for coordination.  The article, IMF calls for global action to lift demand as China exports fall, reports on the IMF’s number 2 (David Lipton) in a speech in which he called on global leaders to increase spending and investment in parts of their economies that would create growth.  This is of course a classic Keynsian drive for government spending, at a time when debt remains significant.  The IMF continues to ask the right question – we do need coordinated action.  But the IMF continues to conclude the wrong response – we don’t need more governance spending, at least overall.  We might leverage targeted spending in some Infrastructure areas.  But we need a lot more coordination in policy change and that takes time.  If the US elects an establishment favorite in its national elections this November, that country will not make the changes needed.  If Trump were to be elected, and the republicans stay in control of the House and Senate, there will be 2 or 3 years of the kind of disruption that would clear the house of cobwebs and overly complex tax and business and private regulation.  And large chunks of non-productive government spending should be cut back, leaving funds spare for real effective infrastructure spending.  

But what the IMF should be doing is helping the leading nations of the world cope with financial volatility.  It should require leading central bankers to form up and create a new currency exchange agreement to help manage the dynamics that are killing global trade and driving the beggar-the-neighbor devlations that are hiding under the rune of negative interest rates, and sometimes not hiding in terms of currency manipulation.   We don’t need fixed exchange rates – we need managed exchange rates – for a period that allows normal, private sector growth to return.  We need a new Bretton Woods agreement.  We need a new Plazza Accord.  We need the IMF to do it’s job, not shirk its responsibility and hand off that impossible task to individual governments.

China’s use of FX Reserves Very Worrying

The front page of today’s US print edition of the Wall Street Journal contains an article and graphic that should be cause for concern.  The title of the article is, Yuan Crackdoan Crimps Business.  The graphic in the body of the article shows the quarterly outflows of China’s foreign currency reserve.  The trend line, representing the growth in quarterly outlay used to help ease the fall of the yuan, chiefly against the stronger dollar, is alarming.  Though China has over $3tn of FX reserves, the last reported quarter used up just over $200m Yuan and the trend line would suggest that the next quarter might be close to $250m.  The trend is a straight line no less.

I have called out the recent effort by China’s PBOC to slow the leakage of yuan across its borders.  The article seems to suggest that the PBOC is much more invasive in day to day workings of the banking system to encourage more controls.  Clearly they are concerned.  We should be very concerned.  In fact, the fall in FX reserve (assuming the data is valid in the first place) is as important in the lack of growth in inflation in the US economy – perhaps more so.  As the yuan falls in value, so more and more of the reserve will be used to soften the fall.  But at some point the market will perceive that the reserve is insufficient to stave off a fall.  At that point the market could well attack the currency.  This is akin to what happened some years ago when George Soros and others “broke the bank” of England and forced the pound out of the ERM.  Clearly the scale here is larger, but the importance is greater too.  China is at the heart of our economic growth engine (with the US and India) and if China sneezes, we all will get sick quite quickly.

See Chinese Authorities Buck the Market to Save the Yuan – But for How Long?

Fear Concerning Chinese Reserves Mount

If you didn’t notice, there are increasing concerns reported in the media about Chinese FX reserves.  It all started a year ago or so when the PBOC’s reported FX reserves showed a slowing of accumulation, and then a slow but progressive fall.  The figure peaked at around $4tn but has since been reported at just over $3tn.  It seems a lot, $3tn, but it has fallen quite fast and the use of the reserve has been in favor of helping the slow but inexorable fall of the yaun, especially against the dollar.  To help the Chinese authorities even changes the way their currency was valued, using a basket of currencies that should have muted the dollars’ rise.  Even that has not helped.  

The concerns by onlookers are mounting.  Every weekend, now almost every day, there are reports of one concern or another.  Last weekend I noted in the US print edition of the Financial Times: Scepticism rife as G20 tries to calm FX.  The G20, meeting in China, was trying to signal to the market that there was nothing untoward about the fall in Chinese FX reserves.  This was an important article since the point was that the G20 itself was voicing support for China – and if the G20 is that concerned, so should we.  In today’s US print edition of the Financial Times there is another article: Concerns grows over Chine’a forex reserves.  The good news is that the most recent data suggest that the outflow of China’s FX is showing signs of easing.  This is good news.  We don’t want China to attract negative market sentiment should it feel that the reserves might be inadequate.  That might lead to a run on the Chinese currency and this would cause turmoil in the markets, and then the global economy. We need to keep an eye on this data point – more so then we should care about the US trade imbalance with China (which is part of the root of the FX build up).

Capital Controls- Here We Come

As expected (see Release the Kraken: Free capital flows will transmit Chinese economic woes fast), and reported in today’s US print edition of the Wall Street Journal, some emerging markets are invoking capital controls to help prevent their currency leaving. The article, Curbs on Outflows Increase, explains that several countries were slapping taxes on certain transactions that resulted in currency movements.  
Certainly these are not large or developed economies but it is a sign of a growing problem. And larger economies may in time respond in kind with their own actions should they anticipate unfair restrictions. It is just a matter of time. Global trade, already down, will take another hit. The very work that would help create growth, is being strangled. That’s just great.