Deflation, like winter in Game of Thrones, is coming, and like that winter, it’s going to be bad. From Ambrose Evans-Pritchard at telegraph.co.uk:
China has abandoned a solemn pledge to keep its exchange rate stable and is carrying out a systematic devaluation of the yuan, sending a powerful deflationary impulse through a global economy already caught in a 1930s trap.
The country’s currency basket has been sliding at an annual pace of 12pc since the start of the year. This has picked up sharply since the Brexit vote, suggesting that the People’s Bank (PBOC) may be taking advantage of the distraction to push through a sharper devaluation.
“This makes a mockery of the PBOC’s suggestion that its policy is to keep the currency’s value stable,” said Mark Williams, chief China economist at Capital Economics. “Markets will not take PBOC policy statements at face value in the future.”
Mr Williams said it is unclear whether Beijing intended to deceive investors all along when it gave categorical assurances earlier this year, or whether it is feeding on events.
Either way the markets have stopped believing what they are told, storing serious trouble for the authorities should there be another surge in capital flight later this year, as widely expected.
“When it comes, the PBOC will find itself sorely lacking in credibility. It may have to intervene on a large scale to maintain control,” he said.
Factory gate prices within China are falling at a rate of 2.9pc, further amplifying the deflationary impact. Analysts fear that Beijing is engaged is an undeclared policy of beggar-thy-neighbour mercantilism, trying to avert an industrial crisis at home by exporting its overcapacity in steel, shipbuilding, chemicals, plastics, paper, glass, and even solar panels, to the rest for the world.
“When you have a relatively closed capital account like China, it means that any currency move like this is a policy decision,” said Hans Redeker, currency chief at Morgan Stanley.
“They seem to be overriding their own model and letting the remnimbi (yuan) fall to improve competitiveness. They are in the same sort of deflationary syndrome as Japan in the 1990 but on a much bigger scale. The global economy is in no position to absorb this.”
Import prices in Japan have collapsed by 20pc over the last year, 5.5pc in Germany, and 5pc in the US, despite the recovery oil prices.
Mr Redeker said China’s attempt to export its problems though devaluation is a key reason why inflation expectations are crashing to record lows across the developed world.
This in turn is driving bond yields to historic lows almost daily, with 10-year borrowing costs down to -0.58pc in Switzerland, -0.28pc in Japan, -0.16pc in Germany, 0.14pc in France, 0.78pc in Britain, and 1.4pc in the US.
The actions of Chinese elites are mystifying. Premier Li Keqiang gave a cast-iron promise in January that the yuan would remain “basically stable” in weighted terms. “China has no intention of stimulating exports through competitive currency devaluation,” he said.
Top officials went on a worldwide campaign to broadcast the same message, reassuring investors and Western leaders in Davos that China would play the good global citizen. This helped to stabilise the yuan after a spasm of capital flight and $700bn of reserve depletion. It appears that premier Li – a reformer – has been sidelined in an internal power struggle.
To continue reading: World faces deflation shock as China devalues yuan at accelerating pace
