I was figuring that QE2 was the dominant factor in price action, subject to “occasional and violent corrections.” Now I suspect that QE2 in USA has now set the successive platform by other jurisdictions to either actively engage in their own versions of QE or take appropriate policy actions to accommodate / facilitate QE2 through QEn in the USA. In Europe we should watch & brief on the enveloping situation centered around Ireland this time around, and also pay attention to the promised but difficult to accomplish British fiscal pullback. In Asia we should watch & brief on accommodative measures by China and Japan.
In China’s case, that economy does affect greatly the global inflation vs deflation outcome, and what China does in tacit cooperation with or in active resistance to FOMC shall matter greatly to our judgment regarding the financial markets. As of now, I note that while China is ostensibly tightening and certainly steeling against inflation so as to guard its social stability, China is also working out ways to absorb the FOMC QE2 and to help keep the FOMC QEs going.
In any case the trend remains intact until not.
The view that the US$ will continue to weaken, unchallenged is not my base case view.
I believe that there will be a global race to zero rates and there will obviously be push back from Asia (capital controls), Japan (FX intervention), and Europe which will inevitably be late to the party with its own QE2. Therefore, the best expression of global QE(n) is a rally in commodities and not necessarily, a weak US$ view. The truth is simply that the currencies are taking successive turns to weaken against commodities, so far.
in the mean time, China figures ... just in in-tray
Cool heads over hot money
CAIXIN VIEW?Edited by Hu Shuli ?Nov 18, 2010
A speech made by China's central bank governor Zhou Xiaochuan this month at a conference organised by Caixin Media has sparked unusually fevered speculation.
The buzz - over his "pool theory" to cope with the excess liquidity set off by the US Federal Reserve's second round of quantitative easing - is overwhelming even for a man whose words are normally closely monitored.
We ought to focus debate not on the form of this strategy, but on the thinking behind it that will guide the direction of China's monetary policy and hint at how it intends to minimise financial risks.
The negative impact of the US policy on emerging markets, such as the pressures from speculative capital inflows and on the home currency, poses a serious challenge to the global economy. According to Zhou, China "hopes to contain [the short-term speculative money] in a `pool', rather than let it flood the real economy. And when the money exits the market, we let it drain from the pool. In this way, our economy on the whole would be protected from the impact of abnormal capital flows".
It is clear from his comments, and those made by state leaders, that the Chinese authorities have already worked out the measures to counter the currency challenge. In fact, Zhou's pool theory is based on the principles of capital management and the use of the central bank's currency tools.
Developed countries and emerging economies are recovering from the global financial crisis, but at their own pace. Without a co-ordinated approach, some countries hope to invigorate their economies by easing money supply for fear of deflation. The inevitable result is that a huge supply of capital is pumped into the market.
How can emerging markets like China deal with the situation? The answer is to take cyclical measures to alleviate cyclical impact, and carry out structural reforms to treat structural problems. Speaking about the renminbi exchange rate reforms at the conference, Zhou again used the analogy of traditional Chinese medicine and Western medicine: no one method alone can work, and reforms should be carried out gradually, and adjusted according to market feedback. This argument can also be applied to the macro economy.
We should tackle the continued inflows of money with counter-cyclical regulatory measures, implemented at both the macro and micro levels. While the macro-economic policies control the overall supply, the focus on counter-cyclical regulations must not slacken. Experience shows that capital controls are far from fully effective, and excess liquidity could still adversely affect the financial system and asset prices. Regulators have to remain alert in their supervision. In this regard, the latest Basel rules for banks have proposed many counter-cyclical measures that are worthy of study.
The origin of the liquidity rush is in fact structural. The financial meltdown did not correct the underlying imbalance of the global economy. And in its aftermath, instead of carrying out the painful structural reforms needed, major economies relied on cyclical jabs to treat long-term growth problems. The measures naturally failed to achieve growth that is strong, balanced or sustainable. The US quantitative easing is an example of using a cyclical policy to try to resolve a structural problem.
To buffer itself against the risks of excess liquidity, China must carry out arduous reforms, both internal and external.
Domestically, a speedy transformation of its economic development model and continued efforts to stimulate domestic demand, especially consumption, could effectively strengthen China's capability to withstand external shocks and maintain stable and rapid growth. This goal is a priority in the 12th five-year plan, and hopes are high that concrete steps will follow.
Internationally, China should actively engage in international forums including the G20 so as to address shortcomings in the global system, such as the unfair and unreasonable international monetary system. Meanwhile, China should speed up its efforts to internationalise the renminbi, as well as reforms of its exchange rate mechanism. This will pave the way for the renminbi to become a truly international (SEHK: 0732) currency.
China must adopt a calm and rational attitude in dealing with such complex issues. Its view of the policies taken by other countries should not be coloured by emotion. Taking the moral high ground will only obscure the nature of the problem, and lead to a narrow, ineffective solution.
In his speech, Zhou acknowledged that the Fed's strategy was understandable, given the state of the US economy. But from the world's perspective, he noted, such a policy had many negative consequences. On the issue of how to cope with the "hot money", Zhou said China should seek to keep its macro economy balanced while taking steps to prevent risks, in particular those arising from speculative activities. At the same time, he conceded that it would be impossible to completely eradicate profiteering. His views are worth pondering by the "conspiracy theorists" both in China and the West.
The G20 Seoul Summit ended only a week ago. Before and during the meeting, there was no shortage of criticism and explanations about the Fed's actions, while Kim Choong-soo, governor of the Bank of Korea, the central bank of the host country, said it was too early to comment on the policy.
Such a cacophony of opinions once again illustrates the importance of strengthening international co-ordination.
The global economy should focus on efforts to create a liquidity pool to contain the hot money and carry out structural reforms that have been clearly thought through. In the long run, these would seem to be the more important and meaningful tasks.
This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caing.com |
