China most interesting when misinterpreted backwards

Update on January 10

Here is yet another example of the need to be bass ackwards on China. This comes, inevitably, from Business Insider channeling one of the most “brilliant” minds on China:

Chu has laid out her predictions for the year ahead in a note titled ‘The war on outflows,” and two things really jumped out at us.

China’s war on money leaving the country (outflows) is being fought with the country’s foreign-exchange reserves and capital controls — that can’t last forever.

China’s future hinges on one wild card — the US and the dollar.

China official sales of dollar assets ACCOMMODATE private capital outflows. They are not at war with it. When Roosevelt snuck through Lend Lease, he was not “going to war” with Britain.

Seriously, China coverage is a weird thing. When the media cover the US economy, the crazy lazy shit they say is random. With China, seemingly uniquely, there is some sort of rule that you have to say the OPPOSITE of what is true.

That kind of work might actually be useful.

Original post

It seems like a lot of people are most attracted to the interpretation of China that is most backwards from what is actually going on.

When the US was in liquidity trap, the big worry was that the Chinese might sell their dollars out of disgust with too much QE of deficit finance in the US. That should not have been a worry, but a hope, although one that was not realized.

Had China sold Treasuries, then the dollar would have weakened and the US would have got stimulus through the trade sector.  Long yields might have gone up slightly, but the extent of the sell-off  there would be limited by the Fed being on hold — you know, because of liquidity trap.  Maybe the term premium would have risen. Ok. That might have actually given QE2 and QE3 a purpose! So anyhow, that “worry” was  totally backwards.

Then a couple years ago, China started losing forex reserves because of financial instability in China (or worries of) which were encouraging private capital outflows and putting downward pressure on bond yields, a process that China reserves management was trying to mitigate. Of course, that created the huge risk of a spike in Treasury yields? Yeah, a rush of private capital inflow and a stronger dollar would really toast the Treasury market.

Now I see a “portfolio manager” from Skybridge saying that one way China could really screw the US would be by not selling dollar assets and just letting the RMB collapse from its “artificially high” level. But the US is now out of liquidity trap, to the main effect of that would be merely to delay Fed tightening.

It might be against Trump’s economic agenda, assuming he has one, which I don’t. But it is hardly the biggest threat out there. I would not even describe it as a negative *, were it to happen. It might have been a risk when people were worrying about the opposite: see above.  (Developments in China or the US that might spark a trade war and possibly capital fight from China might themselves be an issue. But the adjustment this guy worries about is mostly benign.)

Anyhow, if you can figure out some huge issue that is going on in China with really important implications for the global economy and markets, and if you want to get on the TEE VEE talking about it, I think the best strategy is to get it completely backwards.

This is going to sound grumpy, so sorry. But the “portfolio manager” probably should not use big words like “corporatist.” He and the interviewer seem to believe it means doing things that the managers of corporations like. Also to repeat a point I have already become tedious about, I would resist the urge to classify things as essentially this or that. Just talk about what idiot will do or what you think he will do.

PS: I finally figured out how to link directly to a Bloomberg video. Bit embarrassing it took a year.

* A prolonged flood of surplus capital from Asia that forced the dollar higher for a prolonged period would create a risk of a redo of the mid-2000s bubble, whose origins I tried to explain here.   But that longer-term concern is not what the “portfolio manager” was getting at.  Moreover, I doubt history would repeat itself , as the lessons from that era are still fairly fresh. In any event, the risk there comes from an enduring flow, not from a transitory shock.