More on declining Chinese FX reserves…

… from Russel Napier here (via Zerohedge). I fully agree with him that defending the peg and the corresponding reserve-drain is a game changer. Whereas the whole world is focused on whether the Fed will hike or not, global liquidity conditions, as exemplified by declining FX reserves in EMs, have been tightening for a while. Of course, a fed tightening would merely reinforce this trend, since the expanding US monatary base has enabled the distortion to build. Napier summarizes beautifully,

(…)One day we will tell those much younger than ourselves that once upon a time there was a large economy that ran a surplus on both its current account and on its capital account for more than twenty consecutive years. We will tell them, when they’re sitting comfortably, that because it went on for twenty years everyone assumed it would go on forever, despite the fact that such a thing had never ever been seen before. Then one day it ended. And the world thought that this would pass or, if it didn’t pass, they thought that it was not of great import (…)

Think about how many unsustainable capital structures have been built around this epic credit expansion. By this I do not only mean the obvious candidates like commodity exporters. It can be argued that the global shifts in, say, manufacturing capacity have been greatly exaggerated by 20 years of easy money in China. Given that most businesses in China only exist due to low cost of capital (think solar panels), it can be argued that many a manufacturer in DM has been pushed out not because of a lack of competitiveness, but because of easy money in China.

Disclosure: short AUD and CNY


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