ball of yarn globe

“It’s All China, Directly And Indirectly”

Cardiff Garcia is dancing around the inverted yield curve bond market conundrum: “The supply dynamics of advanced-economy sovereign debt, with net issuance available to the public set to turn sharply negative this year and next…suggest that longer-dated US Treasury yields will be under pressure yet again because of foreign demand…Once the Fed begins to hike the policy rate later this year, there is a chance that longer yields will not follow them higher.”  Some history: “The global macroeconomic imbalances that contributed to the mid-2000s conundrum were the result of deliberate policy decisions made by China and the other reserve accumulators, plus the oil-exporting countries, all of which led to a massive and unnatural influx of capital to the US.  This time around, the marginal excess savings growth is coming from Europe, while the earlier perpetrators of the imbalances have helpfully changed their behaviour.”  “‘What is going on is a great unravelling of the market conditions of the past 15 years’…Underlying such sober projections is a sense that an inflection point has been reached with the end of the commodity ‘supercycle’ and the advent of low oil prices…the main expression of this reversal is the implosion of the ‘China carry trade’, in which Chinese investors borrowed at low rates of interest abroad to pump back into Chinese property and a range of shadowy financial products…Slowing Chinese GDP growth, coupled with a slowdown in construction, is triggering a large bout of capital flight…[And] despite a solid current account surplus, capital outflows over the past six months have drained reserves from China’s vast forex chest.”  Meanwhile, “China has continued to move ahead gradually with a host of reforms…Among the more notable policies meant to rein in previous imbalances is the recently announced swap and restructuring of as much as 60 percent of outstanding debt in local government financing vehicles, or LGFVs, into guaranteed municipal bonds or taking the debt onto the formal budget.”  Also, “Chinese leaders are trying to persuade the International Monetary Fund to label the yuan as a reserve currency…finance officials from Germany and Australia this week said their governments are throwing their weight behind Beijing’s request…The amount of China’s trade that was paid for in yuan…has risen from 0.02% in 2009 to nearly 25% last year.”  “Of course, actual Chinese intentions are pretty hard to discern, but they matter a great deal.  Indeed, even if such global governance arrangements seem rather mundane in comparison to the war du jour in the Middle East, the question whether China can and will accept existing global governance arrangements may be the most consequential long-term issue in 21st century international relations.  It will largely determine whether China’s rise is peaceful or whether it upends the international order.  So we will plan to have a few more blog posts on this in the coming decades.”


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