Monday, January 11, 2016

A modest proposal for the PBoC

The specter of currency wars and competitive devaluation is in the air. Evan Soltas recently penned a post at FT Alphaville addressing the issue of how petrostates can solve their fiscal woes. The answer was either fiscal austerity or devaluation. The Telegraph reported that the World Bank was urging Saudi Arabia to use its currency reserves to defend the USD-riyal peg and resist the siren song of devaluation.

The Chinese elephant in the room
The elephant in the room of competitive devaluation is China. With the latest release of China PMI is looking a bit on the weak side, another round of stimulus would not be surprising at all.

As Sober Look pointed out, there is room for the PBoC to ease monetary policy:

If the Chinese central bank were to undertake any steps to stimulate the economy, however, it would have the effect of putting downward pressure on its currency, which could stoke fears of a currency war. Business Insider reports that Charlene Chu of Autonomous Research has suggested that China needs as much as USD 5 trillion in credit injections in order to have a similar effect as the shock-and-awe campaign of 2009. If Beijing were pursue that course of action, I have a modest proposal for the PBoC.

The full post is at our new site here.

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