The renminbi may rise further
In the past year, the Chinese currency has risen by ten percent against the dollar. The risks of shadow banking in China have been pointed out for years, but in 12 months more debt has been added to the United States than the total debt of the People’s Republic. During the corona crisis, Chinese policy is a mirror image of American policy. Not only monetarily, but also fiscally. Even in its approach to Big Tech, China is doing the opposite of the United States. Biden is surprisingly quick to move on many issues, but not on the approach to Big Tech. Meanwhile, China calls out a new tech company almost every week. It all has to do with the Asian monetary zone based on the renminbi that China is trying to create. Compare it to the soaring D-mark in the 1970s. A controlled growth of the German money supply (M3) ensured relatively low inflation rates compared with, for example, France and the United States. In the 1960s there were still four Deutschmarks in a dollar, but by the end of the 1970s there were less than two – a doubling in ten years. This requires discipline and control, which is now central to Chinese policy.
The Great Financial Crisis (GFC) has left deep psychological marks in China. It has reminded the Chinese how dependent they are on the US dollar and on US banks. Since the GFC, China has adopted a policy of reducing its dependence on the United States. The development of digital payments through tech companies (and not US banks) fits perfectly into that strategy, until Beijing threatened to lose control. This is now being rectified and, as usual, the Chinese government is going in hard from the start. Ordnung muss sein. History shows that, in the end, a solution is found that the Chinese government, consumers and even shareholders can live with.
While the United States experiments with monetary financing under the guise of the Modern Monetary Theory, the Peoples Bank of China takes its cue from the Bundesbank. Inflation is the evil that must be fought. It is not only important to make the renminbi a reserve currency. Excessive inflation also creates unrest among the population. Prior to the Tienanmen uprising, Chinese inflation was 20 per cent. That will never happen again. In the GFC, China was forced to pump a lot of money into the economy. As a result, the return on invested capital came under severe pressure. A government usually does not care about returns, so there is nothing for an entrepreneur to do there. Now it is the American government that finances spending with money that does not exist and that will not produce any return. The Chinese, on the other hand, do everything they can to keep the growth of money in line with the economy. This discipline ensures innovation and higher productivity. Only projects that add value are financed.
The remarkable thing is that the Americans are continuing even now that there are plenty of signs that inflation is going to rise. There is an obvious shortage of capacity in many areas (chips, labour, raw materials). This is not the time for massive stimulus. Yet there is a major infrastructure investment programme coming at a time when the Chinese government is cutting back. Moreover, this package follows a support package that is larger than the entire Canadian economy. Monetarily, the tap is wide open in the United States, which is clearly visible in the property market. Timber prices have risen by 500 per cent in one year. China, on the other hand, is trying to put the brakes on the property market. Every time a new easing measure is announced in the United States or Europe, China seems to do the opposite. As a result, the money supply in the United States is growing much faster than in China. As a result, the dollar may fall further versus the renminbi. A stronger renminbi will ensure a moderate inflation trend. At the moment, the ten-year interest rate on Chinese government bonds is still far above the American ten-year interest rate. The same was true for German interest rates versus American rates at the end of the 1960s. Ten years later, German interest rates were far below American interest rates. Investors in Chinese government bonds will not only benefit from falling interest rates over the next ten years, but also from the rising renminbi. Moreover, in the next crisis, the renminbi could also play the role of a safe haven, as that is part and parcel of a reserve currency.