China: Choosing More Debt, More Unemployment, Or Transfers – Michael Pettis

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China: Choosing More Debt, More Unemployment, Or Transfers – Michael Pettis

China: Choosing More Debt, More Unemployment, Or Transfers by Michael Pettis, Global Source Partners

Special points to highlight in this issue:

  • In 2016 the PBoC will evaluate the change in the value of the RMB not just in dollar terms but increasingly in terms of a wider basket of currencies. We should not discount the possibility, however, that after a quarter or two of dollar strength or stability, the dollar will begin to weaken. The US current account deficit may be forced to grow substantially because of irresponsible trade policies, primarily in Europe but also in much of the rest of the world, and if it gets large enough to undermine the US recovery it could easily cause the dollar to fall.
  • The decision about the value of the RMB has become so politicized that predicting the direction of the Chinese currency has become harder than ever, but should Beijing choose to devalue by 10-15% over the next two years, we should be very aware of the potentially destabilizing impact on net capital outflows from China. There may be enough confusion on what drives inflows and outflows that the impact of currency weakness may be the opposite of what Beijing expects.
  • Given the depth of China’s economic imbalances and the difficulty of reforming the financial sector, every policy choice Beijing faces is ultimately a choice between a rising debt burden, rising unemployment, or