Friday, Feb 2, 2024

why I might be wrong on China liquidity, and the other Fed mandate

Phil: “Do you ever have déjà vu, Mrs. Lancaster?”

Mrs. Lancaster: “I don't think so, but I could check with the kitchen.”

- from the excellent film ‘Groundhog Day’

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Hi all, and Happy Friday!! And Happy Groundhog Day to all those who identify with the idea of a furry rodent poking his head out of his burrow after a nice long nap, concluding that things are just too complicated in the outside world, and deciding to snooze some more.

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Note: I’m speaking at BlockWorks’ upcoming Digital Asset Summit conference in London on March 18-20. Normally I say no to conferences, but this is one of the very few worth travelling for. If you’re thinking of going, it’d be great to say hi, and here’s a discount code you can use: CIMN10.

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IN THIS NEWSLETTER

• The China liquidity thesis – why I might be wrong

• The other Fed mandate

WHAT I’M WATCHING

The China liquidity thesis – why I might be wrong

Yesterday, I wrote about why I thought expectations of liquidity injections from China were overblown, at least when it came to the impact on crypto markets.

Today I’m going to focus on the “yes, but…” by looking at why more China liquidity injections are likely, and how it would be good for crypto assets.

One channel for economic support that I didn’t mention yesterday, despite its relevance, is money printing.

Total money supply is subject to many forces, including bank lending and trade balances. But one relatively easy-to-control source of money supply is simply issuing more currency. The world’s second largest economy does not enjoy the same “exorbitant privilege” as the US (which allows the world’s largest economy to essentially print money when it wants because there will always be demand for dollars); printing money in China can easily result in inflationary pressures unless the demand for yuan rises at a similar pace.

But China is currently undergoing a period of deflation. More inflation would probably be welcome.

Another barrier to more money printing is that it could weaken the yuan even further.

This is a problem for China, not so much for its impact on import prices (and therefore also on inflation) as for the message it sends. President Xi Jinping needs the world to see China as a strong trading partner, which is harder to achieve when the yuan is weak. He also needs to boost global demand for yuan, to support its value and to weaken reliance on the US dollar, and likely further depreciation can hinder that. Last month, Xinhua News Agency reported that President Xi had specifically singled out a “strong currency” as one of the key requirements for a “financial power”.