The Chinese renminbi remains in an uptrend against the US dollar, although the pace of appreciation has slowed significantly this year.

The renminbi has risen 1.3% against the US dollar since the start of the year, after appreciating 6.7% in 2020.

Renminbi / US $ (inverted scale)

Source: Bloomberg

The currency has certainly not yet been destabilized by the ongoing turmoil over the regulatory liquidation of Chinese internet stocks, many of which are still listed in New York, recently discussed in this column (“Chinese ADR listed in the US is dead, invest on the mainland instead, September 2, 2021).

To be sure, Chinese leaders continue to view Beijing’s hard-money policy as a stark contrast to the currency depreciation policies prevalent in the G7 world, most dramatically evidenced by the near-record amount of the dollar. negative yielding debt in the euro area.

Total euro area debt with negative yields jumped to US $ 9.38 billion in early August, the highest level since mid-January, from the peak of US $ 9.98 billion reached in mid-December last year; although it has since declined to $ 8.22 billion.

Euro area negative yielding debt

Source: Bloomberg

If the US continues to hurt the dollar, China wants another global currency

In this context, it should be remembered that China has repeatedly criticized the unorthodox US monetary policy since former Federal Reserve Chairman Ben Bernanke first launched quantitative easing in late 2008.

This prompted PBOC Governor Zhou Xiaochuan to write an article published by the Bank for International Settlements in March 2009 calling for a new international monetary system based on Special Drawing Rights (SDRs) and not on the US dollar ( see the BIS article: “Reforming the international monetary systemBy Zhou Xiaochuan, March 23, 2009).

The SDR is an international interest-bearing reserve asset created by the IMF.

It is now based on a basket of international currencies comprising the US dollar, yen, euro, pound sterling and renminbi.

The renminbi joined the SDR basket on October 1, 2016.

China thinks US will flash on tariffs first

This is why it was interesting to read an account of recent comments on the US economy and its dependence on China, by Jin Canrong, an influential academic economist at Renmin University of China in Beijing ( see Asian time article: “Will China bail out Biden?By David Goldman, July 31, 2021).

They are interesting because they reflect what this writer told mainland technocrats to think about the U.S. economy in light of the massive monetary and fiscal stimulus triggered by Covid.

It is that America has entered an inflationary period and that the strong renminbi will add to this inflationary pressure.

Professor Jin Canrong highlighted the continued dependence on Chinese imports in an environment where US consumer demand has been boosted by fiscal and monetary stimulus measures.

Total imports from China stood at $ 540 billion annualized at the end of August.

Annualized Chinese Exports to the United States

Source: General Administration of Customs of China

He went on to say that strong demand for Chinese imports, against the backdrop of the strong renminbi, would exacerbate inflationary pressures in the United States.

All of this is in line with the baseline scenario here that now China will export inflation to America rather than the other way around that has been the trend for the past 20+ years.

But Jin brings up another interesting point.

It is that this trend will lead to pressure to abolish the Trump administration’s tariffs on Chinese products that have made them more expensive for American consumers.

Indeed, Jin cited a comment by US Treasury Secretary Janet Yellen on how tariffs on Chinese goods had hurt American consumers, as they clearly have.

On this point, Yellen said in an interview with the New York Times in mid-July: “Tariffs are taxes on consumers. In some cases, it seems to me that what we did hurt American consumers, and the kind of deal the previous administration brokered really didn’t solve in many ways the fundamental problems we have with China. ” (see New York Times article: “Yellen says trade deal with China has “hurt American consumers”», July 16, 2021).

That Jin is right, and he just might be, it’s interesting that this is what Beijing thinks because it will shape the policy of the Chinese leadership.

It’s also worth noting that Jin advises the Chinese leadership to keep Sino-U.S. “No-break” relations with a move in Washington, say, to lower Trump tariffs, thus creating space for a possible rapprochement.

It is certainly possible.

Yet the risk, with the bilateral consensus against China so entrenched in Washington, is that President Joe Biden will feel unable to be lenient on China in the run-up to the November 2022 congressional elections, even if those elections are still in 14 months.

Easy Money Fed policies greatly benefit the rich

Meanwhile, the Federal Reserve continues to be criticized, concerns shared by this author, about the role that monetary policy has played in wealth inequality, via asset price inflation, since the initial adoption of quantitative easing.

Clearly, this argument is not accepted by the Fed.

However, this author recalled the continued role played by the Fed, in terms of stimulating asset price inflation, by an article on the second quarter results of four major American banks (cf. Financial Time article: “US lenders offer a tide of ‘cheap money’ to the rich», July 26, 2021).

The main point of interest is that the share of total loans made by the wealth management branches of JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley accounted for 22.5% of the total loan portfolios of the four banks to the end of last quarter.

In dollars, they reached over US $ 600 billion, up 17.5% year-on-year.

This is a reminder that the activity of private banking / wealth management since the 2008 crisis has mainly consisted of lending money to the rich to finance asset purchases and carry trades, a process massively stimulated by the extraordinary verbal engagement. of Bernanke in 2011 not to raise interest rates. during two years.

As a result, according to the same article, JPMorgan and Citi now lend more money to a small number of high net worth clients than to their millions of credit card customers and it is clear that credit card borrowers are paying rates. much higher.

The average interest rate on a US bank credit card is still 16.2%.

Meanwhile, from the perspective of the wealthy, borrowing against potential illiquid assets makes perfect sense as it can be very tax efficient.

For example, this avoids paying a high capital gains tax on the sale of an asset. Non-U.S. Readers may not be aware that in Democratic states like California and New York, the combined federal and state capital gains tax on long-term capital gains is 37.1% and 34.7%, respectively.

The above is an example of one of the many distortions created by 12 years of unorthodox monetary policy in America.

And in many ways, it’s even worse in the eurozone after seven years of negative rates, with many high net worth private banking clients being paid to borrow.

Nevertheless, this author would also add that it is quite logical that the rich continue to borrow on their assets, because the assumption must remain that the central banks of the G7 will not be able to escape the pursuit of a weak monetary policy. orthodox and the obvious way to hedge against currency debasement is by owning physical assets, be it stocks, real estate, or gold, or digitally scarce sources of value such as Bitcoin.

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