China: The Significance of Wednesday’s rate hike
· The rate hike means that the PBOC has won a political battle with the politicians about whether growth will be controlled or not
· The measure itself – selling three month T Bills at a higher rate for the first time in 5 months – sends an important signal to markets: the PBOC wants to reduce its current excess supply of money, which is what our Economic Clock® is indicating
· Having said this, the measure itself is a repeat of what we saw 5 months ago, so its “real” economic impact will be muted. This goes back to my first point, namely that the PBOC is having a policy fight with China’s politicians about how quickly to slow down China’s growth
· China’s inflation is of “cost push” nature: producer prices are rocketing, courtesy of stronger input prices such as commodities, unit labour costs and wages.
1 But there is little possibility of “demand pull” inflation, whereby too much money chases too few goods. Indeed, our Economic Time® is characterized by an excess supply of goods, not by an excess demand for them.
2. Nobody can gauge the “real” unemployment rate, but I guess that it must be above America’s effective 18%, so I would guess that unemployment stands at around 25% of the labour force.
USA: waning influence on Asia?
· I tend to view this as an “and-and” and not as an “either-or” situation. If push came to shove, I would bet that most Asian nations would prefer to sidle up to America than to China
· Besides, from a defence/security angle, the bulk of the region remains firmly on America’s side
· Having said this, America’s widening credibility gap – her federal government’s hypocrisy regarding the recent bank bailouts, for instance; Obama’s lack of hands-on leadership and her futile and ill-informed attempts in the Muddle East and in Afghanistan/Yemen - suggest that the American flag is waning in influence out here.
· But to under-rate America’s ability to re-invent herself would be a most severe mistake, indeed.
· Concurrently, to over-rate China’s leadership abilities would be a most severe mistake, too; indeed, it seems to me as if Beijing has so many domestic issues to contend with that she has precious little time to “go abroad”, other than in the quest for natural resources such as in the nether regions of SE Asia and in Africa…
1. besides, any capital flight data will indicate just how keen the Chinese are to get their spare money out of China, suggesting that they don’t feel that the good times will last forever, either.