The Chinese Money Behind Global Inflation Baseball

China’s economy is nowhere near recovered from 2020’s steep recession, yet, contrary to textbook demands, the Chinese central bank is winding down its support. This is especially important given that monetary policy last year hadn’t actually been all that supportive to begin with (see below). The two major money outlets, currency and bank reserves, were allowed a noticeable yet only partial detour upward despite the country facing its most severe setbacks.

Unlike most characterizations, China’s monetary situation is very much like its economic situation. Things have clearly changed and they aren’t going back. This puts an entirely different spin on that country’s reported “no sharp turn” policy.

The PBOC’s activities merely confirm what top officials have already said repeatedly – this is it, as good as it’s going to get. Whatever comeback the country’s economy has managed, leadership has proclaimed it having reached purported potential. In light of that judgment, what the central bank is doing with its balance sheet makes sense – once you understand how the Communists view their own condition.

Quality not quantity growth means, as it has meant for nearly four years, minor interventions no matter what that take at most a short-run position. Nowhere is this more evident than in the money side of the PBOC’s balance sheet which, when confronted by China’s biggest economic slide this side of Mao, throughout 2020 didn’t really provide much rescue at all.

And now it’s coming off.

Currency issue was by far the preferred approach; totals were adjusted so that post-COVID there was more being issued faster than any point since 2013. But even in the face of an outright economic contraction, the PBOC throughout 2020 didn’t even come close to its 2009-11 stance in currency. A bit higher/better than 2014-19 isn’t really that much of a change, yet by being so comparatively little highly revealing nonetheless.

In bank reserves, after years of contraction what followed COVID was only a minor, expressively unexceptional shift. Even today, the latest update for April 2021, the balance of systemic bank reserves remains in the same range as 2015-16’s lows. There was hardly any movable imprint at any time during 2020 by monetary policy despite the serious economic circumstances.

And now both currency and bank reserves are being slowly drained. To begin with, each had been able to achieve that much less of a constraining position (compared to 2018-19) if only because of RMB programs like the MLF or SLF – included on the PBOC’s asset line of claims on other depositories (below).

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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