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Beware China’s quantitative tightening

We’ve discussed last week [1], that China’s recent easing attempt may not be enough. Our Chief Currency Strategist Dean also mentioned [2]the lack of effort from PBoC to boost the Chinese economy.

Craig Stephen from MarketWatch is echoing the same view, going one step further to suggest that China’s tap may be running dry:

Now, however, some analysts warn China’s money tap is running dry and this could trigger the next major deflationary shock……..

…… China’s prodigious money supply growth has been the counterpart to its bulging trade surplus. In fact, China has been consistently running both a capital and current account surplus, where, in order to keep it currency value suppressed, it accumulated its $3 trillion plus foreign reserve mountain. This led to vast quantities of new money being created as the central bank printed yuan as it exchanged foreign currency.

The change is now China’s surpluses no longer look as if they can be taken for granted, nor indeed the expectation of continued strength in the yuan.

Via – MarketWatch [3]


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