China Update
News from the East: China’s Leaders Split Over Policy for $3 Trillion Forex Reserves (Financial Times)
The fact that China’s forex reserves are poised to fall below $3tn as its currency flirts with Rmb7: $1 has sharpened what was already a divisive domestic policy debate. That debate centers on whether the country should continue to “waste” its forex reserves on supporting the renminbi.
Economically literate officials in Beijing argue that China’s forex stockpile is both an embarrassment of riches and a problem to manage. Indeed, the International Monetary Fund reckons that countries need to hold only enough forex to pay for three months’ worth of imports and honor their international short-term debt obligations.
At the beginning of this year, such officials said in closed-door meetings that at least $1tn of Beijing’s forex holdings represented Chinese companies’ risky overseas borrowings that should be paid back anyway, especially as the dollar continued to strengthen against the renminbi. According to these officials, China would be fine with forex reserves of $2tn, or even $1tn.
On the other side of the debate are the mercantilists, some of them senior members of the leadership without formal economic training, who equate large forex holdings with national strength and prestige. Others, more reasonably, simply say that the holdings are a resource that should be spent wisely. According to these cadres, the PBoC should simply let the renminbi fall where it will in order to keep China’s forex reserves above $3tn. Surrender seven, in other words, to hold the line at three.
There are two problems with the mercantilists’ strategy. The first is that the more the renminbi falls against the dollar, the harder Chinese companies and individuals will try to accumulate dollars themselves, exacerbating capital flight. Hence the State Council’s recent batten-down-the-hatches approach to cross-border capital flows, with stronger controls on everything from Chinese companies’ overseas direct investments to foreign investors’ dividend payments back to headquarters.
The second problem is Donald Trump, the mercantilist US president-elect. From his public comments, Mr Trump appears to believe that the Chinese government has been “manipulating” the renminbi downwards against the dollar when it has in fact been doing the opposite.
If China were to step back and let market forces drive the renminbi sharply down against the dollar, it could set the stage for a trade-war collision with the most unpredictable US president-elect that the Chinese government has had to deal with.
The next few days will shed some light on who in Beijing is winning the renminbi v reserves policy debate. The world will be watching.
News from the West: Percentage of Young Americans Living With Parents Rises to 75-Year High (WSJ)
Almost 40% of young Americans were living with their parents, siblings or other relatives in 2015, the largest percentage since 1940, according to an analysis of census data by real estate tracker Trulia. Despite a rebounding economy and recent job growth, the share of those between the ages of 18 and 34 doubling up with parents or other family members has been rising since 2005. Back then, before the start of the last recession, roughly one out of three were living with family.
The trend runs counter to that of previous economic cycles, when after a recession-related spike, the number of younger Americans living with relatives declined as the economy improved. The result is that there is far less demand for housing than would be expected for the millennial generation, now the largest in U.S. history. The number of adults under age 30 has increased by 5 million over the last decade, but the number of households for that age group grew by just 200,000 over the same period, according to the Harvard Joint Center for Housing Studies.
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