The plan, but ultimately large-scale money printing is the only way to escape the deflationary trap. China and the Chinese central bank will also take similar action. Don’t be deceived by the initial mild intervention – the Chinese central bank will ultimately print trillions of yuan to adjust the scale of the Chinese economy. Remember, this is Xi Jinping’s intention!
QE is about to be launched in China, but this is only half of the battle. Banks need to start lending again to generate high nominal GDP growth.
Let’s go back to the incentive mechanisms for senior executives of state-owned banks. They are reluctant to issue a large amount of new loans, as some of these loans will undoubtedly become bad debts and may be investigated for corruption issues in a few years. They need to know that Beijing will support them.
One sign that the People’s Bank of China will encourage credit growth is a recent series of monetary policy measures that indicate the Chinese government’s announcement of borrowing and direct capital injection into the banking system. Considering that the state owns all the banks, borrowing is just a form of transferring funds from the left hand to the right hand. But I think this has to do with image. Beijing is showing through action that individuals will not face risks if bank managers increase lending.
Another sign is that Beijing is preparing to relax its handling of corruption and restore the “three distinctions” policy. In a recent party announcement, the Politburo told party members that they will forgive the mistakes of grassroots officials who take action to improve the economy. By eliminating the personal risks of pursuing targets, officials can begin lending in the desired quantities and revitalize the economy.
The financial indicators of Chinese banks, especially regarding non-performing loans (NPLs), seem somewhat false. According to data from the Bank for International Settlements (BIS), the average NPLs in the banking system reached about 22% after the real estate crisis, but the NPLs reported by Chinese banks are only 2%. Are Chinese banks really that special? I don’t think so. This also explains why Chinese banks are only willing to lend to projects directly supported by the government. It’s like a bank’s loan portfolio only includes loans to companies like FTX, Three Arrows Capital, BlockFi, Genesis, and Voyager. Would you believe the bank’s reported low NPL ratio after knowing that these companies have all gone bankrupt? To revive the “animal spirit” of banks, Beijing needs to restore their balance sheets through equity injections.
Another policy that makes me believe that Beijing is ready to loosen its grip on banks and allow them to lend more widely is the upper limit on total compensation for bank employees. According to recent government instructions, I believe the maximum total compensation limit for all financial services industry employees is 420,000 USD, whether they work in state-owned or private banks. When the US bailed out its banking industry, it did not impose similar restrictions; Jamie Dimon, CEO of JP Morgan, earned 17.6 million USD in 2009 after the bank received government relief. Beijing is well aware that a rekindling of inflation is very profitable for the banking system, especially when the government essentially guarantees all loans. They also know that wealth does not trickle down, which would cause dissatisfaction among ordinary people. Beijing least wants to see a “eat the rich” movement similar to “Occupy Wall Street” on Nanjing Road in Shanghai. This is consistent with Xi Jinping’s plan for common prosperity.
Beijing is quietly conveying its message of injecting currency “chemotherapy” into the market. You just need to observe carefully to see it. One side effect mentioned by many analysts that could cause Beijing to stop taking these measures is the devaluation of the renminbi relative to the US dollar.
Renminbi (CNY)
Russell Napier wrote a brilliant article explaining why he believes China is ready and willing to take the “monetary chemotherapy” I described in the previous section. He also believes that Xi Jinping will tolerate the weakening of the renminbi caused by the sharp increase in supply. I’m not sure if Xi Jinping will allow a significant devaluation of the renminbi, as it could trigger capital outflows. But I also don’t think the devaluation of the renminbi relative to the US dollar will be so severe, so this prediction may not be validated.
It is well known that China is the world’s factory, and with it comes its continuously increasing trade surplus. However, a closer look at the data reveals that the increase in China’s trade surplus (exports minus imports) is not due to an increase in exports, but rather a decrease in its dependence on imports for its economy, while the proportion of imports paid in renminbi has increased.
To explain my hypothesis, let’s assume that China’s monthly total exports are 100 USD and total imports are 50 USD, resulting in a trade surplus of 50 USD. Now, the import dependency of the export economy decreases. For example, in the past, China needed to import parts from abroad to manufacture cars, but now most parts can be produced domestically. Even if the total amount of exported goods does not increase, this increases the trade surplus. To achieve the same value of 100 USD in exports, now only 25 USD of imports are needed. Therefore, the surplus increases to 75 USD. Another way to increase the surplus is to keep the import volume the same, but now half of the imports are paid in renminbi, reducing imports to 25 USD and increasing the surplus to 75 USD.
The chart above shows how China is exporting more construction machinery and cars with fewer imported goods.
Energy is the main commodity that China lacks, but now China can purchase commodities from Saudi Arabia and Russia in renminbi instead of US dollars.
Before the West seized and sanctioned Russia’s dollars and euros in February 2022, China could not dominate the terms of trade. But now, because there are no other options, Russia must accept renminbi payments and supply energy to China at a discounted price.
With the increase in renminbi domestic supply in China and further stimulation of economic growth, inflation is inevitable. However, as more goods are produced domestically in China and the payment proportion for energy is denominated in renminbi, the rise in inflation will not cause a significant devaluation of the renminbi relative to the US dollar as before.
The last reason the renminbi will not experience a significant devaluation is that it coincides with the weak US dollar industrial policy, regardless of who wins the next presidential election. I know that both Trump and Harris are trying to emphasize their differences, but in reality, they will both print money and allocate funds to key industrial sectors in the US.
I’m not saying that Harris’ spending will be less than Trump’s, but regardless of who wins the election, there will be trillions of additional fiat currency supplies entering the market in the coming years. This will inevitably lead to structural weakness in the US dollar.
China will not feel the negative effects of its domestic currency when implementing this reflation policy. All the signs are in place for Beijing’s plan to print a large amount of renminbi. What is the antidote for ordinary savers who will witness an increase in credit creation but not necessarily based on a strong real economy? Bitcoin, let’s go!
Let’s go Bitcoin – Let’s Go Bitcoin
The Chinese people are among the most resourceful in the world. They will not let their renminbi savings sit idle, especially when Beijing encourages asset price inflation. Bitcoin is not a foreign concept for middle and high-income residents in coastal cities in China. Although exchanges are banned from providing explicit Bitcoin/renminbi trading pairs, Bitcoin and cryptocurrencies are still thriving in China.
The market has returned to its peer-to-peer (P2P) roots. In the early days, when the three major Chinese exchanges (OKCoin (now OKX), Huobi, and BTC China) dominated the market, funding exchange accounts with renminbi was always a challenge. Sometimes users could directly transfer money from their domestic Chinese bank accounts, while other times they had to go through cumbersome voucher schemes. Either way, the Chinese people always found a way to transfer renminbi from their local bank accounts to the exchanges for trading.
Nowadays, I hear that China has an active P2P market once again. All major Asian spot exchanges, such as Binance, OKX, and Bybit, have thriving businesses in mainland China. These exchanges operate P2P bulletin boards where local traders help fellow Chinese conduct cryptocurrency transactions. It’s like a Chinese version of LocalBitcoins. The point is, for motivated Chinese people, converting renminbi into cryptocurrencies is relatively easy.
The reason Beijing closed the Bitcoin/renminbi trading pairs – I’m just speculating here – is probably because they don’t want to have a functioning smoke alarm that exposes the impact of their currency devaluation policy. Such an alarm could motivate investors to choose Bitcoin as a store of value instead of stocks or real estate. Considering that the Chinese government knows it cannot ban Bitcoin and that owning Bitcoin and cryptocurrencies is not prohibited in China (contrary to what some misleading financial media say), Beijing would rather keep these transactions unseen and unnoticed. So, if my prediction is correct, I won’t be able to find clear statistical data to track the penetration of renminbi into the Bitcoin ecosystem. Apart from meme coins like Dogecoin, I can only hear about the changes through word of mouth.
Bitcoin exchange-traded funds (ETFs) listed in Hong Kong will definitely not see inflows of funds. If funds flow into the Hong Kong market through the Stock Connect, they will not be used to buy local stocks or real estate. Therefore, mainland Chinese people will be prohibited from buying Bitcoin ETFs in Hong Kong. Sorry to all the issuers who spent expensive advertising fees in Hong Kong subway stations – Beijing will not make it easy for fellow citizens to access Bitcoin.
While I can’t access charts showing inflows into locally listed Bitcoin tracking products or the Bitcoin/renminbi price, I know that stocks and real estate perform poorly when the balance sheet of the central bank expands.
This is a chart of Bitcoin (white), gold (gold), the S&P 500 index (green), and the Case-Shiller US Home Price Index (magenta), all indexed to 100 based on the Federal Reserve’s balance sheet. Bitcoin’s performance surpasses all these other high-risk assets to the point where you can’t differentiate the returns of other assets on the right axis.
As you know, this is my favorite chart. No major high-risk asset class can surpass the impact of currency devaluation like Bitcoin. Investors instinctively know this when considering how to protect the purchasing power of their savings, and Bitcoin will look back at you like Kwisatz Haderach.
For those who expect the market to immediately recognize the future and push up Bitcoin, I’m sorry to disappoint you. The People’s Bank of China’s quantitative easing and the re-acceleration of bank lending will take time. Chemotherapy takes time to kill the patient. In these early stages, the reaction of Chinese savers is as I expected – buying undervalued local stocks and heavily discounted apartments. The world has not yet realized that this is the policy Xi Jinping has decided to implement. But give it some time, and the im