Home' Trinidad and Tobago Guardian : September 10th 2015 Contents SEPTEMBER 10 • 2015 www.guardian.co.tt BUSINESS GUARDIAN
INTERNATIONAL | BG21
It's hard to get by when you don't have a job and the price
of goods keeps rising. That maxim is behind economist Arthur
Okun's dramatically named "Misery Index," which adds together
a country's unemployment and inflation rates. The higher the
number, the more "miserable" your country is.
With inflation extremely low in much of the developed
world, it's worth taking a look at the state of "misery" around
the globe. In its new Global Economic Outlook report, Societe
Generale put together a chart of how miserable the major
global economies are.
Spain, Russia, and Brazil lead the way as the most "miserable."
Spain's high misery number can be attributed primarily to
unemployment, while for Russia and Brazil it's more about
that rising inflation.
On the flip side, Switzerland, Taiwan, and Japan are the
"least miserable." All three have low unemployment and low
As an end note, it's worth mentioning that there have been
some criticisms of the misery index. In particular, studies
show that unemployment influences (un)happiness much
more than inflation. So, if you take that into consideration,
Russia and Brazil might actually be "less miserable" than this
What major global economies are facing
What happens in Bei-
jing doesn't stay in
The high costs associated with maintaining
the yuan's peg to the US dollar amid weak-
ening economic data prompted a startling
currency devaluation by China on August 11.
Since then, the move has come to be viewed
as the proximate cause for the upheaval in
financial markets over the past month, and
led to devaluations from other nations with
fixed exchange rates.
Capital outflows have been Chinese pol-
icymakers' biggest headache. These waves of
money leaving the world's second-largest
economy are a source of downward pressure
on the yuan and have a deleterious effect on
domestic liquidity; the last thing a nation
that's enjoyed an extended run of buoyant,
credit-fueled growth needs.
Because China's delicate balancing act isn't
a permanent solution, market participants
are wondering how---and when---it might end.
Analysts at Deutsche Bank, Barclays and
Societe Generale estimated last week that the
People's Bank of China depleted its foreign
reserves by between US$100 to US$200 billion
in August in order to stabilise the yuan after
the shock devaluation prompted traders to
see how low the exchange rate could be pushed
and capital outflows, in all likelihood, did not
abate. As such, the recently stability in the
exchange rate has been a façade; and an expen-
sive one at that.
"The PBoC appeared to be heavily active
in the spot market after the currency regime
change on August 11 in order to stabilise the
yuan," wrote Societe Generale China economist
Wei Yao."Onshore yuan trading volume almost
doubled in the 15 trading days following August
11, compared to the previous 20 trading ses-
sions and the year to date average."
Meanwhile, Barclays' rates and foreign
exchange team estimates that the People's
Bank of China would have to cut the reserve
requirement ratio by a minimum of 40 basis
points per month just to offset negative effects
on liquidity from its foreign exchange inter-
ventions, given the current pace of capital
This fragile equilibrium, however, could
endure for longer than you might expect.
Even after the drawdown in August, Societe
Generale's Yao estimates that the People's
Bank of China has a hefty US$3.5 trillion in
foreign reserves. According to official data
released on Monday, China's currency hoard
declined by a less-than-feared but still sig-
nificant US$93.9 billion in August, leaving it
with US$3.56 trillion remaining.
Chinese policymakers likely desire to main-
tain a sizable buffer in the form of foreign
reserves, so Yao thinks they would only be
willing to sell US$1 trillion of their assets in
order to defend the yuan. This suggests that
China could probably maintain its current
exchange-rate management tactics for many
months, but not necessarily years.
Chinese policymakers can try to stabilise
their exchange rate through actions other than
direct intervention. Societe Generale's Yao
has suggested that the imposition of more
capital controls could prevent more funds
from leaving the country. On the other hand,
Deutsche Bank Chief China Economist Zhiwei
Zhang points out that the government could
open up financial markets to more participants,
like insurance companies, in order to induce
flows into the country.
Mercifully for China, the storm appears to
be abating, for now.
Going forward, it's only a matter of when
and how much the yuan will fall, according
to the analysts.
Barclays and Societe Generale are calling
for the yuan to decline by seven per cent rel-
ative to the US dollar by year-end, with Yao
citing the futility of this "war of attrition
against capital outflows."
"(T)he longer that significant FX interven-
tion takes place, such costs [in terms of foreign
reserve depletion, tightening domestic liquidity,
and the need to offset it] will increase, and
likely only delaying, rather than reducing,
expectations of further CNY depreciation,"
Deutsche Bank expects a much more mod-
est depreciation for the duration of 2015. For
now, Chinese policymakers will be content
to watch how financial markets digest an
interest rate hike from the Federal Reserve
before making their next move, according to
"We expect the government to keep the
current arrangement for the rest of 2015, and
monitor how international market reacts to
rate hike in the U.S.," he asserted. "It is unlikely
that the People's Bank of China attempts to
repeat what it did on August 11 before the US
How long can China
keep up its fragile
new exchange rate?
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