Ha Jiming: You Can't Grow M2 By 14 pc Annually And Not Devalue

A phase change in understanding China's monetary system is underway. Nothing has changed materially, more economists are willing to publicly state what was predicted by independent economists, hedge fund investors and this blog several years ago, namely that inflation eventually leads to currency devaluation and China has been printing like crazy.

The latest is Goldman Ha Jiming who states to obvious: if you growth the money supply at 14 percent annually, the currency can't not devalue. He gives the example of the supermarkets and housing. Think about how much you could buy at the supermarket for 100 yuan a few years ago versus today. Think about how much house you could buy for 1 or 2 million yuan versus today. He goes on to say, if the currency doesn't devalue and China continues growing the money supply at 14% annually, then in a few years China can buy the whole world simply by printing money. That's not going to happen, so either M2 growth rate falls or the yuan depreciates.

This is the very point made on this blog many times before, deflation or depreciation. Last year, M2 growth fell slightly below 10% annualized for two months. The real estate market was rolling over and the northeast in recession. At 10% annualized growth, the currency is still inflating at a healthy clip. What are the odds M2 is allowed to slow to a peak of 8%, let alone something lower that would tip the economy into a full blown depression?

Steve Keen recently published an article with a simple credit based model of Australia's economy. As he puts it:

The logic is pretty simple: your spending in a year is the total of what you earn plus what you borrow, and the same maths applies to the economy as a whole.

If nominal GDP grows this year at the 2.8 per cent rate it has averaged for the last five years, then GDP in 2016 will be roughly $1,634 billion. If private debt continues to grow at its average rate of 6.9 per cent per year, it will reach $3,414 billion — an increase of $220 billion over the year. Total private sector demand (which is spent on both goods and services and asset purchases) will be $1,855 billion.

What about 2017, if private debt grows at the same rate as GDP itself, so that the debt ratio stabilises? Then GDP will be $1,680bn, and private debt will rise from $3,414bn to $3,509bn — an increase of just $96bn over the year (compared to $220bn the year before). The sum of the two will be $1,775bn — 4.3 per cent less than the year before.

This is the inevitable debt crunch coming Australia’s way, but conventional economists are oblivious to this danger because they’ve brainwashed themselves to ignore private debt as just a “pure redistribution”, to quote Ben Bernanke. This deluded textbook thinking is why Bernanke didn’t see the GFC coming.

China is no different. If debt growth stabilizes, there will be a depression. If debt growth doesn't stabilize, then the currency depreciates.

Ha Jiming doesn't see a one-off devaluation coming and he believes the country can keep the currency stable in the short-term. I suspect the short-term is much shorter than most realize.

iFeng: 哈继铭：M2每年14%的增长 人民币不可能不贬值