Submitted by Taps Coogan on the 26th of May 2020 to The Sounding Line.

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Daniel Lacalle, Chief Economist at Tressis Gestión and author of several books including ‘Escape from the Central Bank Trap‘ and ‘Freedom or Equality,’ recently spoke with Main Street for Wall Street in a fascinating and wide ranging interview. He notes that independent assessments suggest that China’s true inflation rate may be as high as 7.5% to 10%. Meanwhile, GDP growth is at best 2%, meaning that China is already being gripped by strong stagflation, limiting its ability to implement monetary stimulus and ‘competitive’ devaluations.

 

Some excerpts from Daniel Lacalle:

“Food prices in China have rocketed (higher) and inflation, not the official CPI obviously, but the analysis and calculation of inflation that independent houses make, are talking about an inflation rate that is closer to 7.5% to 8%, even some people say 10%, compared to a growth rate that is probably going to be 2% at best, even considering the massive intervention from government spending. So that, as you were mentioning, is stagflation.”

“The (Chinese) government is aware of that and that’s why the government has not conducted what everybody knows that they have to do, which is a massive devaluation of the Yuan and why it has not implemented an aggressive QE… At some point, the government is going to have to do either a form of devaluation or some very aggressive structural reform. The latter is virtually impossible in this situation.”

“The Chinese economy right now is like a factory that is building things that are not being sold. So working capital build is a big problem. The official figures of growth are not that bad because a lot of the activity is coming back to build things that are not being sold or exported. That has a very big risk of creating, short term, a very big deflation risk globally once they start to try to export that at almost at any price. And, that will exacerbate the issue of their US dollar shortage… It is true that China has about $3 trillion of (foreign currency) reserves. But that… covers about 60% of its dollar denominated liabilities plus, and this is the critical part, plus the expected US foreign exchange liabilities in the next two to three years.”

“There is another problem in China which is that the utilization of the Yuan is very very poor. As you know, the Yuan is used in about 4% of global transactions according to the Bank of International Settlements, relative to the US Dollar which is the vast majority, or the Euro. Compared to the size of the Chinese economy globally, which is about 17%, 4% utilization (for the Yuan) shows that it a very very… irrelevant currency in terms of global trade. I think that also an important factor is that China, the past three years, has been massively increasing its capital controls. It’s a very tight capital control system. That generates very little confidence…”

All of which makes one wonder how much internal economic weakness is behind China’s increasingly belligerent actions in the South China Sea, Hong Kong, Taiwan, and elsewhere.

There is much more to the interview, so enjoy it in full above.

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