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Weekly » The titillating and terrifying collapse of the dollar. Again.

This post was originally published at China Financial Markets.
By Michael Pettis
Foreign perceptions about the Chinese economy are far more volatile than the economy itself, and are spread across a fantastic array of forecasts. On one extreme there are still many who hold the view that overwhelmingly dominated the consensus just four of five years ago, with a book by Martin Jacques,When China Rules the World, titillating or terrifying many with a subtitle that promised the end of the Western world and the birth of a new global order. Although few within this camp still believe in their earlier forecasts of 8-9 percent annual growth for another one or two decades, many among them still think China will manage to double its GDP in ten to twelve years.
On the other extreme are those who expect the economy to collapse well before the end of the decade. Although he himself does not expect an economic collapse but rather a political one, among the deeply pessimistic is George Washington University’s David Shambaugh, who published an article in the Wall Street Journal last year about “The Coming Chinese Crackup”.

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By Michael Pettis
originally published on 1 September 2015.
With so much happening in China in the past month it seems that there are a number of very specific topics that any essay on China should focus. I worry, however, that we get so caught up staring at strange clumps of trees that we risk losing sight of the forest. What happened in July this year, and again in August, or in June 2013, or a number of other times, were not unexpected shocks and game changers. China is a dynamic and unbalanced economic system entering into something that we might grandly call a “phase shift”, or less grandly the rebalancing process, and that it is doing so with a great deal of debt structured in a highly inverted way. Anyone who sees China this way would have been able to predict not so much the specific shocks, panics, and credit crunches that we have experienced, but rather that we would of necessity experience a series of very similar shocks.
These debt-related shocks will occur regularly for many more years, and each shock will advance or retard the rebalancing process so that it affects the way future shocks occur.

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By Michael Pettis
Last Tuesday the PBoC surprised the markets with a partial deregulation of the currency regime, prompting a great deal of discussion and debate about the value of the RMB. Part of the discussion was informed by a consensus developing in one part of the market that the RMB is no longer undervalued but is in fact overvalued. Why? Because if left to the “market”, that is if the PBoC stopped intervening, the excess of dollar supply over demand would force the RMB to fall.
This argument is based on a pretty confused understanding of how markets work and why investors do what they do. I thought it might be useful if I were to try to lay out the issue a little more clearly, and along the way address related issues. Because it isn’t necessarily easy to tie all of the topics together in an essay, I thought it might be better if I put it in the form of a series of questions.
There are two conclusions, or at least two points I would argue:
“Market” forces, that is the balance of supply and demand, do not always indicate the relative valuation of an asset. This is partly because there are several ways to define market forces, but mostly because we usually think of valuation in terms of economic fundamentals.

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By Michael Pettis
originally written on 31 Jul 2015
I plan to post a new entry very soon but before doing so I wanted to say a few things about the stock markets, which continue to be insane (but not unexpectedly so) and then repost a blog entry that is nearly five years old. By the time I published my latest (July 17) blog entry Beijing had managed to stop the panic with the use of what I called “brute force”, by which I meant that there was never likely to be much impact from interest rate moves, regulatory changes, margin relaxation, and so on. This is because there had been such a remarkable convergence among investors, almost all of who were purely speculative, on how to interpret information, and because any interpretation was likely to be self-consciously skeptical, that any regulatory response had to be completely unambiguous.
There is nothing less ambiguous than actually buying or selling large amounts of shares. In a July 8 message to my clients, I argued that

… the only way to create a credible floor, or to create credible expectations of rising prices, is by “brute force”. Beijing must force entities under its control, or entities it can influence, to buy shares until all uncertainty is removed.

I was recently asked by an Australian economics journal to write a review of a book I had already read, The Leaderless Economy, by Peter Temin and David Vines (published in 2013). Because the book is a great place from which to start a discussion on the links within the global economy, I decided to base this essay on the book. I had already read Peter Temin’s Lessons from the Great Depression (1991), The Roman Market Economy (2012), and Prometheus Unshackled (2013), and I know his work fairly well.
There is substantial overlap between the way Temin and Vines view the global economy and the way I do. I am a regular reader of Diane Coyle’s blog, The Enlightened Economist, in which she reviews books, usually on economics-related topics but also on anything else that might catch her attention. Besides having said very nice things about my book, The Great Rebalancing, and including it in her shortlist of top books for 2013 (I am bragging a little) she has also reviewed The Leaderless Economy, and has noted the similarities in the way both books approach the balance of payments.
She is right. Both books analyze the global economy in pretty much the same way, as an economic system in which any country’s domestic economy is inextricably linked to other economies through the balance of payments mechanisms.