Russia’s Ukraine invasion throws China and US central banks a new inflationary ball of confusion
https://asiatimes.com-by William Pesek
US and Chinese monetary authorities are weighing the inflationary and other upshots of Russia’s assault on Ukraine. Photo: AFP
People’s Bank of China (PBOC) staffers are suddenly busy with something more than supporting Asia’s biggest economy: canceling any planned vacations for 2022.
The Ukraine crisis already has officials in Beijing opening the monetary spigot. The fallout from Russia’s invasion prompted the PBOC on Friday to pump US$46 billion into the financial system via seven-day reverse repurchase agreements.
It was the biggest repo move since September 2020. And it’s a harbinger of bigger easing steps to come.
The Federal Reserve’s year in Washington had also been tossed into confusion. Ten days ago, the betting was that Chairman Jerome Powell’s team might hike interest rates as many as seven times this year to tame runaway inflation.
Those bets are falling by the wayside. The combination of Russia’s invasion of Ukraine and sanctions imposed on it by Western powers will virtually ensure that inflation is not transitory. Oil’s surge past the $100 per barrel threshold could cement Covid-era inflation in new and stubborn ways.
The Bank of Japan faces its own challenges. One is a possible flight to quality low-risk yen assets. Another is the repatriation of capital by Japan Inc which also wrecks Tokyo’s hopes of keeping the yen weak to support exports. The European Central Bank may confront a year of stagflation.
These varied challenges raise the stakes for the global economy in 2022.
Take the Fed outlook. Goldman Sachs economist Jan Hatzius notes that even if Ukraine-related turmoil prods the Fed to scale back on tightening this year, inflation isn’t going anywhere.
With inflation, “we are increasingly concerned about two main risks,” Hatzius says. “First, the initial inflation surge might have lasted long enough and reached a high-enough peak to raise inflation expectations in a way that feeds back to wage and price setting.”
Inflation and the dollar
Second, he adds, there’s “a very tight labor market – which now shows the widest gap between available jobs and workers in postwar US history – that is generating broad-based wage growth at a pace well above that compatible with 2% inflation.”
If the Fed delays moves to curb inflation, it could undermine the dollar and result in higher US Treasury debt yields. Traders might take things into their own hands, sending bond rates sharply higher just as the US national debt tops $30 trillion. The Fed’s need to play catch-up could make the 2013 “taper tantrum” look tame by comparison.
The bottom line, says Krishna Guha at Evercore ISI, is that for the Fed and ECB, the timing of a clear break with pandemic support and quantitative easing is now in doubt.
The PBOC, meantime, already faces what economists call a “pushing-on-a-string problem.” Its easing steps in 2021 and very early 2022 aren’t gaining the traction PBOC Governor Yi Gang likely hoped. At the same time, efforts to boost construction as a means to stabilizing growth haven’t worked.
Chinese President Xi Jinping wanted to lead the globe out of the Covid-19 era. Now, China’s “zero Covid” strategy is colliding with intensifying headwinds from abroad.
Economist Iris Pang at ING Bank recently slashed her team’s 2022 China growth projection to 4.8% from 5.4% despite the stimulus efforts of recent months. Part of her calculus is that municipal governments aren’t going further to support growth, despite Beijing approving increased borrowing.
“If local governments do not act with the same sense of urgency as the central government, the pre-approved limits are worth little for the economy,” Pang says.
One big risk is that Xi’s Communist Party begins this week’s annual policy meeting less inclined to reform an unbalanced economy. Well before the Ukraine crisis emerged, Xi’s government made it clear it is not ready to turn against coal despite pledges to cut emissions.
Now, political sensitivities ahead of Xi’s plan to secure an unprecedented third term later this year may derail needed upgrades. The odds, says Xu Hongcai at the China Association of Policy Science, are that “stability overrides everything before the 20th Party Congress.”
The trouble is, stability in 2022 could just delay the reckoning suggested by last year’s defaults by China Evergrande Group and other huge developers.
Japan’s big mistake after the 1990s, for example, was prioritizing fiscal pump-priming year after year over supply-side structural reforms. Massive monetary easing by the Bank of Japan was supposed to end deflation once and for all.
Yet the BOJ swelling its balance sheet past the $5 trillion mark, topping annual gross domestic product (GDP), didn’t generate self-reinforcing growth.
Instead, all-stimulus-no-reform ended up deadening Japan Inc’s animal spirits. It reduced the urgency for the 10 governments since the early 2000s to internationalize labor markets, cut red tape, catalyze innovation, increase productivity, empower women and attract more foreign talent.
It also reduced incentives for companies from Sony to Toshiba to Nissan to rekindle the entrepreneurial energy that once made Japan a powerhouse of inventiveness and game-changing technologies.
China needs to avoid this trajectory. The last 16 months in Beijing have been more about cutting China’s billionaire tech founders down to size, starting with Alibaba Group’s Jack Ma. Recent chatter that social media and gaming giant Tencent and food delivery giant Meituan could be next erased more than $100 billion of valuations in the space of a few days.
There’s certain reason for optimism. On Monday, Xi commanded his economic generals to hasten efforts to build world-class enterprises and strengthen human capital. Xi highlighted the need to accelerate the development of higher-quality sectors and boost state-owned enterprises’ ability to invent new technologies.
The paradox of Xi’s crackdown on Big Tech is his broader “Made in China 2025” aspiration to lead the future of aerospace, artificial intelligence, biotechnology, renewable energy, semiconductors, biotechnology, aerospace, electronics, green infrastructure, renewable energy, self-driving vehicles and other key industries.
Team Xi also is endeavoring to create a Greater Bay Area, a kind of “Silicon Valley East” in southern China. It groups Hong Kong and Macau with Shenzhen and eight other municipalities all destined to become powers of their own: Guangzhou, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing.
Tech unicorns that come out of this giant special-enterprise zone could list shares in China or Hong Kong and create new wealth from the ground up.
Wealth and disruption
Yet new wealth creation comes hand-in-hand with disruption. Over the last 16 months, Xi has displayed less tolerance of this latter dynamic than reformers hoped. Particularly in the fintech space, which Ma planned to upend with the Ant Group initial public offering in November 2020.
Xi’s regulators scrapped that $37 billion listing and Ma has seldom been heard from since.
“With noneconomic factors having an increasing impact on growth, all kinds of public policies, both economic and non-economic ones, must work in sync to maximize the macro policy effect and deliver more tangible outcomes,” says Liu Shangxi, head of the Chinese Academy of Fiscal Sciences.
The bottom line, Liu says, is that “market sentiment and expectations are likely to have an impact on demand. Currently, softening consumption and lackluster investment have something to do with market expectations.”
As this tension plays out, the PBOC is in the driver’s seat. It’s clear that Chinese policymakers, says economist Raymond Yeung at Australia and New Zealand Banking Group, “are paying close attention to the heightened geopolitical risk.” Beijing authorities, he adds, are reassessing the timing and intensity of support measures for 2022 growth.
That’s true of the Fed, ECB and BOJ, too. But anyone at the PBOC planning a vacation this year can thank Vladimir Putin for the cancellation fees to come.