The China Crisis

Post-Evergrande. A major devaluation of the Chinese Yuan is needed

The process of economic adjustment to fluctuations in the quantity of liquidity involves changes in the price of money. Contrary to consensus opinion the price of money is the exchange rate and not the interest rate. And, technically, it is the ‘real’ exchange rate, because relative price levels also need to be considered. Sudden changes to liquidity conditions can come from private savers following productivity shocks and from foreign investors through capital flows. We argue here that modern economies channel most of the necessary adjustment through asset markets, because other conduits are blocked. China is just the latest example.

China is suffering the aftermath of an asset bubble resulting from a misaligned ‘real’ exchange rate. Evidence the demise of property giant Evergrande. This is not another Lehman Bros in terms of market risk, but it may prove to be China’s Lehman Moment in terms of policy change?