[Elite Forum]Is the US raising interest rates to deal with the RMB? | China’s Economic Crisis | Currency Devaluation |

[Epoch Times, September 27, 2022]In an effort to curb the highest inflation in four decades, Federal Reserve Chairman Jerome Powell and his colleagues are now implementing the most aggressive tightening policy since Volcker took the helm 40 years ago. On September 21, the Federal Reserve announced another 75 basis points of interest rate hikes, raising the target range for the federal funds rate to 3% to 3.25%, the highest level since before the 2008 financial crisis and far higher than the level close to zero at the beginning of this year. This is the fifth time the Fed has raised rates this year and the third in a row to raise rates by a massive 75 basis points. The market expects that interest rates in the United States will reach 4.6% and 5% in 2023, and the Fed’s strong interest rate hike has raised concerns about whether the U.S. economy will fall into recession as a result.

Will the U.S. economy slip into recession as the Fed raises rates aggressively?

After the Fed’s continuous aggressive interest rate hikes, Cleveland Fed President Loretta Mester, who holds the FOMC voting power of the Fed’s Monetary Policy Committee this year, expressed a hawkish view on September 26. Mester said that the Fed’s policy interest rate will not be in 2023. year down. Mester believes that further interest rate hikes are needed to suppress high inflation, and in order to avoid uncontrolled inflation expectations, interest rate policies that have a restrictive impact on the economy must be maintained for longer.

The latest forecasts show the Fed’s target range for policy rates is expected to rise to 4.25% to 4.50% by the end of this year, before peaking at 4.50% to 4.75% in 2023. At the same time, the Fed’s forecast shows that the US economic growth will slow sharply in 2022, with an annual growth rate of 0.2%, before recovering to 1.2% in 2023. The unemployment rate is expected to rise to 3.8% this year and 4.4% in 2023. The current unemployment rate is 3.7%. Fed policymakers see inflation slowly returning to the Fed’s 2% target in 2025, with no rate cut expected until 2024.

Greg McBride, chief financial analyst at financial institution Bankrate, said the Fed was too late to recognize the severity of inflation, to start raising rates late, and to reduce its bond holdings too late. Since then, they have been catching up. Their operation is not yet complete.

The latest forecasts suggest that the Fed’s policy of raising interest rates will continue for longer and may at least push the economy to the brink of recession. Generally speaking, if GDP is declining for two consecutive quarters, it is a recession. Xie Tian, ​​a professor at the Aiken School of Business in South Carolina, said in NTDTV’s “Elite Forum” program that in the first two quarters of this year, the US GDP growth fell, and in fact there was a mild recession , and this mild recession, which may last for a few quarters, may start to rebound a little by the end of the year or next year, but it will not rebound greatly.

However, according to the Biden administration, the United States has not fallen into a recession. The reason for the Biden administration is that the current employment rate in the United States is very good, and the unemployment rate is only a few percent, so how can it be regarded as a recession. In this regard, Professor Xie Tian said that the Biden administration actually wants to change the definition of recession, but it is estimated that there may be a slight recession in the third quarter of the US economy. If there is a decline for three consecutive quarters, I don’t know. What else would the Biden administration say.

Professor Chen Songxing, director of the New Economic Policy Research Center of Donghua University in Taiwan, told the “Elite Forum” program that the war or because of the epidemic, especially in China because of the dynamic clearing relationship, caused a supply chain interruption, then These are all inflationary pressures. Under this circumstance, the World Bank recently gave a report that shows that we estimate that the global inflation environment may still be very high next year, and it is likely that this inflation will still be around 5%. Therefore, the world is indeed facing an economic recession that may be caused by the central bank’s interest rate hike. Even the World Bank report said that we may still fall into global stagnant inflation.

Will raising interest rates curb inflation?

The U.S. is experiencing the highest inflation in four decades. In June this year, the U.S. consumer price index (CPI) rose by 9.1% year-on-year, the highest in nearly 41 years. In August, the US CPI rose by 8.3% year-on-year, and the inflation rate remained close to a 40-year high.

Professor Xie Tian said in the “Elite Forum” that the question now is, if this inflation continues, can you curb inflation by raising interest rates? If we see a rebound in the market after this rate hike, in fact, you know it’s going to be difficult. Professor Xie Tian said, we used to say that inflation in the United States was serious. Of course, one of the main reasons was excessive government spending, and the government printed money and money; another was the rise in energy prices. But what’s very interesting is that last month we saw that energy prices in the United States have begun to decline. Gasoline prices in many places have fallen below three dollars, but inflation is still continuing. The decline in energy prices has not brought about the entire inflation. fell.

Is the US raising interest rates to contain the CCP?

The U.S. Federal Reserve raised interest rates strongly, the U.S. dollar strengthened, the interest rate differential between the U.S. dollar and other currencies widened, and currencies in Europe and Asia fell sharply against the dollar. On September 21, the U.S. capital market reacted to this rate hike, with the stock market down 1.7% that day. Other currencies in the world also fell sharply against the US dollar. The euro fell to 1 US dollar against 1.02 euros, the lowest point since 2002; the yen fell even more sharply, falling to the lowest point since 1990, and it will take 144 days Yuan to 1 US dollar; RMB fell to 7.05 to 7.06 yuan to 1 US dollar that day. After that, the renminbi continued to fall. By September 26, it had fallen to 1 US dollar to 7.15 yuan.

As an international currency, the US dollar is often used as a US dollar weapon in international politics to implement financial sanctions or financial wars against some countries. Professor Chen Songxing believes that the target of the US dollar rate hike this time is the renminbi.

Professor Chen Songxing pointed out in the program “Elite Forum” that the reason why China has made such great progress today is that it has benefited from globalization, that is to say, it can take advantage of the capital market of the United States to buy American companies with American money, and acquire American companies. American technology. But the so-called peaceful rise of the CCP is not peaceful at all, and it has been seen through by the Americans. Since the Trump (Trump) administration, the United States has launched a counterattack against the CCP.

In order to challenge the hegemony of the US dollar, the CCP has always wanted to internationalize the renminbi. Recently, the CCP negotiated with Saudi Arabia again, hoping to use the renminbi to settle oil transactions. According to The Wall Street Journal, Saudi Arabia is negotiating with the Chinese government to convert some of the oil it sells to China to be denominated in yuan. About 80 percent of global oil sales are currently settled in dollars, and the Saudi government has traded oil in dollars since 1974 under an agreement with the Nixon administration of the United States. Negotiations between Saudi Arabia and China to settle oil trades in yuan have been going on on and off for six years, according to people familiar with the matter, starting before Saudi Arabia’s de facto leader, Crown Prince Mohammed bin Salman, made his first official visit to China in 2016. . The talks have been unsuccessful until now, but the two countries have stepped up their pace this year as relations between Saudi Arabia and the United States are deteriorating and relations with China are getting closer.

Professor Chen Songxing told the Elite Forum that the negotiation between the CCP and Saudi Arabia is a key turning point. If it is negotiated, the status of the US dollar will be greatly reduced, so the United States has this incentive to launch a counterattack against the RMB. From the standpoint of the United States, it can be said that now is the best time to set back China’s entire economic strength in the past few decades. Therefore, at this time, there is such a good excuse for inflation, and a substantial increase in interest rates will cause a large amount of capital to flow out of China, or out of Hong Kong, then it is indeed a very important means to attack the RMB.

Professor Chen Songxing said that if the renminbi is to be internationalized, central banks of various countries must be willing to use it as a reserve currency, investors are willing to use it as an investment target, and then we are willing to use it for trade calculations. If the renminbi depreciates rapidly, investors will give up targeting the renminbi, and people’s confidence in holding renminbi assets will drop sharply. This means that China’s use of global funds as a channel may be relatively restricted. , it will also be a big blow to China’s economy in the future.

How much will the renminbi fall?

The renminbi has depreciated by 10% in the past year, but compared to the euro and the yen, this amount is still very small, but many investment banks believe that the renminbi may depreciate to around 7.2 by the end of this year, which is 1 US dollar to 7.2 RMB. Some commentators on the Internet believe that the yuan may depreciate to 12, 13, or even 20 yuan to the dollar.

In this regard, Professor Xie Tian said that if the renminbi is truly fully open to free convertibility, its exchange rate against the US dollar can reach 1 to 20, or even 1 to 30, which is similar to the New Taiwan dollar. The reason is that the CCP is indeed a Too many banknotes are printed. Many of these banknotes are actually used as cash, left in the hands of the private sector and in the hands of corrupt officials. In fact, they have not yet fully entered the market. If the exchange rate is truly opened, then the RMB will plummet.

However, the exchange rate of the renminbi is actually controlled by the authorities. Professor Xie Tian said that now we see that the RMB has started to fall offshore. In fact, it is still a result of the CCP’s control of the exchange rate. Basically, whether it is a decline or a decline in offshore or onshore, it is under the control and permission of the CCP. within the interval. So it does not actually represent the real value of the renminbi, nor does it represent market fluctuations. Moreover, the internationalization of the renminbi is unlikely, because under the situation of indiscriminate issuance of banknotes by the CCP, it does not dare to let the renminbi be freely convertible. How can it be an international currency?

Professor Xie Tian also pointed out that another reason why the renminbi is unlikely to fall to 10, 12, or even 20 is that once it falls, it will stimulate exports, and the United States and other trading partners will immediately complain and put pressure on the CCP, so the fact that the CCP Above is a dilemma.

Ms. Guo Jun, editor-in-chief of The Epoch Times and president of the Hong Kong Epoch Times, pointed out in the Elite Forum that she agrees with Professor Xie Tian’s statement that China’s renminbi is actually not freely convertible. In other words, it has been basically controlled since 2018. Private companies and individuals have been unable to freely exchange foreign currencies for investment. As you can see now, Chinese companies buying houses abroad and investing heavily are all national strategic enterprises.

Ms. Guo Jun said that the CCP has many means to control the currency, and the CCP believes that this is its institutional advantage in the current international economic changes that are turbulent and turbulent. So in this case, from the current point of view, if the renminbi falls sharply, for example, to 12 or 13, under normal circumstances, I think it is unlikely.

Ms. Guo Jun also said that the reason why the renminbi is not freely convertible is actually an assessment in a document within the CCP, especially after the Asian financial crisis. The CCP believes that if the RMB is freely convertible, the United States will use the U.S. dollar as a weapon to stop China. Therefore, in this sense, the CCP’s internal documents say that the RMB must not be freely convertible.

Why can’t the renminbi become an international currency?

For a currency to become an international currency, it needs to meet at least three conditions: one is to be freely convertible, the other is to have an independent central bank to control its issuance, and the third is that the economy that uses the currency must have long-term and stable economic development prospects , the government can guarantee the credit of this currency. For the RMB, these three basic conditions cannot be met.

Professor Xie Tian pointed out in the “Elite Forum” that firstly, the CCP will not allow the renminbi to be freely convertible; secondly, China does not have an independent central bank, and the CCP can freely issue renminbi; thirdly, China’s economy is in trouble, driving The troika of China’s economy, infrastructure and consumption have been completely shut down, and the carriage of import and export is now half shut down. Because as the U.S. dollar continues to raise interest rates, the CCP does not dare to raise interest rates. It wants to keep interest rates low, and the interest rate gap between China and the United States will become larger and larger, the capital flight from China will become more and more serious, and the transfer of the industrial chain will also More and more, when most of these industrial chains and export-oriented companies move to Vietnam, China’s export carriage will also stall. So the CCP does not actually have the economic strength to support it in printing currency.

Mr. Shi Shan, senior editor and chief editor of The Epoch Times, said in the “Elite Forum” that he once asked a friend who is doing business in mainland China about the internationalization of the RMB. The friend said that there is one condition. When the economic crisis occurred in China, the Chinese were able to hand over their gold and silver jewelry to the country, just like the Koreans did. Mr. Shi Shan pointed out, but in fact this is impossible, because we see any problems in China, everyone takes money out of China and runs everywhere.

In this regard, Professor Chen Songxing pointed out that the inability to internationalize the RMB is a structural problem of the CCP. Professor Chen Songxing gave an example, when the International Monetary Fund wanted to include the RMB in its Special Drawing Rights (SDR), Zhou Xiaochuan promised everyone that the RMB could be freely convertible to a certain extent. But how can it be freely exchanged with management? Therefore, it has developed to this point today because its entire structural problem is too serious, that is to say, its own economy is likely to be a big asset bubble. Well, this bubble, if you don’t let it burst and make adjustments at present, then all the ongoing problems are hidden in the system. On the surface, you have painted the peace, but in fact the problems are still there.

Professor Chen Songxing said, including the devaluation of the renminbi this time, you can control it and let it depreciate slowly, and the result will be the same as that of Japan. That is to say, we will not see the renminbi fall extremely rapidly today, and we will do a quick reorganization of the economic system, but we will do it slowly. It is actually very expensive to do it slowly, and it will be slower to adjust in the future. Under such circumstances, if the RMB wants to be freely convertible, it may be difficult in the short term or ten years, unless it has the determination to clean up these bubbles and this non-performing asset hidden in its own system.

Professor Chen Songxing emphasized that the non-performing assets in Chinese banks may still be huge. International rating agencies have said that the non-performing assets officially announced by China must be multiplied by ten to be the real data.

“Elite Forum” production team

Responsible editor: Li Hao#