Thursday, August 13, 2015

Yanghangese: China’s Fedspeak.

On July 29, 2015, China Daily reported on the statement made by the People’s Bank of China the day before. The statement claimed that the central bank would “continue a ‘prudent’ monetary policy in thesecond half [of 2015] while maintaining proper liquidity to stabilize financial market expectations, reducefinancing costs, and keep a stable currency exchange rate.”  Many of the adjectives used in the statements are great leaps of faith in the institution of central banking.

Fedspeak is an English word for the intentional wording of Federal Reserve statements in a manner that could cause different market participants to come to completely different conclusions on the direction offuture policy. The word for central bank in Mandarin is zhōngyāng yínháng, often shortened to Yāngháng when referring specifically to the People’s Bank of China. Given the habit of ending Asian languages or dialects (Japanese, Cantonese, etc.) with the suffix –ese, the Chinese equivalent of Fedspeak would be Yanghangese.

In the statement quoted above, one person’s understanding of the words “prudent”, “proper”, and “stability” are quite different than the intended meaning of those words in the context of Yanghangese. In Yanghangese, the definition of a “prudent” monetary policy is the same monetary policy that initiatedthe largest single-country stock market bubble in history. This policy will be continued, despite the consequences. Similarly, the Yanghangese meaning of “proper” liquidity means whatever amount of liquidity is needed to re-inflate the stock market to its previous high and continue the upward trend in equity prices for at least the next 5,000 years of Chinese civilization. The central bank has facilitated greater inflation in the domestic money supply and pushed interest rates lower against the general trend of higher interest rates in the developing world. Maintaining the exchange rate at about ¥6.2 against the dollar has led to a dramatic decrease in foreign exchange reserves as capital leaves the country. As foreign exchange reserves decrease, more capital will leave the country in anticipation of a greater devaluation than otherwise would have occurred. This will become a self-fulfilling prophecy, but in Yanghangese this arrangement will lead to the maintenance of a “stable” exchange rate.

A proper translation of Yanghangese based on the central bank’s announcement should lead us to expect imprudent monetary policy that will deliver excessive liquidity and higher volatility in the exchange rate value of the renminbi.