The Second Asian Crisis? Feeling the impact of Chinese monetary tightening

This is from Bloomberg this morning:

Asian stocks fell for a fourth day after U.S. Treasury yields reached a two-year high. Currencies from Malaysia to Thailand declined amid an emerging market exodus that’s seen investors withdraw $8.4 billion from exchange-traded funds this year.

…Indonesia’s Jakarta Composite Index dropped 3 percent, taking a four-day rout beyond 10 percent…Malaysia’s ringgit decreased for a seventh day, and the Thai baht fell 0.8 percent.

…Asian economies are struggling to ignite growth.

…Five stocks fell for every three that gained on the Asia-Pacific index. Real estate and construction firms led declines in Jakarta where the benchmark index tumbled as much as 20 percent from a high in May.

China’s economy, No. 2 in the world, has been slowing for the past two quarters. Indonesian shares led declines in emerging Asian markets yesterday, sliding 5.6 percent, after data showed the current-account deficit widened to a record last quarter. A report this month also showed the economy grew less than 6 percent for the first time since 2010 in the second quarter.

…Foreigners sold a net $3 billion of Indian stocks and bonds in July amid the slowest growth in a decade in Asia’s third-largest economy, according to data compiled by Bloomberg. The rupee slid to a record low yesterday and 30-day volatility on the CNX Nifty Index touched the highest level since April 2012.

…Thailand’s SET Index dropped 3.3 percent yesterday, the most in two months, after a report showed the economy unexpectedly shrank in the second quarter, pushing the country into a recession. The government also cut its growth forecast.

It is hard to feel optimistic about growth in Asia when you read this kind of thing.

In the article the market turmoil is blamed in Fed “tapering”, but I would suggest that Chinese monetary tightening is at least as important. Hence, China is as I have argued earlier the monetary superpower of Asia and Chinese monetary tightening weigh heavily on the Emerging Asian currencies. If the “local” central banks try to fight the currency sell-off then they are automatically importing monetary tightening from China causing growth to slump. The slump in the local stock markets is an indication that this is in fact what is partly happening.

The good news is that we are in fact seeing currencies weaken across Asia – that is softening the blow from the “China shock” . The bad news is that Asian central banks in general has been fighting the currency sell-off by hiking interest rates, intervening in the FX markets and by introducing all kinds of draconian currency controls. All that is likely hit growth across the region. And yes, I am quite nervous about new cases of monetary policy failure, where local policy makers in their attempts to curb the currency sell-off end up doing more bad than good. Just take a look at stop-go policies of Bank Indonesia and the Reserve Bank of India over the past two months.

The best way to shield the Asian economies from the negative impact of Chinese monetary tightening and fed tapering is to let currencies float completely freely and to the extent necessary letting the currencies weakening. Trying to fight the currency sell-off with monetary tightening is the recipe for setting of the Second Asian Crisis. As long as the impact of the Chinese monetary tightening continues Asian policy makers have the choice between weaker currencies or lower growth.  You cannot have both in the present situation.

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  1. Egor Duda

     /  August 20, 2013

    Lars, I don’t have relevant statistics, but let’s suppose a large chunk of household and corporate debts in those Asian economies is denominated in foreign currencies. Does free-floating exchange rate (via EPN/NGDP targeting), force a wave of defaults leading to a supply-side hit to local economies?
    I understand, that trying to maintain exchange rates by tightening monetary policy can be disastrous, as Argentine and Asian crises had demonstrated.
    But I wonder if highly-indebted-in-foreign-currency countries might have to somewhat adjust their monetary policies away from EPN/NGDP targeting to take those debts into account?

  2. Benjamin Cole

     /  August 20, 2013

    Sad, sad, sad.

    The globe’s major central banks should be acting in concert to stimulate, not to stifle and suffocate.

    The PBoC boosted the China economy for decades—but now is succumbing to central banker-itis.

    Tight money does not work.

  3. Lars, That´s right. And it´s symetrical. In the past there was the “currency war” complaint about US monetary policy expansion. Now it is about US “tapering”, or tightening MP. It was China then and it is China now!

  4. Here we are at the precipice of the next Lehman crisis – which no one saw coming yet again.

    It’s a repo thing — the Fed captured too much good collateral and paper gold confidence was lost.

    They will taper, go to war, then fire up the presses to print the expanded deficits.

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