China -- Year Of Decision

China ratcheted up money supply growth over over mid - 2014 through mid - 2015. In so doing,
the stewards of the economy succeeded in halting a trend of sharply declining production growth.
Since early 2015, output growth has stabilized a little above 6% , measured yr/yr. The strong easing
of monetary policy and subsequent other stimulative measures triggered the big surge in the stock
market through mid - 2015 to excessive levels. At the same time, one engine of growth -- export
sales, continued to flounder and decline. to buttress this area, China devalued the Yuan in Aug.
just as the speculation in the stock market was unwinding. China then tried to hold the new, lower
value of its currency via tightening of its monetary reins and failure to replace liquidity outflows.
It stepped up again in late 2015 to add liquidity aggressively to the financial system, but in so
doing, faced enormous cost to hold its new currency peg. So, it had to devalue again last week. On
top, its stock market cratered again and set up a global equity market sell - off.

Now China has been able to maintain its output growth over the past year without a recovery in
export sales. Time now will tell whether The Dragon will have to devalue the Yuan further to
stop the erosion of exports. If regaining market share of global trade is now a primary objective, it
may well trigger additional capital outflows, which damage other important portions of its economy
as well as China's capital markets.

In a slow global economic growth environment, a fresh China initiative to regain export market
share is bound to have rather limited success anyway, and since China wants to re-orient its
economy to increase consumer spending and its services sector, logic suggests it concentrate
liquidity growth on funding its longer term priorities and allow the currency markets to adjust
to China's new direction.

Since latest available data suggest China is adding liquidity to re-generate monetary growth,
there may be a strong temptation on currency desks to challenge The Dragon's latest, lower
peg. At the same time, China may want to start to husband reserves. To add to the fun,
stronger liquidity growth within its economy could well lift output growth, and signs of
further economic stabilization might eventually garner some recovery of the Yuan.