Global View May 2015 - The Most Important Question in the World: Have the Chinese Translated Bagehot?

by Michael J. Howell22. May 2015 16:39

Financial crises are different from economic crises insofar that they are often triggered by a jump in contingent liabilities, such as short forex positions and mismatched duration. Walter Bagehot, the nineteenth century doyen of Central Bankers, invented the Lender of the Last Resort role to flood markets with liquidity. Bagehot argued that more liquidity was enough. With China perhaps suffering its equivalent of the 2008 Financial Crisis, we venture that a further sizeable easing of PBoC liquidity is both needed and likely. This will not only reduce domestic Chinese investment risk, but it will have global implications. Foremost are a sell-off in global bond markets ('safe assets'), a revival in cross-border flows to EM and a rebound in gold and commodity markets.


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