Reports that prices will fall in China while rising elsewhere around the world bear a curious twist for Central Asia, where China is muscling out Russia as the dominant trade partner.
During the 2020 pandemic, China expanded production of exports to supply nations demanding home capital, like woks and exercise bikes, to survive the lockdowns that confined frustrated folks to the house. The pandemic is over, and China has more woks than it knows what to do with. So it will export at a cut price.
Its Central Asian neighbors like Kazakhstan, Kyrgyzstan, and Tajikistan will substitute these cheap imports for their own expensive goods. In addition, the Chinese themselves will buy more of their own goods rather than from other countries.
Both effects raise demand for Chinese goods and lower demand for Central Asian goods. As a result, demand for the renminbi relative to Central Asian currencies will rise. The exchange rate of, say, Kazakhstan's tenge per renminbi will rise over the months to come, since people are willing to pay more tenge than before for a renminbi.
Although the tenge weakens, it is not accompanied by inflation this time. People stop buying Kazakhstani goods, so their prices don't rise. The conventional wisdom in Kazakhstan that inflation and depreciation are inseparable is more convention than wisdom.
Interest rates will fall in Kazakhstan, because people sell tenge for renminbi. The increase in available tenge makes them easier to procure. The price of procuring a tenge is the interest rate, since you pay this to the bank to borrow it. To lend out the excess tenge, banks will lower their interest rates.
The ceteris paribus assumption applies with a vengeance. --Leon Taylor, Baltimore, tayloralmaty@gmail.com
Good reading
Jason Douglas and Stella Yifan Xie. Wall Street Journal. While Everyone Else Fights Inflation, China Deflation Fears Deepen - WSJ . July 30, 2023.
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