Update No. 56 – 20/04/12

There is considerable hand-wringing in the financial media about the long-term effects of the substantial money-printing that has been conducted by the major central banks since the GFC took hold in 2008.  In particular, the conservative European and US press are certain that there will eventually be enormous inflation as a consequence of these actions.

What are rarely reported are the actions of the Chinese central bank, which as the world’s second largest economy probably warrants closer regular inspection?  I read in a link from FT Alphaville this week something that made me pause and consider if this could be why inflation has not run away in advanced economies as a consequence of their ‘money-printing’ actions.  The whole article is well worth a read, but included in it was this interesting quote:

"China was responsible for 52% of new M2 creation globally in 2011… This is not a recent phenomenon – in the-three year period after the global financial crisis began (2009-11), 48% of new M2 globally was in Chinese Yuan"

That is absolutely extraordinary if you stop to think about it, the Chinese economy, which is about half the size of the US economy has printed significantly more money than the US over the last 3 years. But the most extraordinary element of the article was the comparison of the balance sheets of the 3 largest central banks in the world, which rightly points out the folly of any type of criticism by China of the ‘money printing’ practices of the ECB and the Federal Reserve.

The massive expansion by the Peoples Bank of China (PBoC) is chiefly due to their managing their currency relative to the US dollar.  Because the US dollar was weakening due to the US Federal Reserves actions, it ‘forced the hand’ of the PBoC, to maintain relative currency value.  When you combine this US action against a Chinese currency that should have been appreciating much more rapidly, you can understand why the Chinese printing presses have been working so hard.

My take is that with everyone doing it, you end up like old ‘ducks on a pond’ analogy, with everyone rising, there is nothing to quack about – it is only if you start rising (or falling I guess) relative to the rest of the ducks that something will cause great concern.  It is my expectation that if in aggregate the rest of the world are printing as much or more money than say the US in proportional terms, US inflation is unlikely to run away.  The way to trigger inflation is to operate a policy that is significantly out of step with the rest of the world and in particular those economies you have important relationships with.

In fairness to the mainstream media, they do mention the Chinese printing occasionally, such as the Gareth Hutchens article I spotted today in SMH’s Business Day, which said:

"The sharemarket hit its highest level since early August yesterday after China's central bank said it planned to increase the supply of cash to the world's second-biggest economy."

But commentary about ‘running the printing presses’ when China ‘increases liquidity’ seems very different from the invective used when the same actions are taken in the US or Europe.  I appreciate China as a developing economy faces different drivers, but the likely outcomes from the action are not necessarily completely different.

This situation is a big part of the reason Australia finds itself with such a strong dollar presently, due to our relatively strong economy, we have had less need to resort to printing compared to all our major trading partners, this along with high interest rates has led to capital inflows and currency strengthening.  If the Chinese would allow their currency to ‘float’ more naturally, they would be able to slow the exponential growth in their central bank’s balance sheet, stimulate internal trade and substantially lessen their reliance on exports as their key economic driver.  The Chinese are taking substantial and important steps toward a truly floating currency, but they still have a long way to go yet.

How does this affect your investment in EGP Fund No. 1 Pty Ltd you may ask?  It doesn’t really but isn’t it interesting! In all seriousness, I don’t spend as much time on macro factors as the analysis above may make you think, it’s more out of personal interest.

Almost all of my work in investment decisions goes to relative decisions, why is company A likely to outperform company B over the medium term.  A few thousand such ‘investment death-matches’ and we narrow down our investment field.  However the fact is a few of our investments operate in China and most of them deal with China in some way.  Out of the 9 stocks we hold presently, 7 have what I would describe as having ‘significant’ exposure to the Chinese economy, or more to the point, only 2 would be virtually unaffected by major economic change in China, so I will always watch with interest. In truth, a substantial appreciation of the Yuan would be a negative for our portfolio, so you should be pleased with the very cautious approach the Chinese are taking to ‘unshackling’ their currency from the US dollar – Tony Hansen 20/04/12.


April 1st 2011

Jan 1st 2012

Current Price

Current Period

Since Inception

EGP Fund No. 1












EGP Fund No. 1 Pty Ltd. Up by 7.83%, lagging the benchmark by 1.36% since January 1st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 3.8%, leading the benchmark by 9.17% all-time (April 1st 2011).