Barely had William Pesek written cautioning Asian governments not to engage in competitive devaluation, Bloomberg flashed a news-story on its website that Chinese government agencies were pencilling in RMB7.0 to a USD for 2015 and 8.0 for 2016. This reinforces the point that I had made in my blog post here and in MINT that China’s move on August 11 on its currency was the first of the many moves that are to come.
Chinese agencies would not be using them as their forecasts and that would not be shared with Bloomberg unless there was intent to do so and to signal to the world that China was going to do so.
‘Investing in Chinese stocks’ – a good blog – warns that
China must do a large one-off devaluation of the yuan or it will bleed its way to a currency collapse. [Link]
The chart of Chinext 2015 vs. Nasdaq 2000 that is constantly updated on this blog site bears watching. There is a lot more correction to come of Chinext, if Nasdaq 2000 is any guide.
Ambrose Evans-Pritchard had noted that capital outflows had accelerated:
Capital outflows from China have surged to $190bn over the last seven weeks, forcing the authorities to intervene on an unprecedented scale to defend the Chinese currency. [Link]
So, whether one-off depreciation would spook people violently and massively or drip-feed would give them time to adjust and take money out slowly is an empirical question. One-off big devaluation could be dangerous in today’s world for other countries and for social stability in China. People’s anger could boil over. China’s GDP would be reduced below USD10.0trn overnight and in a big way.
AEP, of course, says that China could have another of its mini up-cycle in the second half of the year. Two months are gone in the second half already. This article is riddled with so many questionable statements that it would take a big effort to write them all out. ‘Stimulus works’ and ‘China has stimulated’ are the messages. The effects will be felt. This flies in the face of global evidence over time and China’s failure with its own stock market intervention recently. Faced with a debt trap, stimulus may only delay the inevitable. AEP hedges bets but his fascination and faith with stimulus are deeply ingrained.
There is a famous quote in the article. That man will surely live to regret this:
The violent moves over recent days may prove to be no more than an August squall. “Liquidity has dried up over the summer and that has exaggerated the moves,” said Marc Ostwald from ADM [Link]
‘Alpha Now’ has an effective response to AEP’s mild/mini optimism on China’s mini up-cycle.
I would urge you to read at least one of them – especially the one that tells us how much of FX Reserves that China can actually deploy to defend the currency or stem capital outflows – around USD667 out of USD3600bn!
If that is the case, I am not sure why Chinese agencies are talking of a much weaker Yuan exchange rate publicly.
In the meantime, China moved to cut deposit and lending rates by 25 basis points on Tuesday afternoon and reduced the Reserve Requirement Ratio (RRR) by 50 basis points. The last one will take effect on September 6. Throwing money at problems will make them vanish, of course. For proof, ‘Solarcycles’ has four charts on the U.S. economy which has thrown trillions at its economy.
Finally, Christopher Balding is a guy worth following, if one is following China. Three blog posts by him are great reads. The post he had written on the quality and quantity of GDP overstatement in China is a MUST READ. Amazing stuff on how the National Bureau of Statistics of China understated housing inflation by assuming an Urban/Rural mix of housing of 80/20 when the true ratio was more like 35/65! The resulting understatement of GDP deflator has resulted in a significant overstatement of real GDP in China.
Then, there is a ‘Grab bag of thoughts on Thursday’. The last point debunks the myth that ‘China is different’. His comment on the stimulus that China unleashed in 2008/09 is also well worth noting. Right upfront is the comment on the threat by shadow banks to commit financial ‘immolation’. The story is this. They have sold ‘Wealth Management PRoducts’ to clients whose deposits (these are called high-yielding deposits) have been used to lend money to Property Developers. These loans are guaranteed by Hebei Financing Investment Gurantee Co. Credit Guarantee Firms are like ‘Credit Default Swaps with Chinese characteristics’. Hebei Financing has stopped paying out on its guarantees since January! Read the full stuff in FT here. The risk of social unrest and strife comes through palpably in this story.
On the rate cut today, he has a post too and asks us to watch the deposit rates, liberalisation of which is an attempt to keep money from leaving the country.
Tyler Cowen on PBoC rate cut and other developments – in bullet points. Timely reminder that the PM has to sign off on rate cuts in China.
With this rate cut and RRR cut, has China decided not to defend the Yuan? Perhaps. Then, this will be a problem. Gwynn Guilford has two very good charts in this post.