Chinese Debate Yuan Risk in the Wake of Ruble Collapse, Liu Junluo Sees Path to 1997 Repeat, Niu Dao Sees Path to Latin American Crisis of 1980s

Since the ruble's collapse, there have been several articles comparing the Russian situation to the Chinese one. Most of the opinion argues the yuan is not going to depreciate like the ruble due to China's large reserves and more diversified economy, but popular financial bloggers Liu Junluo and Niu Dao disagree (no surprise) and see paths to yuan collapse.

人民币有贬值压力 不会重蹈“卢布式”危机 (Yuan Has Depreciation Pressure, Won't Follow "Ruble Style" Crisis)

With a stronger dollar, currencies of emerging market countries will go where? "Ruble" type of crisis will be transmitted to the renminbi and the currencies of other emerging market countries?

Yu Xuejun of the PBOC Shenzhen branch:

He told the 21st Century Business Herald interview, said the crisis affected the ruble devaluation will increase pressure on the yuan, but now China and Russia's economy and is quite different, coupled with China is sitting on nearly 1/3 of the world's foreign exchange reserves, is perfectly capable of maintaining the RMB exchange rate at a reasonable level. Therefore, the RMB is unlikely to occur, "ruble" type of crisis.

He goes on:

Of course, in addition to the supply side, there are reasons for the demand side. That is, since the 2008 global financial crisis, after adjustment for years, the global economic downturn has not yet out of the quagmire. Meanwhile, the 2014 world economic growth is weak there is an important factor, that is downward pressure on the Chinese economy, the demand for energy, raw materials decreased significantly. A few years ago, although the financial crisis hit the global economy, but oil, iron ore, copper and other bulk commodity prices have remained high, which is an important reason for the huge investment in China provides a huge demand. Now, as China's economy was continuing downward pressure on demand for bulk commodities significantly reduced, which makes almost all of the world's bulk commodities are declining. Therefore, the sharp decline in oil prices is not independent and accidental, but there is a macro-trend of problems. In this trend, the United States and Europe to Russia before they can make the best use of sanctions, the flow, and thus to exert enormous pressure on Russia.

This article (好淡因素相当 人民币汇率以稳为主基调) argues the yuan is stable, but don't forecast otherwise! It could lead to a self-fulfilling prophecy:

From a broader perspective, the market should not be made for the expected depreciation of the RMB, but also to avoid the authorities concerned to make such a policy orientation. At present, the global fluctuations in currency exchange rates increased, the potential risk of the outbreak of the currency crisis in emerging economies in the increase. The recent outbreak of the ruble crisis, the financial system and the economy caused serious injury. Southeast Asian financial crisis in history, starting from the currency crisis and also transmitted to the financial system and the real economy. If the yuan devaluation is expected to form a broad, eventually self-reinforcing, and finally transmitted to the real economy and deeply hurt China's real economy.

Popular blogger Liu Junluo disagrees with the optimists. 中国央行将加息了和楼市

Dollar index broke the 100 later, China's central bank about $ 2.3 trillion in the hands of "non-US currencies," oil and mineral assets will face a loss of up to 70% of losses.

Now, in China in 1994 is similar to the famous Mexican Tesobonos bond size at about $1.5 trillion, which is "dollar interbank bond." And, most did not do currency hedging. 1994, Tesobonos problem outbreak in Mexico, Mexican currency and overnight sent the Mexican economy, "hell."

He's talking about Chinese investments in natural resources and minerals around the globe, as well as short-term debt and dollar denominated loans at SOEs and real estate developers.

Now the problem is that Chinese real estate developers, Chinese state-owned enterprises and the Chinese central bank's position is a "single position", "single position" in the financial markets is a suicide pact. For example, if the dollar rises, Chinese developers and state-owned companies will start panic buying dollars, and that will cause a loss to China's central bank due to reserve diversification. Thus, China's central bank will raise interest rates sharply to attract dollars, however, a substantial hike will lead to China and the Chinese state-owned real estate to further losses, so that China and the Chinese state-owned real estate would be more mad rush to buy dollars, while China's central bank diversification of official reserves will be further loss, therefore, China's central bank will raise interest rates further. In 1997, the ASEAN region was annihilated by this real estate and central bank suicide pact.

Liu goes on to argue that the stock market bubble isn't there to prop up the economy or repay debt, but to keep hot money from pouring out of the country and triggering a currency devaluation. It will also trap Chinese citizens when the central bank closes the dollar window (although Chinese stocks will be better than cash in the long-run if the yuan devalues sharply).

So, we see the Chinese central bank quickly creating super hot Chinese stock market in the past few months, has attracted hundreds of trillions of money into the stock market. Soon, we will see all these hundreds of trillions of money is buried in "the stock market dead pit" scene. Will China's stock market is now crazy aunt who rushed to the time to become China's aunt who ruin, and that also what the Chinese central bank stepped into the doorway to exchange American dollars?

After the Spring Festival, China's central bank will allow the rapid devaluation of the RMB exchange rate. And in this year, May 4 to domestic residents dollar closed the window. At the same time, tightening the money supply began to promote the domestic real estate fell to lock estate liquidity.

This year in March, the launch of the "real estate registration" to "anti-corruption", or for overseas Chinese central bank's huge losses to lock in domestic liquidity. Let's central bank has not yet entered the door, ready to exchange dollars people first "dead" mean?

This isn't new ground for Liu, who argued in 2013: Gold going to $500; Chinese yuan will collapse; China will nationalize dollar deposits

Another Chinese financial blogger "Bull Knife" (Niu Dao) argues that the collapse of oil shows the Chinese economy is collapsing: 原油崩盘昭示中国经济全面崩溃. He argues that the global rebalancing will take place via exchange rates. Chinese real estate is not "its own thing," rather in the age of globalization, it too is subject to global conditions. He says the A-share bubble is fueled by commercial bank loans funneled into stocks because Chinese shares have no investment value, only speculative value. Make some money and run. He criticizes the Chinese government printing money to pull up land prices and even copper. (From November 2014: Chinese State Agency Buys Up Copper, Keeping Floor on Prices. China needs to prop up copper for the same reason that it needs to prop up land and real estate prices: a mountain of speculative debt will collapse if the underlying collateral craters. And copper is at a critical juncture....) Ultimately, he compares China's fixed exchange rate system to the fixed currency regimes in Latin America during the early 1980s. They began collapsing when the U.S. Dollar Index climbed between 100 and 126. By 1984, the USD Index was at a new high of 165. Niu Dao sees the USD Index hitting 171 this time.

Liu and Niu don't give a lot of background to why they thing as they do. While I can make a case for their conclusions, they don't connect many dots in their posts. These bloggers have a flair for rhetoric, but do not give a good foundation for their forecasts. Their predictions are also extreme and Liu has at least poor timing (see some of Liu's other projections here, including a 40% drop in the yuan in 2013). They are entertaining though, and show that China allows a wide range of debate in areas such as economics.

For all their flaws, their conclusions may still be pointing in the right direction. The yuan is at a greater risk of breakdown than is recognized by the market, and the path to serious devaluation (or the threat of it) would likely involve the Chinese central bank ending dollar convertibility. Liu earlier had a post noting how the U.S. dollar collapsed as China gobbled up treasuries in the aughts (2000s) and goes to argues it will surge as China diversifies away from the dollar in the 2010s. Foreign exchange and billions upon billions of dollars invested in natural resource projects, plus the Chinese real estate bubble, are all at risk from deflation, the flip side of a dollar rally. Michael Pettis has noted how China today is very similar to the USA in 1929 and Japan in 1989; both nations had huge foreign reserves and were creditor nations. Most yuan bulls cannot conceive of a path to yuan devaluation because of the large reserves and seemingly invulnerable Chinese economy, but the yuan is literally a paper tiger, as are all fiat currencies. Even many yuan bears base a yuan devaluation on internal economic conditions, not an external dollar rally. Chinese bloggers, however, see a US dollar rally as the genius Federal Reserve and Wall Street about to skin their biggest prize yet.