Shotgun Post on China: Depreciation Pressure Now Political

A few ideas and links.

There's been a lot of coverage of China lately. The standard view of China's market crash pulling down the U.S. is, as put in the second link below, missing the forest for the trees.

This is China related and it is far more important than China's stock market: For Commodities, This Is The Next Great Depression

Also Stocks Join Global Risk Adjustments:
The U.S. has stopped inflating the global money supply. Rising oil production, falling budget deficit and end of QE3 reduced the supply of USD to the world.

China's problem is misallocated resources and bad debt. This is an Austrian moment for them. Exports are not the future. Reviving the export engine is a step backward and probably impossible. It follows that yuan devalaution/depreciation is the final step in China's economic crisis, not a way to rescue the economy. If China tries to go back to 2000, it will meet protectionism. The odds of Trump winning approach certainty if the US economy is hurt by global events and China devalues the yuan. (Trump could implement something close to the strategy discussed in The Logic of Strategy: Yuan Devaluation and the Road to Trade War) The best economic policy is the one recommended by Andrew Mellon:
Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.
More true for China in 2016 than it was for the USA in 1929. Mellon's advice was ignored by Hoover, and then FDR ramped up Hoover's policies and the rest is history... China won't take Mellon's advice.

Russell Napier has been one of the analysts on target with China analysis the past few years. ZH: Russell Napier Explains How The Decline Of The Yuan Destroys Belief In Central Banking. Worth reading the whole thing, but some key cuts:
The key failure of control is in China because that failure will overwhelm other seeming successes. In 2012 this analyst labelled one chart “the most important chart in the world”. It was a chart of China’s foreign exchange reserves. It showed how they were declining and The Solid Ground postulated that this would produce a decline in real economic activity in China and higher real interest rates in the developed world. The result of these two forces would be deflation, despite the amount of wind puffed below the wings of the global economy in the form of QE.

This bird does not fly and if this bird does not fly the centre does not hold. A major devaluation of the RMB is just beginning and the faith in all the falconers will wane as deflation comes to the world almost seven years after the falconers first fanned the winds of QE supposed to levitate everything.
The next sentence encapsulates why I expect yuan devalutation:
The failure to inflate is the failure to destroy debts to the benefit of equity.
China already inflated (at least 2008-2013), but it can avoid the deflation by devaluation.
For those investors who have to be in equities, North Asia is the only game in town. They, in the form of China, Japan and probably also South Korea, will win the currency wars....Hedging all North Asian currency exposure is essential.
If you had not noticed, 2016 has begun with gold and the USD rising simultaneously. This is different and important. This is very positive for gold and very bad for the world.

Finally, political pressure for devaluation is rising. This may reignite the MoF vs PBoC battle. This post has many links to the political battles over reform in the 2000s: Anti-Corruption Drive Enters Final Stage?

Reuters: Pressure on China central bank for bigger yuan depreciation: sources
China's central bank is under increasing pressure from policy advisers to let the yuan currency fall quickly and sharply, by as much as 10-15 percent, as its recent gradual softening is thought to be doing more harm than good.

...Policy insiders are now calling for a quick and sharp yuan depreciation, backed by tighter capital controls to curb speculation and the flight of money out of the country.

"We should let the yuan have a considerable depreciation, but we should have a bottom line; it cannot create a big impact on the economy and the financial system, and big panic in the capital market," an influential government economist told Reuters, suggesting the yuan be allowed to depreciate by 10-15 percent over an unspecified timeframe.
A depreciation of 2% causes panic in the capital market.
"The yuan should depreciate at least 10 percent to have any impact on exports ... but I don't think the authorities will take this step," said a researcher at the commerce ministry. "If China wants to rely on expanding exports to spur growth, other countries may follow suit."
The game is afoot.

One way to ease foreign tension: slash overcapacity to curb exports. China to Cut Overcapacity, Help Companies out
China will provide full support for the coal and steel sectors, which suffer serious overcapacity, to help them out of their current difficulties, according to an official statement issued Thursday.

...The central government is going to set up a special fund to subsidize the efforts of local governments and companies to defuse overcapacity. The fund will be mainly used in taking care of laid-off workers, according to the premier.

The country will safeguard the legitimate interests of laid-off workers by offering new jobs, supporting them to start businesses and providing posts in non-profit endeavors.

Li added that local governments must abandon all preferential policies and protective measures for fields with overcapacity, and efforts of eliminating excessive capacity will be one of the major aspects in evaluating the work of local governments.
The crisis is as much political as economic. Reforms have been slow going. Overcapacity has barely been cut to this point. Events will play into the leadership's hands if they have the power to seize the moment. The best solution to the crisis is a bold and rapid roll-out of planned reforms. Relying on devaluation and exports will represent failure.

No comments:

Post a Comment