FYI. You might have seen a post I made to tejek earlier which showed the money supply plunging. This is usually a harbinger of serious pain in the economy and almost always happens when a recession is already underway, even if the stock market continues to rise for months afterwards.
What you may not know is that China has been one of the largest money supply creators on earth, surpassing even our prodigious money printer in chief, Chairman Bernanke. Now China's money supply is also shrinking and what that is a harbinger of is a massive global synchronous downturn. A recession is already here by all key metrics other than GDP. The stock market is already running on fumes. Beware a China implosion. It will take all of us with it...and structurally, China is much worse off than the US, despite their mountains of currency reserves. The fact is that we have many growth engines, notwithstanding the folly of our financial industry. China has been doing exactly what you and tejek love to see, Centrally Planning their economy, and it has resulted in massive malinvestment, which is like building a castle on sand, instead of on bedrock. The US is built on bedrock, so we can withstand even a very destructive financial industry and fight our way back. China is built on sand and when their castle comes crashing down, it will make 2008 look like a mild cold. We won't be immune from the raging economic maelstrom that is unleashed worldwide from something like that. Just my honest opinion.
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Beware China’s quantitative tighteningWatch the People’s Bank of China, not the Federal Reserve
marketwatch.com
By Craig Stephen
HONG KONG (MarketWatch) — The idea of an all-powerful Federal Reserve, as custodian of the world’s reserve currency creating new money that cascades to all corners of the globe, is a popular one.
Last week, confirmation of a fresh round of quantitative easing by Fed chairman Ben Bernanke, lifted equity markets all the way to Asia.
But given the shift eastwards in the growth dynamics of the world economy, perhaps it’s the actions of the People’s Bank of China (PBOC) we should be more focused on.
After all, in the aftermath of the Lehman financial crisis, it was China — not the U.S. — that deployed a mega stimulus that helped lift not just its own economy, but everything from commodities and luxury goods to properties from Hong Kong to Vancouver.
Perhaps unsurprisingly, it has also been China that created the majority of new money globally in the past five years supported by its bulging trade surpluses.
Now, however, some analysts are warning China’s money tap is running dry and this could trigger the next major deflationary shock.
According to CLSA strategist Russell Napier, speaking in Hong Kong last week, since 2007 China has accounted for 40%-45% of broad money growth across the world’s 16 largest economies. Its broad money growth now stands at $14.49 trillion, having jumped from $5.47 trillion in 2007.
In the U.S. by contrast, despite all Ben Bernanke’s various rounds of quantitative easing, in the same period, M3 accounted for just 10.4% of the total growth.
China’s prodigious money supply growth has been the counterpart to its bulging trade surplus. In fact, China has been consistently running both a capital and current account surplus, where, in order to keep it currency value suppressed, it accumulated its $3 trillion plus foreign reserve mountain. This led to vast quantities of new money being created as the central bank printed yuan USDCNY -0.11% as it exchanged foreign currency.
The change is now China’s surpluses no longer look as if they can be taken for granted, nor indeed the expectation of continued strength in the yuan.
Societe General’s Albert Edwards, in a strategy report last week, warned increasing economic and political uncertainty is leading to capital flight from China.
Further, the country’s first balance of payments deficit since 1998 in the second quarter this year was a “game changer” for the global economy, he said.
If China’s period of surpluses is over, it means the PBOC is no longer going to be creating yuan like before. In fact, the reverse will be true if the yuan weakens, where the central bank will effectively have to buy its own currency by selling foreign reserves to maintain its peg.
In the second quarter, China had a $70 billion capital deficit and $12 billion balance of payment deficit. Although the absolute numbers might be small, this marks a massive shift down through the gears for the monetary printing press, said Edwards.
The question now is whether money exiting China through its porous capital controls is the beginning of a sustained trend?
The ongoing scandal of Bo Xilai revealed how wealthy party officials were illegally shifting money out of the country. There is also speculation a new wave of money could take flight due to the upcoming change in government. Reportedly, up to 70% of senior military and government personnel could be replaced in the once-in-a-decade reshuffle.
Napier at CLSA argued that structural reasons are also at play, which have more to do with economics than politics.
Despite China’s big gross domestic product growth numbers, returns on capital are shrinking fast.
CLSA said in the listed sector, return on capital has fallen from 15.6% in 2007 to 10.5% in 2012. In the same period return on capital in the U.S. is virtually unchanged at 13.6%. You can take your pick at the reasons for this from overcapacity, higher wages and costs, to worsening corruption.
The other big change in how we look at China is expectations on the currency. No longer is it taken as a given that the yuan is a one-way bet, that must strengthen. Societe General noted that due to China’s loose dollar peg, its trade-weighted exchange rate has actually become very strong.
If China’s period of surpluses is over, it means the PBOC is no longer going to be creating yuan like before. In fact, the reverse will be true if the yuan weakens, where the central bank will effectively have to buy its own currency by selling foreign reserves to maintain its peg.
Much depends on expectations on direction of the yuan. Napier cited another wild card, which is the behavior of Chinese corporations who have loaded up with U.S. dollar debt in recent years, betting on continued yuan appreciation.
According to the Bank of International Settlements, Chinese entities have borrowed about $497 billion in foreign currencies from offshore banks.
If currency expectations alter, one possibility is there could be a scramble to cover U.S. dollar liabilities, potentially sending the yuan much lower.
While both Edwards and Napier are well known as longstanding bears, there is increasing speculation about the yuan valuation. In Hong Kong, for instance, yuan deposit growth has virtually ground to a halt this year.
No matter who China’s new leadership turns out to be, they will face a testing dilemma. Stimulating growth and defending an exchange rate are incompatible, warned Napier — eventually the currency will have to give. |
