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Albert Edwards Calls For The Next Black Swan: Expect Yuan Devaluation Following Deep 2010 Downturn

Tyler Durden's picture


With everyone and their grandmother screeching that it is about time for China to inflate the renminbi, despite that such an action would be economic and social suicide for the world's most populous country, SocGen's Albert Edwards once again stalks out the Black Swan in left field and posits the contrarian view de jour: China will aggressively devalue the yuan following a deep 2010 downturn coupled with escalating trade wars. As Edwards says: "I think the next 18 months will see major ructions in the financial markets. The consequences of a double-dip back into recession next year require some lateral thinking. If the carry trade unwind results in a turbo-charged dollar, any collapse in the China economic bubble will be doubly destructive to commodity prices. A surging dollar, coupled with China moving into sustained trade deficit through 2010, could prompt the Chinese authorities to acquiesce to US pressure for a more flexible exchange rate. But why does no-one expect a yuan devaluation?"

The critical observations from Edwards that may end up being spot on, courtesy of everyone with an FX account being short the dollar:

Investors seem to have spotted that the global economic cycle may be on the wane. The ECRI leading indicator for US activity has now slid for five weeks in a row. Recent data such as the slumping October US housing starts are causing very valid jitters of what will occur as the turbo-charged fiscal stimulus now starts to abate.

Having been in Asia for the last two weeks on business my thoughts turned to China. President Obama'?s recent visit there re-opened some uncomfortable issues about increasing trade frictions in the context of a Chinese currency which most commentators believe to be hugely undervalued and the US authorities believe to be ?manipulated?.

If we do indeed see the sort of unexpected 2010 synchronised global downturn I envisage, geo-political tensions are likely to increase sharply. And with trade barriers already beginning to be erected in a recovery, investors should be really concerned about what might unfold in any renewed global recession. Aggressive competitive devaluation and a proliferation of trade barriers would become an increasing prospect in 2010.

I show below one of my favourite charts of what world trade did in the 1930?s. Politicians reassure us that they have learnt the lessons from that period. Unfortunately, all I see are more and more protectionist measures being implemented, belying the soothing rhetoric.

First, here is why 2010 will be anything but what the Fed and the administration's puppets want everyone to believe:

Some serious concerns are emerging in the US about the sustainability of this recovery. And so they should! The jump in unemployment rate above 10% was entirely consistent with what is occurring in some of the other labour market surveys. The Conference Board Survey, for example, shows no abatement in the gloom about job availability (see the chart below). In addition, the moderation in job losses in the payroll data to its 188,000 average over the last three months vastly overstates the improvement. The Household Survey measure of jobs typically leads the payroll measure because it includes a better snapshot of what is going on with smaller companies. And this series shows a renewed downturn with job losses averaging a worrying 588,000 over the last three months (see chart below). Double-dip here we come.

Second, scrap all pre-existing expectations about China's traditionally burgeoning trade surplus. On deck: Chinese trade deficits!

Our Asian Economist Glenn Maguire has been very right on China this year. I was chatting to him on my recent visit to the region and he re-emphasised his call that China will be heading into trade DEFICIT (!) throughout 2010. This is a mega-call and will have major implications for the global financial markets. First and most obviously is that China will not be accumulating FX reserves at anywhere near its recent pace. This has implications not just for US treasuries etc., but also for the pace of Chinese growth itself, as the rise in reserves has previously been a major stimulus to domestic monetary growth and activity (see chart below).

Third - combining one and two would result in a major international capital flow revolution.

The fear of a cessation of flows of funds out of China in the event of a shift into trade deficit might also combine with similar worries about Japan. I, like many others, am increasingly concerned that the Japanese authorities may be nearing the end of the road in their ability to fund the out-of-control public sector deficit. Japan has been a major source of flows of funds for the global economy over the years as a direct mirror image of its massive trade and  current account surpluses. Currently Japan is seeing huge long-term outflows (see chart below). A spike higher in JGB yields could seriously impair these capital outflows. Watch this space.


And the conclusion could very well be the harbinger of a major 2010 black swan (together with who knows what else courtesy of the Fed's central planning policy).

Imagine we are in the middle of 2010. Imagine the western economies (plus Japan) are sliding back into recession as the lack of additional fiscal stimulus reduces 2010 GDP growth back to its weak underlying rate (deficits need to widen to boost the economy). Imagine also that in 2010 the Chinese economy is beginning to roll over. China'?s vulnerability is perhaps far higher than the bulls suppose, having engaged in the same sort of recession defying stimulus as the US in 2003. The US authorities in no way thought gently tapping the monetary brakes in 2005/6 would end in the biggest economic and market crashes since the Great Depression. Personally, I see the Chinese conjuncture as little different ?- in particular, the market's? confidence that the authorities are in control of events opens the possibility of a rude shock.

I am reassured that my views are not totally bananas when two of the deepest thinkers in the markets are also concerned about a Chinese economic crash. Edward Chancellor thinks China is a bubble waiting to burst (link - he is one of the worlds? leading thinkers on bubbles and the author of the seminal book on the history of bubbles ? The Devil Take the Hindmost). I was also reading a news report on the views of Jim Chanos at Kynikos Associates -? link. Amid all the bullish hype on China, it is well worth taking some time to read these men'?s views.

Any synchronized end in Chinese and US recovery will undoubtedly heighten geo-political tensions and accelerate the inevitable trend towards protectionism. The trend towards competitive devaluation will also increase. And in the case of China, if its economy founders unexpectedly and unemployment soars, no lever to restore growth should be ruled out, including devaluation. With the potential for the dollar to soar, in the same way the yen did in 2008 as risk carry trades unwound, this may be all too much for a beleaguered Chinese economy. With a Chinese trade deficit and a loss of confidence in the growth miracle, China?'s reserves will in all probability be in decline. What better way of meeting the American?s call for greater flexibility than to give them what they want? The Chinese may yet respond to the new market pressures and devalue. 2010 could be a very lively year indeed.

A devaluation in the renminbi relative to the dollar will likely short-circuit all the millions of FX algos that expect a perpetual peg if not outright Chinese currency appreciation. This solidifies our view that the US Dollar is poised to become the next iteration of the Volkswagen short squeeze in the near- to medium-turn.


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Mon, 11/23/2009 - 13:42 | 139513 bugs_
bugs_'s picture

WOW fabulous article.  Shake it UP!

Mon, 11/23/2009 - 16:57 | 139765 Anonymous
Anonymous's picture

I have a hard time believing it. If China wants to take center stage in the world then it has to let its currency rise. It's a matter of power, and the leaders of China like their power.

Mon, 11/23/2009 - 17:45 | 139822 BorisTheBlade
BorisTheBlade's picture

Not to mention that it might by a matter of survival for a communist party of China too, if RMB is devalued significantly then lots of chinese will lose their savings, which is the only thing there are relying upon in abscence of any form of social security or public medical care. CPC is already under heavy pressure because of the high unemployment and if they add to that devalued RMB, they will commit suicide. I doubt that they don't understand that.

Mon, 11/23/2009 - 20:52 | 140044 mitack
mitack's picture

The chinese save in RMB, so how is a devaluation of the RMB going to hurt them ?

I think it will do more good than bad, because will encourage domestic consumption

by making import goods more expensive... also, it has to be taken in the context

of the wildly expected (on this fine site that is) "race to the bottom" in terms of

 devaluation- they cant stop BenThePrinter, so everyone's only choice is to join

him... why not China ?

Mon, 11/23/2009 - 22:33 | 140126 Anonymous
Anonymous's picture

Well said mitack; Despite hubris in American MSM, Obama and Clinton were told off like beaten-up stray dogs last week and given a lecture on how to run an economy. So Americans who are still deluded to think China would reval are living in Alice's world of illusions.

Edwards and company are desk-top Asian observers, fly in 2 weeks a year and make strong statements; they got the facts wrong but the conclusion is not totally incorrect, there would be no RMB deval nor reval, but interest rates would start going up soon in China, there would be pain but the folks in beijing have been preparing their cronies in advance, so the mess would be absorbed by the recently HK-listed property developers and foreign shareholders who bought the junk.

Tue, 11/24/2009 - 02:59 | 140302 BorisTheBlade
BorisTheBlade's picture

The chinese save in RMB, so how is a devaluation of the RMB going to hurt them ?

The zimbabweans saved in Zimbabwe dollars, so how devaluation of the Zimbabwean dollar did hurt them?

I think it will do more good than bad, because will encourage domestic consumption by making import goods more expensive.

Chinese are not consuming a lot of imported goods unlike americans, so it will not do any good for their economy. The only imports that are going to become more expensive are the raw materials, oil, food. The rest is already being produced inside China.

they cant stop BenThePrinter, so eveeryone's only choice is to join

him... why not China ?

Implying that everyone else should commit economic suicide just because US went down that way.

Mon, 11/23/2009 - 18:56 | 139911 Dadoomsayer
Dadoomsayer's picture

"Our Asian Economist Glenn Maguire has been very right on China this year. I was chatting to him on my recent visit to the region and he re-emphasised his call that China will be heading into trade DEFICIT (!) throughout 2010. This is a mega-call and will have major implications for the global financial markets. First and most obviously is that China will not be accumulating FX reserves at anywhere near its recent pace."

Who are the Chinese going to have the trade deficit with?  And if it supposed to be the US how will this happen? 

As long as the trade balance with the US is positive in China's favor it should not effect the need to continue buying US treasuries.  Unless I am missing something...

Mon, 11/23/2009 - 22:00 | 140102 Anonymous
Anonymous's picture

China is a huge importer of raw materials, energy, etc. If they keep importing and can't sell anything, bingo! Trade deficit.


Tue, 11/24/2009 - 08:58 | 140392 Dadoomsayer
Mon, 11/23/2009 - 13:57 | 139522 BrianOFlanagan
BrianOFlanagan's picture

I wouldn't count on a short squeeze in the dollar, Tyler.  The world is far overweight dollars as it is, more than offsetting the impact of carry traders.  And if China devalues, the US will just print more.  Hard to see how that leads to people rushing back into the dollar.  If anywhere, investors would probably go to rational countries such as Australia or Canada or to gold and silver.  But good to see contrarian views.

Mon, 11/23/2009 - 14:37 | 139575 Anonymous
Anonymous's picture

All the countries are
increasing money supply at
double digit rates. Thats
the reason for the asset
inflation we re having now.
USD is weakening because
countries are allocating a
smaller percentage of reservs
in USD. and because of
speculation. The USD declined
after introduction of EURO.
Short squeez is very possible
just like what happened in
the JPY.

Tue, 11/24/2009 - 00:34 | 140237 Anonymous
Anonymous's picture

I do not think that it is accurate to assume that just because the fed is injecting liquidity like crazy that those dollars end up as "extra" dollars looking for a home (some obviously do, but the equity and commodity markets still pale in comparison to the derivative markets). I think that most went to derivative instruments with a dollar funding shortage, so that the revenue streams continued uninterrupted. I am with Tyler, I think that although the Fed has done nothing but inject, the conditions are still right for a dollar shortage, should any number of events occur...Just a thought

Mon, 11/23/2009 - 14:02 | 139526 lizzy36
lizzy36's picture

Tyler, can you please post the orginal.

Mon, 11/23/2009 - 14:04 | 139531 cougar_w
cougar_w's picture

I learned a new word: ructions


Mon, 11/23/2009 - 14:08 | 139536 faustian bargain
faustian bargain's picture

it sounds so dirty.

Mon, 11/23/2009 - 20:55 | 140046 mitack
mitack's picture

Stop watching porn on your bloomberg terminal.

Mon, 11/23/2009 - 14:12 | 139543 AnonymousMonetarist
AnonymousMonetarist's picture

What is old is new again.

Ambrose Evans-Pritchard at Jan 15, 2009 at 13:27:42

The key argument is that markets have been sold a pup on the China growth miracle and have massively underestimated the risks for the global FX and trading system as this unravels.

"The Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the yuan. A subsequent trade war could see a re-run of the Great Depression.... Do you really trust politicians to "do the right thing"?

Mon, 11/23/2009 - 14:24 | 139557 KeyserSöze
KeyserSöze's picture

When the MSM is all starting to shift at the same know the stories are the direct hand of the oligarch....allow me to translate....


Dear China...either float your yuan (so we can control you) or we will keep this up longer than you can remain solvent...and if that doesn't work we will shut you out of the rest of the world (trade war)until you which time your people will topple your goverment so we can put someone in place that we can control...much like the rest of the once free it now or else! 


Mon, 11/23/2009 - 14:29 | 139564 cougar_w
cougar_w's picture

We suddenly find ourselves rethinking the reason for Obama's visit to China. Oh yes.

When it's all become smoke and mirrors then you might as well be blind; nothing you would see would be real anyway. Better perhaps to close your eyes and sit very still and think.


Mon, 11/23/2009 - 21:05 | 140053 mitack
mitack's picture

you meant drink ?

Mon, 11/23/2009 - 21:47 | 140093 tomdub_1024
tomdub_1024's picture

think...drink...inter-CHANGABLE now-a-days...

Mon, 11/23/2009 - 17:05 | 139775 PeterB
PeterB's picture

+ 10 Ain't that the truth! This whole game is just the start of the next big con.

Mon, 11/23/2009 - 14:17 | 139551 Charley
Charley's picture

The long term trend is that American labor's share of consumption was being undercut by off-shoring manufacturing to China. For a while this off-shoring was concealed by the expansion of consumer credit here, which then funded Chinese purchasing of American treasuries. But when Americans could no longer continue accumulating debt, trade collapsed and the dollar recycling mechanism was broken. This collapse now threatens Chinese export surpluses, even as Chinese industrial capacity is ramping up on domestic stimulus.

China is facing a major incident of overproduction.

Mon, 11/23/2009 - 14:25 | 139559 BobPaulson
BobPaulson's picture

At least somebody is talking Malthusian end game now. Good to see.

Tue, 11/24/2009 - 00:34 | 140238 Reductio ad Absurdum
Reductio ad Absurdum's picture

How is this "Malthusian end game"? Malthus wrote about human overpopulation surpassing our ability to produce food, like in the movie "Soylent Green".

Tue, 11/24/2009 - 10:31 | 140439 BobPaulson
BobPaulson's picture

Economics are related to population and the Chinese "economic" miracle will be limited by their overpopulation.

Mon, 11/23/2009 - 14:17 | 139552 KeyserSöze
KeyserSöze's picture

I guess everyone is missing the 125k puts bought on EWJ (Tyler)?...

then again don't worry about it the Yen is only the 2nd largest basket to the almight "worthless" dollar...

oh and don't forget the squid called USD/JPY long a few weeks ago as well as a 20% rise a few days ago see Tylers post...

There is your theme...when will it happen? Who knows but it is coming...

Mon, 11/23/2009 - 14:28 | 139561 Chopshop
Chopshop's picture

Recall that China announced that commodity contracts with state purchasers etc. could be unilaterally rescinded, contract broken, tough crap.  Most everyone thinks that implies inflation and higher CRB/ PPI ... tsk tsk.  

Mon, 11/23/2009 - 14:34 | 139563 steve from virginia
steve from virginia's picture

Albert Edwards suggests that trade contractions would force a Chinese administrative devaluation. What this boils down to is whether a) the Chinese will stop buying dollars and b) that stopping will cause the dollar to rise against the yuan.

Maybe, maybe not ...

I never bought the 'Strong Yuan' argument for a lot of reasons.

I can't imagine the Chinese authorities will ever shut off the stimulus spigot - they don't dare! They will fill their country's blank spaces with zinc and aluminum ingots. Whether they have dollar inflows or not, they - like their Chimerican countrymen - will print. After all, Chinese money is backed by zinc ingots. Our money is backed by ... Janet Tavakoli's credit card.

China's prestige hounds call for an internationally recognized yuan so this means more and more yuan in circulation. The outcome would be a de- facto devaluation, anyway. Dollar devaluation is advancing the acceptance of the yuan as a dollar proxy. The difference is the dollar already buys everything that is made or available in China, including Chinese whores.

Nothing in North America can be bought with yuan, which makes them worthless in the worlds (still) largest market. So ... how can the yuan be made less valuable?

Along with Edward Chancellor, Andy Xie sees a Chinese finance/real estate bubble that will be inevitably deflate. I see Chinese savings being turned out all at once by the machinations of the state. This could go either way; deflation or hyperinflation. The dollar peg has helped the Chinese import much of Ben Bernanke's inflation (which would have done some good here, btw). The need for China to make USA- style 'consumers' out of its indentured multitudes - and massive capacity overhang - gives more force to an inflation scenario.

I'm still in the Chinese hyperinflation (black swan) camp. As long as the authorities print, their bubbles will continue to grow. Our deflating economy is much more dependent on petroleum than theirs is. Deflation is inescapable for us. For the Chinese, the issue is creating the appearance of extra spending money among their multitudes.

Which Swan has the sharpest teeth? Like the Americans, the Chinese are grasping at all bits of floating flotsam and jetsam to keep from drowning. As long as the dollar declines, they can peg the yuan to it - by buying dollars as needed - and both keep inflation under control and maintain what's left of their merchantilist pose. A dollar rally - which will be caused by the current, strong crude oil/dollar link IMO - will stifle trade to the point where the broken peg and yuan devaluation won't matter.

The bottom line is everyone is going broke more or less simultaneously. Because of the differences in color of the different kinds of cash, some will become broke a tiny bit faster.



Mon, 11/23/2009 - 14:49 | 139597 cougar_w
cougar_w's picture

Very nicely done.

Mon, 11/23/2009 - 15:15 | 139613 Bob
Bob's picture

One would think, from most analyses, that the 1.3B Chinese have already become "USA-style consumers" and would, consequently, perceive the world and act just as we do. 

I think they have a multitude of advantages in an economic war with the US.  First, their people are not consumers by our standards, to say the least.  Those people would be more than willing to accept relatively (wrt current conditions for the vast majority) small diminishment of their "living standards" as a condition of surviving in a war that was perpetrated by the USA.  American bankstas and all.  Perhaps I'm being simple-minded, but I think virtually all of the world's people will be strangely disposed to view things in the same way and support their governments acting accordingly.  Not that Wall Street hasn't make out spectacularly, but some see this whole terrific fragility of the global financial system thing as something created by Americans who have perpetrated the largest financial crime against humanity in history, on a scale previously unimaginable.  Hey, they might even be right.   I think the Chinese people would be perfectly happy to go with that story, all in all.  And they don't demand much more than rice as a whole. 

I think things could get very interesting very quick, and in a way we are not used to. 

Tue, 11/24/2009 - 00:44 | 140250 tip e. canoe
tip e. canoe's picture

bob, have you ever been to china? you think americans like to shop?  the chinese take shopping to a whole 'nother level.  saying that they don't demand much more than rice is like saying americans don't demand much more than corn.  and many chinese have a lot deeper understanding of global events than americans think they do (or that most americans do for that matter).

just remember, it was students in CHINA that laughed in timmy's face.



Tue, 11/24/2009 - 01:27 | 140270 Bob
Bob's picture

No, I haven't been there and characterizing the Chinese as demanding nothing more than rice is obviously a gross exageration on its face.  But there is some fundamental truth in it, I think, in comparison to Americans as "consumers"  and as a people.  Most Chinese, say 1B people, still live on what we regard as a basic subsistence level. 

As to the sophistication of their educated class regarding international matters, your observation seems to support my contention that they are nobody's fools, including Wall Street's.  Find a group of American students who would have either the knowledge base or the nerve to laugh in timmy's face. 

Give them a sufficiently compelling rationale for deprivation, e.g., an economic war with the "Criminal USA," and I think their society would hold up well in comparison to ours.  Who would the rest of the world side with if push comes to shove?  I just don't think it's as simple as we like to think. 

Tue, 11/24/2009 - 11:54 | 140529 tip e. canoe
tip e. canoe's picture

ah, now i see where you're going with this...sorry i misunderstood before...excellent points, i agree.  the USA and its people may be about to get a lesson in hubris.

and yes, there is much we as a people can learn from the chinese (and many others) about how to survive with basic subsistence. 


Mon, 11/23/2009 - 17:51 | 139833 Joe Sixpack
Joe Sixpack's picture

One must wonder if this is why the Chinese government is encouraging its citizens to buy gold and silver.

Mon, 11/23/2009 - 14:58 | 139601 Anonymous
Anonymous's picture

The links to the Edward Chancellor and Jim Chanos articles are dead.....

Mon, 11/23/2009 - 14:58 | 139602 Anonymous
Anonymous's picture

let's quiet the bull**** and the misguided commentary on the USD. The US is still the best and most powerful country in the world and to ignore it or diminish it's impact is ignorant to say the least.

China is a just a big pimple on the ass of an elephant and when the timing is right the world will medicate that zit.

Please stop will the fearful crap as it is becoming boring.

Mon, 11/23/2009 - 19:40 | 139974 Anonymous
Anonymous's picture

the china syndrome is certainly overplayed but
the usa is a rogue criminal nation who instigated
the financial terrorism affecting the world....but
the evil of the usa in no way vindicates the
chinese who have their own sloppy toilet to clean.....

the yuan is undervalued and should float - that
is the only way that it could conceivably
become a world is also the only
way the trade imbalances can correct....fixing
the yuan is putting ice cubes on the thermometer
in the middle of july and claiming an impending
snow storm....

the chinese economy is far more advanced than
americans understand especially in its conversion
to a consumer economy....

the china trade figures and economic growth are
pure bullshit....china will see a crash at about
the same time the usa does in its equities markets
sometime in the first half of 2010....both will
suffer orders of magnitude rises in unemployment...

however, china is far more than a pimple on our
ass such thinking being the hallmark of an
intellectual midget....the chinese are capable
of challenging the usa navy and its military power

it's neocon fucktards like you who want to build
a plunder economy like rome's....when the zit
gets popped i hope it's in your face....

Mon, 11/23/2009 - 21:20 | 140068 mitack
mitack's picture

Agreed- the crash will be global, most likely in 2010H1.

Who has the manufacturing base ? China.

Who has FIRE* economy ? USA.

Who will "recover" first (times faster than US) ? China.

Why ? Because you can fool some of the people

all of the time or all of the people some of the

time- good luck selling MBS to pension funds in

Norway or even Venezuela... on the other hand,

everyone needs real goods...

*FIRE is Finance, Insurance, Real Estate.

Mon, 11/23/2009 - 15:22 | 139604 AN0NYM0US
AN0NYM0US's picture

Soc Gen: "Expect New Equity Lows In H2", China Is The Global Achilles Heel

Posted by Tyler Durden at 1:35 PM (June 17, 2009 - SPX 912)

Just released, a new and highly relevant Weekly Strategy report out from Albert Edwards of Societe Generale. Not only does Edwards, who was previously vilified then praised for calling the 1997 Asian Bubble, see a significant drop in equities before the end of the year


still could happen we have a few weeks to go but to this point Edwards has cost his followers a couple of hundred points on the S&P

Mon, 11/23/2009 - 15:23 | 139631 pivot
pivot's picture

smart people are often a bit ahead of the curve timing wise (but correct directionally).  the trick to making good investment decisions is both to be ahead of the curve, and also to put on trades/positions that don't hurt you too badly if you are wrong on the timing but correct directionally.

I am routinely amazed by how long it takes for equity markets to realize/reflect the gravity of economic realities (see the full 12 month period from summer 2007 to summer 2008).  the key is to be patient and wait for catalysts.

Mon, 11/23/2009 - 15:19 | 139628 Anonymous
Anonymous's picture

People won't rush to the Aussie dollar because the collapse in trade from China will push it into recession and the recent rate hikes will have to be undone.

The China story is getting really boring now because people can't dig deep into the numbers, they just have this theory (which was based on pre-crunch numbers) that China will cruise past the U.S. and haven't updated their studies.

Mon, 11/23/2009 - 15:40 | 139648 spekulatn
spekulatn's picture

China wants to be kissed before doing sex with.

Mon, 11/23/2009 - 21:18 | 140064 Failure to Comm...
Failure to Communicate's picture

First funny SNL skit in quite a while.

Mon, 11/23/2009 - 15:46 | 139667 crzyhun
crzyhun's picture

Of course you all already know that the trade with the Chinese vis a vie imports has fallen dramtically. Thus less dollars to them from us, thus less available to buy TSY from far so good. Global trade has fallen as well.

What has me puzzled is the deval of the yuan. Chinese would not likely do anything like this as it would mean riots in their streets, not a prescription for them at all. So, they adhere to printing and more yuan to the SOE and so forth...

Mon, 11/23/2009 - 21:30 | 140073 mitack
mitack's picture

The only way to entice a tapped out US consumer

to buy their crap and put their people in the factories

and not in the streets is to make the prices in walmart

even lower. How ? Print and devalue- our very own Ben's

playbook. Do what with the printed yuan ? You name it-

social safety net, write off bad loans, infrastructure, etc...

Race to the bottom people- I tell ya...

Mon, 11/23/2009 - 16:07 | 139686 gmak
gmak's picture

The thesis in the article might carry more weight if there was some justification and /or data support for the contention that China could experience a trade deficit.

Any takers?

Yes, I've seen this:


BUT: as exports fall, so will imports - particularly if China eases off on their massive infrastructure "leap forward", no?

$122 bb in trade surplus is not going to melt away easily.

Mon, 11/23/2009 - 17:11 | 139779 delacroix
delacroix's picture

food and fuel. you can spend money really fast, when the price is inflated. unemployed chinamen still need to eat, cook their food, and stay warm

Tue, 11/24/2009 - 11:55 | 140530 tip e. canoe
tip e. canoe's picture

so do unemployed whitemen

Mon, 11/23/2009 - 16:10 | 139697 Anonymous
Anonymous's picture

A trade deficit would by a good way to get rid of all their crappy dollars though (they ain't handing out Yuan after all) and it basically means that instead of relying on a foreign nation to buy speedboats and two cruises a year, the Chinese will have stacks of commodities and all the capital goods that they need to keep growing on the strength of their domestic economy.

English football fans say never bet against the Germans and frankly, I wouldn't stake my shirt on the Chinese taking a bath just to preserve their export economy which is probably past its sell by date.

Mon, 11/23/2009 - 16:26 | 139723 carbonmutant
carbonmutant's picture

 While I understand that China may be heading into a trade deficit, will they ever release numbers that show it. Remember China is about as transparent as the FED.

Mon, 11/23/2009 - 17:28 | 139800 Anonymous
Anonymous's picture

Where is that commentator from Asia? I think he's in HK. "Chin"-something. He would also appreciate this article.

Nice one ZH. It's what we've been investigating for the last few months and we feel this it is highly probable.

Mon, 11/23/2009 - 17:39 | 139817 Anonymous
Anonymous's picture

You guys make me laugh. Where were the warnings from you guys during the boom time? When Greenspan was creating a bubble. Oh-right, no one wanted to stop the party, cuz everyone was getting laid.

And now? lol. Now Tyler Durden can't even fucking trade, cuz of a $700 insider trade.

You guys are a bunch of fucking loser douche-bag. Though you have great hair, and small dicks.

Tue, 11/24/2009 - 00:40 | 140245 Anonymous
Anonymous's picture

call your mom, you need a hug

Tue, 11/24/2009 - 00:42 | 140249 Anonymous
Anonymous's picture

call your mom, you need a hug

Mon, 11/23/2009 - 17:54 | 139840 Joe Sixpack
Joe Sixpack's picture

Wow! The Treasury dept. is resorting to pretty low tactics these days. Say hi to Tim for me.



Mon, 11/23/2009 - 19:53 | 139989 Anonymous
Anonymous's picture

China's economy, so far, has depended on exports, not imports. The export earnings have financed a lot of internal expansion but the domestic consumer market is not real strong. That being the case then why would China do anything to increase the relative value of their currency?

I think the article raises some valid points that should be watched as things unfold. It is not real complex to imagine immense pressure on Chinese exports if consumers (particularly US consumers) are just not consuming.

All pure currency trading is done on the basis of relative values, not absolute values. In theory all currencies could decrease in absolute value but the ones that decreased the least would be strong relative to the others.

Mon, 11/23/2009 - 20:28 | 140019 litoralkey
litoralkey's picture

China could devalue the Yuan and increase Rice, Wheat (and 2ndary grain fruit and vegetable) subsidies.  This would balance out the devaluation to the 800 million or so peasant class, and calm the urban classes through the transition.  Happy rice farmers make good army privates.

Short term solution that would buy China's central Bankers time in the brinksmanship game.  Long term it is a horrible trade off for the peasant class.


Food import costs are more important than energy import costs to the Chinese central planners.

At least until the median BTU consumption rate increases substantially.



Mon, 11/23/2009 - 20:36 | 140029 grunk
grunk's picture

Question I've been having for a while: Why does China want to finance our health care plan? Are there no sick people in China?

Mon, 11/23/2009 - 21:38 | 140077 mitack
mitack's picture


They need consumers and they cant make them...

Pretty much the only thing they desperately need

and cant make right now...



Mon, 11/23/2009 - 22:14 | 140108 Anonymous
Anonymous's picture

Jim Grant predicted a renminbi devaluation also, in an issue of Grant's Interest Rate Observer a while ago.

Of course they will do it if they have to, to try to save declining exports. They are still an export-based economy.

Tue, 11/24/2009 - 02:32 | 140314 chindit13
chindit13's picture

Chinese' backs are up against a Great Wall.  Their economy is wedded to export, and cannot suddenly change into a domestic consumer driven entity, because the population (99% earn less than $6000 per year) cannot afford to move much beyond the purchase of t-shirts and carnival prizes.  People also have to pay for food and shelter, and even in China not much is left over from wages after these necessities are secured.  Then there is saving, which is ingrained into them because there is no social safety net or workable pension scheme.

What alternative does that leave the CP?  Stimulus and money printing, plus pushing exports out the door even if this means at a loss.  China is currently producing well more than half the world's steel, yet even the stimulus-fed domestic property bubble cannot absorb all of the production.  Produce they must, however, lest the population become idle and angry. Of course the bubble is a bubble and will end the way all bubbles end:  disaster.  The CP is trying to buy time in the hope the US consumer will somehow re-embrace the spendthrift ways that made them famous.  

It is ironic that the US thinks China will save it, and China (at least the CP) thinks the US will save it. Mutually assured destruction or coincident suicide is more likely.  It is equally ironic that both countries have determined that the problem currently being faced can be solved by engaging in the exact same behavior that led to the edge of the abyss.  For the US that means the problem of too much debt can be solved by more debt, and in China the problem of too much capacity can be solved by more capacity.

Both will fail.  Both will also engage in a race to the bottom, with the not-yet-so-clear "winner" likely to be China.  The US printing machine has so far yielded the same result as what Japan experienced:  continued deflation of asset prices and no broad money supply growth.  China, on the other hand, has been able to explode M3 at a 25-30% annual rate, which has fueled the property bubble and undoubtedly imperiled the Chinese banking system.  Meredith Whitney remarks about how in the US consumer credit has fallen by $1.5 trillion in the last year.  Contrast this with the fact that Chinese lending has increased just this year by an amount equal to 25% of GDP.  To put this into perspective, equivalent growth in the US would mean increased bank lending of $3.5 trillion.  Bernanke, in comparison, is a mere poseur.

Yuan devaluation?  The true contrarian play, and maybe the only mechanism for survival which the CP has.


Tue, 11/24/2009 - 09:11 | 140395 Anonymous
Anonymous's picture

Clearly. Thanks Chindit.

Tue, 11/24/2009 - 03:08 | 140322 Anonymous
Anonymous's picture

I'll hang with the "China Crash" side for now.

Ask yourself---When has any GOVERNMENT, on government's terms, successfully built a REAL economny. The hot button words de jour these days seem to be:

"China, with it's authoritarian, centrally controlled, economy can MAKE STUFF HAPPEN, build an economy, etc"

It's still just a damn government and governments SCREW STUFF UP!!! A lot more often than they get it right. What you have is a desperate world looking for a savior and the last man standing is China.

How does that make them automatically successful?? They've lived off exporting CHEAP STUFF with cheap, plentiful labor.

Guess labor doesn't go buy a condo in the newest see-through building in downtown Yanghai, nor does cheap labor shop 'til they drop at the newest Chinese mall.

Long story short....the Chinese people (it's now fashionable to refer to them as "consumers' them that is if it will magically turn them all into consumers!) aren't even close to being able to consume to the degree and amount that the government needs them to to prop up their "build it and they will come" economy.

What a joke...the rest of the world visits China, tells them they "must consume" while yanking away the source of a big part of the potential domestic consumption (Our credit binge driven imports = the wages to Chinese workers = the so-called "Chinese consumer").

The equation isn't complete anymore and the Chinese are going to find themselves with a bunch of empty buidlings and a "too broke" populace to do anything about it.

Their plate is full, the guests left the restaraunt (the US and other importers) and the locals can't afford to eat.


Tue, 11/24/2009 - 18:48 | 141157 topshelfstuff
topshelfstuff's picture

If it wasn't for the fact that this Theme for China to ReValue [Raise] the Value of the Yuan [renmimbi] for a solid 10 years+, thereby making it accepted as beneficial to the US, taking a good look at those asking for this; All the FED Heads, most recently Greenspin & Bernanke, All the Treas Sec, most recently Paulson and now Geithner---and then toss in Big Bussiness, Corp America, along with the usual "assistants", the MSM, assorted politicos---I think most here would be suspicious, and rightfully so --- this has been very well orchestrated and for a long time---this is Red Herring ----a move by China to a 4 to $1 Exchange Rate gives the Chinese People/Workers a huge Increase in Purchasing Power [see PPP, Purchasing Power Parity] and where China stands in this regrard ---and why they can have a Savings Rate near 50% ---the Benefit to Manufacturers is Huge ---its a 40% Discount on Raw Materials, Commodities ---and isn't China already the Big Buyer of Commodities, and how about Gold & Silver ---instead of having to pay 6,820 renmimbis for each $1,000/USD in Gold or Silver, how about we just pay 4,000 renmimbis per each $1,000 ---up until June 2005 each $1,000 took 8,280 renmimbis, if China follows what now Geithner, Bernanke, and the rest of the Gang or asking for, that's over a 50% Discount in 5 years ---the last 5 years that already put China on steroids and destroyed the Average US Joe&Jane

So, you don't see something "Fishy" here ? Consider the History, the Track Record of this crew

So, all of a sudden these same guys are correct ? They're actually doing something beneficial for America/ns, and not US Big Business, Corp Elite ---Please think about this

Paulson promotes letting yuan rise
Martin Crutsinger ASSOCIATED PRESS
Wednesday, December 3, 2008

Treasury Secretary Henry M. Paulson Jr. said Tuesday that China must continue allowing its currency to rise in value against the dollar as part of reforms to address trade tensions with the United States.

Mr. Paulson praised the Chinese for allowing their currency to rise in value by more than 20 percent against the dollar since July 2005, but said it's critical that currency reform process be allowed to continue.

American manufacturers contend that undervalued Chinese currency puts them at a competitive disadvantage and is a key reason for the huge trade gap between the two countries.

"Making this shift will take bold leadership and decisive structural reforms to boost demand among households," Mr. Paulson said in a speech previewing his upcoming trip to China. "As I have said in the past, continued reform of China's exchange rate policies is an integral part of this broader reform process."

The U.S. and other major trading partners have long complained that the yuan is undervalued.

American manufacturers contend that the yuan is undervalued by as much as 40 percent even with its increase in value since the summer of 2005. They argue that the Chinese government is manipulating the yuan's value to gain unfair trade advantages against U.S. companies.

[[[ deduct 40% and you get 4 to $1 ]]]


Geithner Warning on Yuan May Renew U.S.-China Tension


Jan. 23 (Bloomberg) -- Timothy Geithner’s warning that President Barack Obama believes China is “manipulating” its currency may trigger renewed tensions between two of the world’s three biggest economies.

Geithner, Obama’s nominee for Treasury secretary, also told senators the administration will press China to “adopt a more aggressive stimulus package” to boost its domestic economy. The remarks on manipulation were a shift from President George W. Bush’s team, which stopped short of using the term in criticizing China’s exchange-rate management.

“The signal this sends is not good” for ties between the two nations, said Charles Freeman, a fellow at the Center for Strategic and International Studies and former top trade negotiator for China at the U.S. Trade Representative’s office. “It opens a Pandora’s box. We need the Chinese to hold onto their Treasury and agency debt.”

Geithner’s comments triggered a drop in Treasuries on concern that demand from China, the largest foreign investor in U.S. government debt, may wane. They may also reignite calls among some U.S. lawmakers for measures to punish trading partners perceived to have undervalued exchange rates.

“What they can’t work out diplomatically we can work out legislatively,” said Representative Charles Rangel of New York, who chairs the House Ways and Means Committee, which has jurisdiction over trade issues, in an interview. The committee has been saying for years” that China has manipulated the yuan’s value, he said.

Tue, 11/24/2009 - 19:30 | 141223 rapier
rapier's picture

Since the valuation of the RNB is strictly a political decision because there is no market invovled I doubt the Chinese would dare devalue. Such would bring the wrath of even the most devoted yet increasingly skittish 'free trade' politicians.  The risk being that the cure of devaluation may end up being worse than the disease.  Far be it from me to predict what will happen but I'll figure not much of anything on this front for 10., is the highest probability.

Thu, 11/26/2009 - 09:32 | 143036 Anonymous
Wed, 12/09/2009 - 06:53 | 157647 Anonymous
Anonymous's picture

Competing currency devaluations beg the question: Are we here (in relation to gold)?

Wed, 12/09/2009 - 12:03 | 157899 Anonymous
Anonymous's picture

I thought that Black Swans were supposed to be unpredictable by their nature?

Sat, 01/16/2010 - 21:53 | 196231 Anonymous
Anonymous's picture

So many deluded people who think that the U.S. will go down and China will charge forward. Dream on.

China has built a system based on an unsustainable level of global trade. The stimulus packages have propped this up but the Kool aid is fading.

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Thu, 07/07/2011 - 01:57 | 1431802 newdeals2
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there is no market invovled I doubt the Chinese would dare devalue. Such would bring the wrath of even the most devoted yet increasingly skittish 'free trade' politicians. The risk being that the cure of devaluation may end up being worse than the disease. Far be it from me to predict what will happen but I'll figure not much of anything on this front for 10., is the highest p 70-516 | 70-516 | 70-519 | 70-523 | 70-526 | 70-528 | 70-536 | 70-542 | 70-547 | 70-562 | 70-564 |

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