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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bugs_'s picture

WOW fabulous article.  Shake it UP!

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.

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.

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 ?

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.

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.

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...

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.


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.

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.

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

lizzy36's picture

Tyler, can you please post the orginal.

cougar_w's picture

I learned a new word: ructions


mitack's picture

Stop watching porn on your bloomberg terminal.

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"?

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! 


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.


tomdub_1024's picture

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

PeterB's picture

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

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.

BobPaulson's picture

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

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".

BobPaulson's picture

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

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...

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.  

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.



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. 

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.



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. 

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. 


Joe Sixpack's picture

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

Anonymous's picture

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

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.

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....

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.

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

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.

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.

Failure to Communicate's picture

First funny SNL skit in quite a while.

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...

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...

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.

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