A Contrarian View Of China: Tying It All Together

Tyler Durden's picture

Recently China has once again attained prominent status among the investment community, where while the majority still adheres to the old, permabullish view that Chinese risks are contained, increasingly more fund managers are convinced that the Beijing-based central-planned economy is due for a major pullback. One such one investor, as we pointed out previously, is Jim Chanos, whose exemplary track record means his opinion should never be ignored. Somehow we doubt Chanos is much insulted by Jim Rogers' derogatory remarks of his understanding of the China situation. He who laughs last...

Any discussion of Chinese prospects has major implications on the country FX rate, especially vis-a-vis its peg with the dollar. Here experts again disagree, with one analyst who has set forth a controversial idea is SocGen's Albert Edwards, whose position, against the grain of prevailing opinion, is that China will devalue the yuan in the face of the same headwinds that are forcing the US to do all it can to do the same. Edwards' colleague, Dylan Grice provides another compelling perspective, arguing that the Chinese bubble has no option but to burst in the near term, and any investment overtures should be delayed until at least such time.

And where FX is concerned, one must obviously evaluate the implication on that country's FX reserves, especially if, as in the case of China, said reserves are massive, and amount to over $2.4 trillion. Today, we presented some speculative observations on what may be occurring behind the scenes of the Chinese economy, where a peculiar disconnect has occurred in the last 6 months as Chinese US Treasury holdings have not kept up with the country's aggressive growth in FX reserves. Is China simply diversifying its US debt holdings, or is there something more sinister going on?

Below we present another view, this time of Corriente Advisors, whose report "A Contrarian View of China" comes as close to tying it all together as is possible under the current information (or lack thereof) regime.

The paper's conclusion provides some unique observations:

  • Over the past decade, China has accumulated a massive sum of total FX assets - approximately $2.7 trillion, by our calculations
  • Conventional wisdom suggests that China's accumulation of FX assets is an indication of strength and high savings, and that the RMB will only move higher vs. the USD
  • Our work suggest otherwise. Based on our analysis, we conclude that
    • Because of the peg and the common perception that the RMB is undervalued, the RMB has been in a bubble for several years
    • China's accumulation of FX reserves is the result of extensive monetary expansion
    • A significant and underappreciated source for China's FX reserves has been speculative capital inflows
    • Massive monetary expansion and speculative foreign capital inflows have fueled asset bubbles within China that inevitably will burst
    • The next significant move for the RMB vs the USD is most likely LOWER.

And here are the Corriente-proposed catalysts that could cause the Chinese government to devalue the RMB vs the USD (whether the US will allow such a move, is a totally different topic altogether).

  • Stronger US Dollar: As a net exporter of goods, China has benefited from a weak dollar. If the USD (and, as a result of the peg, the RMB) were to strengthen vs. other major currencies, then Chinese exports would become less competitive, adversely affecting the Chinese economy and hampering job growth. If the USD strengthens vs. other major currencies, we believe it is highly likely that China will devalue the RMB vs. the USD to remain competitive. Further, we believe this to be a highly probable scenario, as global USD-denominated debt deflation reduces the amount of USD outstanding and pressures the USD to strengthen vs. other major currencies
  • Protectionism/Trade War: Rather than China implementing import tariffs of its own, which would heighten trade tensions, protectionist policies by the U.S. could be met with a currency devaluation.
  • Bursting of the Chinese Asset Bubbles: Declining asset prices would cause foreign capital flight out of China, shifting demand to buy USD and sell RMB, especially by speculator who funded their asset purchases with USD-denominated debt. In addition, the resulting wealth destruction and unemployment in the construction sector would likely compel the government to devalue (or allow a depreciation of) the RMB to boost its export sector.
  • Removal of the Peg: Removing the pef and allowing the USD/RMB exchange rate to freely adjust to market forces would eliminate China's primary rool for monetary accommodationm thereby creating a drag on the Chinese economy and asset markets. Paradoxically, unless the PBoX were to compesnate enough through other means of money creation, the ensuing fall in asset prices would result in foreign capital flight and downward pressure on the RMB.

Full Corriente presentation is certainly a must read for anyone interested by China.

Corriente China

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Handle with care's picture

Very interesting.


I think its good to remember that for all the talk of massive Chinese trade surpluses, these are pretty much exclusively with the US.  It runs a deficit with the rest of the world.


The point that a rising US dollar could affect its trade with the rest of the world due to the peg is a very good one.  Especially if continuing economic weakness in the US means that the US becomes less important as a market in relation to the rest of the world.


What China may do is renounce the US dollar peg while not fully liberalising capital flows and thus allowing it to manage its currency more flexibly against a basket of currencies 

Anonymous's picture

It runs a deficit witht the rest of the world? I'd like to seee the facts behind that statement. In 2008 the US accounted for 25 percent of chinas exports. 10 years prior, it was 50 percent..see the trend?...in 10 to 20 years the US will mean little to china

ATG's picture

Bottom line: SSEC down -47% from highs.

Big4 short emerging markets including China.

Remember the Japanese economic miracle in

1989 before the two lost decades?...


Charley's picture

Suppose China is being turned into a giant, government-run industrial park, complete with an extensive infrastructure and docile government-run unions, created for the purpose of receiving the industrial operations of US companies moving off-shore to reduce labor costs.

How then does this analysis change?

One obvious problem is dollar accumulation on the Chinese side and how this is to be disposed arising from the relationship. This problem is just the flip side of how the US sustains a mounting deficit in light of domestic capacity destruction. As Alford showed, domestic demand is outstripping a sustainable growth rate for the domestic economy.

pros's picture


The consensus basically says:


"It can't happen here." and

"This time is different."


But every boom in history has been followed  by a bust....so the odds are stacked severely against China.

MeTarzanUjane's picture

I wonder how many 'experts' really understand the full picture.

Imagine a place where people honor their debts. A place where suicide is the preferred option before a declaration of bankruptcy.

A place where people actually buy things with hard earned cash on hand, not dream money envisioned from pie in the sky thoughts of future uber-prosperity.

ZH experts have a proven record after-all, they have been short equities since S&P 666, right??

John Bigboote's picture

How about if we first imagine a world where money is not created as debt by an unconstitutional cabal of unelected bankers.

Then maybe I will commit suicide before declaring bankruptcy if that makes you happy.

Anonymous's picture

That imaginary place is absolutely not in China, so where is it exactly - rural India maybe?!

In China it is quite normal for a struggling factory owner to first not pay salaries for months, then strip the factory of any salvageable items during the weekend and leave town. Sometimes an angry mob of former workers even catch and kill the manager.

"guanxi" in practice: Your relations, especially family, comes first and above all others. But you do not do anything for a person not related. They do not count. Thus you can put plastic in their milk. So what, who *are* those people anyway*???

chinaguy's picture

Yup, that's pretty much it in a nutshell!

MeTarzanUjane's picture

Where the fuck are you from because I know it's not China, numbnut.

Another one of the ZH shillgang.

dnarby's picture

They *were* their customers, lol.

E.g. we just bought a coffeemaker that was made in Italy to replace the cheap piece of Chinese re-badged American shit that never worked right to begin with.  It was 70% more expensive and worth twice that.

Expect to see a lot more of this.  Things should just work, goddamnit!

WaterWings's picture

It's called Shangri-La, or Shambala. But China isn't really a country - it's an empire with loose control over billions of people that live on a piece of Earth in the shape of China, just like the United States, only that ours is shaped like the United States - with bases in 180 occupied territories, which naive Americans still call "countries". When someone has a military base in your country you're not exactly a sovereign nation. 

So they don't control Shangri-la. Even the Nazis tried to find it:


But I'm not a Buddhist so I don't waste any time thinking about it.

Anonymous's picture

Yeah the bankruptcy point goes too far. Debtor-friendly bankruptcy laws made banks adjust by farming subprimes for quick dollars short-term interest inflow on sub-prime loans the banks knew would never be paid off, which led to more debtor-friendly bankruptcy laws (until the GWB BK reform in '05). Just as shit's hitting the fan and just as people have begin relying on easy fresh starts of bankruptcy, the rules of changed and the banks hold all the cards.

People don't like hearing it but violence is really the only solution to this problem

Anonymous's picture

Last year I spoke to two different Americans who married Chinese women. Their warning to me...don't believe the news. They were there. And they saw.

Crowded trades - when on the sidelines - are fun to watch unwind. The pending spike in the dollar? Might it be one for the ages?

ozziindaus's picture

I share the same opinions in many areas except the following;

Unpegging may cause the RMB to appreciate leading to retail deflation in China and Inflation in the US based on supply/demand and FX. Unlikely since we'll see many more years of deflation due to outstanding debt servicing and a higher savings rate. Additionally, the US still cannot compete with $2/day wages so unemployment will remain high and demand to continue down.

Protectionism unlikely since this will hurt the heavy corporate US presence in China. Corporate American created China's industrial boom with the help of the US gov. and the taxpayer financed it through low duty's and high US payroll tax, property taxes etc. 

Finally, IMO Australia may be the biggest loser once China's bubble pops. Both the Chinese and Indians are the largest buyers of real estate over $1m and are pure speculative investments only. Reminds me of Japan in the 80's.

Anonymous's picture

You have a source for the comment about >$1m homes being purchased by chinese/indians?

Anonymous's picture

Are you referring to the Australian real estate market when you said the chinese and indians are the largest buyers of re over $1m?

Anonymous's picture

...and are you suggesting that the poster of that comment needs to substantiate his statement? This site has been taken over by tards who make statements that are factually incorrect and/or tin foil hat loony. My advice to you is to stop reading the comments and just read the articles. There has to be some way to stop the idiots posting on here, the junk filter isnt working. Perhaps the owners can implement some kind of "Bleachers" relegation system like on businessinsider.com.

Marla and Tylers if you are reading this, can you allow us some way to add certain users accounts to 'ignore' so we dont have to read their tin foil hat retard comments? There are some people on here who say stupid shit day after day and its getting tiresome to wade through it all.

I am starting to think this is the lifecycle of a good site. It starts of well with interesting articles and comments and then the gold bugs and conspiracy nuts find the site and start ruining it by repeating the same crap over and over.

chinaguy's picture

New financial blogs, used to get about 9 months before the majority of comments were not worth reading, then, after the market crashed, that time dropped to a few months. Zero Hedge, IMO has a somewhat longer timeline because many of the articles are so technical that the common Joe doesn't have the patience to push through them & subsequently bore us with their opinions. 

WaterWings's picture


Your entire comment is a waste of space, as well. I'm tired of supposedly "elite posters" that whine instead of actually contributing something. You should realize that the point of junking is to junk, not to ban, delete, or prohibit free speech.

Go start your own blog.

Anonymous's picture

other commentators published here have advocated delinking the cny and usd and i whole heartedly agree....it is yet another market distortion caused by central planners both in washington and beijing....

the whole idea of floating exchange rates was to let the market find equilibrium....although anyone with a brain knows that justification for fiat currency was just claptrap to fool the masses, the principle is still valid if you adhere to the principles of corrupt fiat currency...(fiat and corrupt are redundant).

once delinking occurs, some badly needed corrections will sort out the capital misallocations and at least clean up that aspect of international capital flows....

unfortunately the likelihood of delinking is only 10-20% at best....

Anonymous's picture

Excellente Reporte

Anonymous's picture

On slide 23 titled "China's Unreported Debt," them sure are a lot of assumptions whith a lot of different sources.

Anonymous's picture

Can anyone point to a primer on how China's dollar-pegged currency actually operates? If a US company buys goods from a factory in France it pays in Euros which they buy ahead of time or a bank converts (trades) for them on the spot. You can't buy yuan in the FX market so to buy Chinese goods priced in yuan you effectively pay in dollars. Does the Chinese factory get the dollars or does a state bank take the dollars and hand over yuan to the factory? If there is no yuan market that means $US held by China must act as currency to buy non-US foreign foods from countries with which they have a trade deficit. Is the yuan basically China's domestic currency and the dollar their foreign currency? Can Chinese citizens hold dollars themselves in any meaningful amount? What are specific risks and advantages of such a system?

pros's picture

Look at Chapters 7 and 8 of the Lecture Notes in Roubini's International Macro Course at NYU


The bottom line is that normally currency pegs have been used by weak countries to contain inflation by adopting the rate of the country whose currency is the reference...the intervention support by the central bank is normally to prevent currency depreciation and the risk is that the peg will be hit and foreign currency reserves depleted by the run (Mexico, Argentina, etc.)

But China's peg is unusual--it supports the dollar versus the Rmb...so the risk is overaccumulation of dollar reserves and excessive growth in the domestic money supply connnected with the purchase of dollars and the related flood of Rmb. China attempts to contain the negative effects on its money supply via capital controls, but these controls never work 100%.


The one problem all acknowledge is very high levels of non-performing loans in the Chinese banking system.


Anonymous's picture

I really can not abide Jim Rogers. He's one of the great humbugs of our, or any, time. He clearly hates the U.S. Fair enough. He's allowed to, but his smug, superior attitude, and his myopic love of (seemingly) most, if not all things, Asian, to the point of possessing a seemingly willful blindness about the inherent flaws of his newly adopted culture, manages to be both puerile and obnoxious. Jim, since you've decided to bid bye bye to the west, do us all a favor and shut your craw, because your repetitiveness is more annoying than a neighbor's yapping dog.

Stevm30's picture

What is "the west" doing to deserve to keep him?

Anonymous's picture

Exactly. For someone who "hates" the US, it's
rather odd that he's still a citizen who
pays US taxes. Just because he doesn't
like what he sees in the US doesn't mean he
"hates" it - it just means he has common sense.
Or do you just hate him because
his views (Asia is a lot
more progressive and will be more
successful in the long run) are different than yours?

blindfaith's picture

Agreed. I could not put it in better words if I sat and looked each one up, one by one.

My respect for the (if you don't calls me masta, I'll be pissed) Jim Rogers faded like cheap newspaper when he sold his US real estate and hopped on the plane yelling " see ya later suckers!". His big calls on food and water...well any fool can see as the populations grow, and polution prevales, then food and water will be
He loves the things Asian, who else will buy his tea? Starbucks?

Funny how you never hear about all the quarters they these 'experts" put into the slot machine before the got the two cherries and crowed at their success.

Anonymous's picture

Do you like what is currently going on in the US?
If you do not, then why is Jim Rogers unable to
have that same opinion?

Anonymous's picture

You seem to have willful blindness about the the inherent flaws in the USA. Where do I begin? Terrible public education system? High tax rates? Ponzi scheme financial system? Spending more than we earn on every level; government, corporate and household?

China seems to be doing everything a nation should do to be successful like building infrastructure, high savings rate, quality education system.

I don't know if China is in a bubble or not, but I do know that in 100 years they will be a far more powerful nation than the USA.

A tumor named Marla's picture

Not being an economist and not having stayed in a Holiday Inn Express last night, I may be missing something here, but this post fairly screams to me that there is a full-on Currency War taking shape here, and much like the old Cold War the hemispheres are being divided up and forced to choose sides. 

The question is, does our overextended and overdebted state of existence win out over theirs?  We all know that once one or the other trips, everyone falls.  The biggest kids on the block aren't exactly fighting, but everyone is gathered in the playground every day at 3:00 (hmmmm, just about the time Timmy guns the bots).....


WaterWings's picture

Everyone knows the world economy is collapsing. Everyone. This is a waiting game. Many exclaim, "But then China would collapse too so they'll never do that!" How naive. It is only a matter of "last man standing" at this point. Since late 2008 everyone has been playing solitaire, waiting, already knowing the outcome. The blame game is just around the corner, and the massive states will do what massive states do best throughout history: make war. Well, it's clear that it's already happening, it's just not "hot" yet.

Promises of world peace only come from the mouths of warmongers.

I will concede that there is someone that doesn't know we are headed for a collapse: the average American.

Nah, it's just severe denial. Everyone knows. No one wants to admit it, however, because stepping forward too early is like a pitbull after a porcupine:


Anonymous's picture

No doubt China has a lot of problems, but ask yourself this...

Are Chinese leaders stealing everything from their citizens/serfs for the benefit of Goldman Sachs? Are the "leaders" of the US doing the same?

Anonymous's picture

China will continue to trend higher. A little bird from william & blair told me they are very bullish on china. Very cheap labor, in bed with every major manufacture in the world. They will own the alt energy market, using reserves to obtain commodities and secure other resources on the cheap. Cash strong, the list goes on and on, they are the u.s.a . late 40's. 1.4 billion population by 2025 as they grow the middle class the businesses will explode.

They may pull back ( and if and when they do the u.s.a equities will drop 2 fold). I'll keep my money on china now and long term.

bluebare's picture

Overweight China but not over committed.

Dont Taze Me Bro's picture


China's cheap labor + massive (and growing) manufacturing base is the key distinction that separates China from current Western economies. China might (and probably will) have a pull back, but it will not implode like the US, because China's GDP is not driven by housing/equity bubbles.

It's hard to believe, but there are actually millions of factory workers in China that go to work every morning and build real tangible things (paid real cheap waves too). This is unlike say in NY, where you have an army of financial "engineers" working at outfits like Goldman, who do nothing but push paper around and are paid millions in bonuses which is basically funded by the government.

Right now, a lot of people are predicting a crash in China, because frankly, they feel dumb for not seeing the crash of 2008 here at home, so they are trying to outsmart everyone else by predicting the next big crash. But they are going to be disappointed, because the key variables that brought down the house of cards here in 2008 (massive debt + deindustrialization) are not an issue in China.


Jus7tme's picture

>>because China's GDP is not driven by housing/equity bubbles.

What makes you say that? China has an off-the-chart housing bubble

Here are some numbers from

http://www.businessinsider.com/the-chinese-real-estate-bubble-is-the-mos... :

One clear clue (regarding the rising real estate prices in China) is that the average price-to-income ratio in Beijing has reached 27:1, five times the world average, according to data from the Bureau of Statistics of the Beijing Municipality. In addition, the average price-to-rentratio neared 500:1 in the city, far above the international alarm threshold of 300:1, which sends out a clear signal that the foundation of the real estate boom is losing stability.

And the stock equity bubble is not far behind.


faustian bargain's picture

Bubbles matter less in China than they do here. Also, bubble or not, RE is not the foundation, manufacturing is.

MeTarzanUjane's picture

Anonymous, the only voice on ZH that makes sense.

Look at it this way. The US gives $100 million to Haiti for the recent earthquake. China gives $1 million.

They understand ROI.

Anonymous's picture

Actually, the USA borrowed $100 million from China to give to Haiti.

Anonymous's picture

Help me out, seems to me China is being paid twice for the junk they sell us. Firstly they take our USD, sock it into PBoC FX reserves to the accumulated tune of $2.5T and then secondly they create an equivalent domestic supply of RMB to be spent locally....is this a normal part of FX currency markets? Excuse my ignorance if I've missed Capt. Obvious, still learning a complex subject.

mikla's picture

Help me out, seems to me China is being paid twice for the junk they sell us. Firstly they take our USD, sock it into PBoC FX reserves to the accumulated tune of $2.5T and then secondly they create an equivalent domestic supply of RMB to be spent locally....is this a normal part of FX currency markets?

Mostly yes.  More specifically, money is printed twice for the stuff they sell us.

China makes something (there was a cost), and sells it to the US for dollars (which the US printed).  China hides the dollars in a mattress.  Then, China prints RMB to offset those dollars to keep the value of the RMB low (so their manufactured goods will continue to be low cost and we will buy more).

This is similar to central bank currency swaps:  You print a bunch of your money, and I print an equal bunch of my money, and we swap.  You are now "richer" by what I printed, and I am now "richer" by what you printed.  However, the funny part of that math is:

  1. Nobody is richer, we just printed, devaluing each other.
  2. The world saw 2x increase in currency for what was printed so that you and I could each think we were 1x richer.

However, by involving the manufactured goods shipped from China to the US, we at least get to keep the Chinese busy and let the Americans think they are wealthy.

strike for return to reality's picture

Just to make sure that I've got all this clear...

1)  China has 2.7 trillion USD that it can use to buy RMB in the event that the RMB starts to weaken.

2)  If I recall correctly, there was a fair bit of speculation about who put up $12 billion USD at about noon yesterday to make sure that the SP500 moved up just a tad.  Leading contender is presumed to be the entity that prints USD.

3) China has been busy buying all the raw materials it can get it's hands on.

4) China has been telling its citizens to buy gold.

5) The US airwaves are filled with adverts telling the American people to sell gold jewelry for cash (USD).

6) The US Mint is busy shipping gold coins to all buyers, not.

7) The US govt and state govts have huge budget surpluses, not.

8) The US is doing a great job with a couple of little territorial wars, not.

9) Running the US Treasury does not require that you have a record of paying your taxes, but it does require that you have a record of delivering for Goldman Sachs.

10) The US federal govt has to print/borrow 4+ billion USD seven days a week just to keep the lights on.

Now, this isn't to say that China is a great place or has any respect for human dignity.  However, the US empire is in a state of collapse.  If the American people don't take back the republic, China will simply pick up the pieces of a broken empire (and send all the lucky ex-employees of Goldman Sachs to a prison camp).




Leo Kolivakis's picture

Jim Chanos is an incredible short-seller. His analysis of Enron, exposing it as a fraud, ranks as a classic. On specific stocks, I listen to him. On China, I prefer listening to the views of Simon Hunt, GaveKal and BCA Research. Read the Economist article, Not just another fake:

The similarities between China today and Japan in the 1980s may look ominous. But China’s boom is unlikely to give way to prolonged slump


Anubis's picture

Do you have any of BCA's analysis available for reading? Could u please send me these?

I appreciate their high quality work, and would like to see more of their analysis.

Leo Kolivakis's picture

You have to pay for BCA Research but you can read some of their thoughts by clicking on the reports on themain page.

From the Economist article above:

Furthermore, Chinese homes carry much less debt than Japanese properties did 20 years ago. One-quarter of Chinese buyers pay cash. The average mortgage covers only about half of a property’s value. Owner-occupiers must make a minimum deposit of 20%, investors one of 40%. Chinese households’ total debt stands at only 35% of their disposable income, compared with 130% in Japan in 1990.

China’s property boom is being financed mainly by saving, not bank lending. According to Yan Wang, an economist at BCA Research, a Canadian firm, only about one-fifth of the cost of new construction (commercial and residential) is financed by bank lending. Loans to homebuyers and property developers account for only 17% of Chinese banks’ total, against 56% for American banks. A bubble pumped up by saving is much less dangerous than one fuelled by credit. When the market begins to crack, highly leveraged speculators are forced to sell, pushing prices lower, which causes more borrowers to default.

Even if China does not (yet) have a credit-fuelled housing bubble, the fact that property prices in Beijing and Shanghai are beyond the reach of most ordinary people is a serious social problem. The government has not kept its promise to build more low-cost housing, and it is clearly worried about rising prices. In an attempt to thwart speculators, it has reimposed a sales tax on homes sold within five years, has tightened the stricter rules on mortgages for investment properties and is trying to crack down on illegal flows of foreign capital into the property market. The government does not want to come down too hard, as it did in 2007 by cutting off credit, because it needs a lively property sector to support economic recovery. But if it does not tighten policy soon, a full-blown bubble is likely to inflate.