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SocGen On A Chinese Slowdown: Buy China CDS, Sell Hard Commodities

Tyler Durden's picture




 

Following last week's news that as we suggested US stagflation is starting to shift to China, SocGen's Patrick Legland looks at the consequences of what a Chinese slowdown in H2 would look like for the country, and the world. Cutting to the chase: buy Chinese CDS, and sell hard commodities. That said, the risks to the global economy, should China implode, are far vaster, and we fail to conceive how the central planning cartel would ever allow this to happen, or the PBoC for that matter, considering today's earlier news of not one but two failed Chinese auctions.

From SocGen:

Chinese financial sector begins to reflect concerns of an economic slowdown. Following the US-China strategic meeting, cooperation between the two countries is again under the spotlight. But let’s try to analyse the current situation in China from a market viewpoint. The latest figures released for the housing market in April showed that sales in Beijing were down 40% in Q1 11. If we obtain confirmation of the property slowdown, bank balance sheets will be damaged. Markets now view this scenario as possible. Therefore, the Chinese financial sector is now exhibiting worrisome signals. Thus, the Chinese equity financial sector has clearly been underperforming US and European peers over the last six months. Next event: New Yuan loans 10-15 June 2011.

Consequence 1: Chinese CDS will be on the rise in H2 if China starts to slow. For now, the 5-year CDS is not pricing this scenario. Current market pricing suggests that either a hard or soft landing for China is merely seen as a potential scenario not very likely to happen. Conversely, SG economists (link) believe that China may soon face unusual turbulence and have adopted a bumpy landing as a definite possibility. Indeed, recent inflation figures and warnings of a potential property slowdown are not discouraging investors from investing in China. But, with further rate hikes, there is a risk of a property crash or equity market collapse. If we compare the Chinese situation with the economic situation before 2009 in the US, we get an idea of what could happen to Chinese CDS as US CDS jumped to nearly 100 from 6.5 in only 10 months at that time (May08-March09) Next event: Chinese CPI for May, 13 June.

Consequence 2: Hard commodities will fall apart if China starts to slow in H2 11. For example, early in 2011, we already saw a dramatic fall-off in Chinese appetite for copper although prices remained high due to continued production issues. Contrastingly, agricultural demand from China is likely to protect soft commodities better from a fall in prices as demand is still trending higher. For example, soybean imports from China doubled over the past five years which means demand was up by nearly 5Mt/year. The recent tightening in monetary policy had a limited impact on soybean prices and even the deceleration in economic growth could fail to curtail agricultural demand. Shortly, China will become a net corn importer and then a wheat importer. Next event: End of US QE2 30 June.

So what are the main risks:

Risk 1: Revaluation on the horizon. The economic situation, with high inflation, may push China to revalue its currency. It seems that the option of a one-off or smaller revaluation may be back on the agenda. The effect of a revaluation will of course depend on the amplitude of the move. But, excluding the US dollar, if we assume a 20% currency revaluation, this would only bring the yuan back to where it was when China joined the WTO in late 2001. As the Chinese currency is pegged to the USD, the yuan has mirrored the USD’s decline against €, Japanese ¥ and AUD since China joined the WTO. Meanwhile, the yuan was revalued by 20% against USD during the last 10 years.

Risk 2: Hard landing (vs bumpy landing) could be a major risk for the world economy China’s April data release was quite mixed with inflation still above the target 4% ( at 5.3%) and disappointing retail sales figures meaning Chinese consumption didn’t growth fast enough. Once again, this is pushing the People’s Bank of China to raise rates for the fifth time since the start of the year. The  key issue for the Chinese central bank seem to be the slowdown in demand for credit and capital inflows. Our economists expect  two more interest rate hikes, but the risk attached to this policy is that we could end up with a hard landing. If this were to materialise, it would be a major threat for world economies.

 

 

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Mon, 05/16/2011 - 13:13 | 1279760 eurusdog
eurusdog's picture

Not promising when the regression line AND real GDP are both headed south.

Mon, 05/16/2011 - 13:44 | 1279865 Weisbrot
Weisbrot's picture

so many disasters man made & others

so much turmoil all over the globe

conspiracy or happenstance it almost doesnt matter

I am convinced that the powers that be, believe something much worse will happen

various theories and reasons abound, based on strings or piles of truth

things will never be what they were

may what ever it is or the series of events that lead to it

be quick, be concise, and have the best possible outcome for the worse of all possible situations

 

until then enjoy all the side shows

and remember that everything is temporary

Mon, 05/16/2011 - 13:15 | 1279767 Chuck Bone
Chuck Bone's picture

If the Chinese aren't buying Chinese bonds, who will buy ours?

Mon, 05/16/2011 - 13:31 | 1279823 Boston
Boston's picture

Recently, I have.

Soon, the panicked sellers of equities, high yield, etc.

Ultimately, Bill Gross.

 

Mon, 05/16/2011 - 13:15 | 1279771 Robslob
Robslob's picture

Sell hard commodities...got it.

Interpretation:

Buy hard commodities on every dip.

 

Mon, 05/16/2011 - 14:22 | 1280006 Canucklehead
Canucklehead's picture

If there is a deflationary slowdown in China, the "communist" leadership are gone and the political structure within China will change.  In one word, revolution.

I think you should look at it like a tsunami.  First the ocean tide goes out (deflation), shortly followed by the tidal wave crashing everything before it.

I expect the failed Chinese bond auction shows that the market expects monetary printing to start shortly.  I think we are about the watch the money tide go out.  The big question is what does the "hot money" do?  If you wait too long, you may not get out of China (capital controls).

Hard commodities start looking good...

Mon, 05/16/2011 - 23:45 | 1281845 sellstop
sellstop's picture

If money flees China they will go to USD.

Mon, 05/16/2011 - 13:20 | 1279773 InconvenientCou...
InconvenientCounterParty's picture

cry deflation, then print your ass off. got it.

Mon, 05/16/2011 - 13:22 | 1279778 Sudden Debt
Sudden Debt's picture

3 trillion in dollar reserves and 2 failed auctions of their own...

 

what should they do....

 

thinking... I'm thinking.... I'm thinking....

WOW!!

CHECK OUT THE GIRL WITH  THE NICE RACK!!

LET'S RUN AFTER HER NACKED!!

 

 

Mon, 05/16/2011 - 13:25 | 1279800 topcallingtroll
topcallingtroll's picture

I like chasing women. Might as well, because to do the obvious, sell treasuries, would ultimately unravel their yuan suppression scheme which would be far more terrifying to the chicom government than a few failed auctions.

Mon, 05/16/2011 - 14:42 | 1280060 GoinFawr
GoinFawr's picture

USA: debtor nation market of 300 mil plus with red balance sheets
China: creditor nation market of 1,000 mil plus, savers

American hubris: priceless.

For everything else, there`s renminbi.

Mon, 05/16/2011 - 13:22 | 1279782 TruthInSunshine
TruthInSunshine's picture

I think that all the PonziNomic nations (including the U.S., China & nearly all EuroPIIGS+U.K. club members) should just go repo 105 bond swaps on each others' asses.

I'm talking massive batches, limit is infinity, bitchez.

What will it accomplish?

I don't know. But it adds excitement and a layer of stupidity to the PonziNomics and global CONfidence game.

Mon, 05/16/2011 - 13:36 | 1279843 Global Hunter
Global Hunter's picture

I don't think that's stupid at all, a sovereign nation can buy other nation's debt on 100:1 (print the 1 side of the ratio) leverage and then buy some credit default swaps on 100:1 leverage (print the 1 you put up of course).  Lets hope the central wankers read your post its brilliant!

Mon, 05/16/2011 - 14:22 | 1280019 Canucklehead
Canucklehead's picture

Who would you collect from?  Don't tell me you would go to court to collect.  If you would, which court?

Mon, 05/16/2011 - 15:14 | 1280231 SilverDOG
SilverDOG's picture

Already done.

Mon, 05/16/2011 - 13:27 | 1279801 Math Man
Math Man's picture

Just sell commodities, the whole complex is going lower.

 

Mon, 05/16/2011 - 13:34 | 1279835 tmosley
tmosley's picture

I was told by a guy on the internet who claims to own a Ferrari that $34 was definitely the top.

Mon, 05/16/2011 - 13:39 | 1279842 Imminent Collapse
Imminent Collapse's picture

Sell commodities?  For what? Fiat currency?  Better hang on to your PMs.  You will need them to buy food in the not too distant future. 

Send lawyers, guns and money, and get us out of here.  -Warren Zevon-

Mon, 05/16/2011 - 16:09 | 1280425 Al Gorerhythm
Al Gorerhythm's picture

Is that your car? What model is it? Just curious.

Mon, 05/16/2011 - 19:25 | 1281026 sun tzu
sun tzu's picture

I doubt that he took a picture of his own car on the highway

Mon, 05/16/2011 - 13:27 | 1279802 lolmao500
lolmao500's picture

What about they use their 3 trillion fund to buy Microsoft/Apple/Oil corporations/Gold? China should stop wasting their time.

Mon, 05/16/2011 - 13:30 | 1279813 jmc8888
jmc8888's picture

..and if it did, which it certainly could....who would be solvent to pay off the CDS?

...besides the federal reserve (who isn't solvent but pays off such things anyways).

The principle behind Glass-Steagall knows no boundaries.  Oxygen is oxygen no matter what country you are in.

Mon, 05/16/2011 - 13:35 | 1279825 Josh Randall
Josh Randall's picture

Ghost cities evidently need more time to populate

Mon, 05/16/2011 - 13:37 | 1279833 Urban Redneck
Urban Redneck's picture

Chinese sovereign debt is an artificial market.  China doesn't issue bonds to fund current expenses which exceed current revenues.  Bonds are issued to drain liquidity from the private market, and to facilitate the globalization of the yuan.

Mon, 05/16/2011 - 14:07 | 1279936 Encroaching Darkness
Encroaching Darkness's picture

"That said, the risks to the global economy, should China implode, are far vaster, and we fail to conceive how the central planning cartel would ever allow this to happen...."

That ILLUSION of control is ever so hard to give up, especially when you're a high Party official or "princeling", and everyone who hears your voice scrambles to do exactly what you tell them to ....

until the economic tsunami sweeps in and over everything, and all those beautiful sandcastles you built go pouring away in the waves.

I hope you have resources and assets held independently of all "official" and "bonded" agencies, since officials and bonds will mean little underwater.

There will be much to rebuild in the Republic, and elsewhere, after the Crunch.

Mon, 05/16/2011 - 14:12 | 1279970 slewie the pi-rat
slewie the pi-rat's picture

failed auctions?  the Treasuries are selling well. 

like watching the soapbox derby of fiat. 

downhill, BiCheZ!

Mon, 05/16/2011 - 19:27 | 1281034 sun tzu
sun tzu's picture

Of course when the Fed is using monopoly money to buy them

Mon, 05/16/2011 - 14:24 | 1280015 Silver Bug
Silver Bug's picture

How about this for advice, buy precious metals to protect your familys future. Just more nonsense and drivel coming out of these guys.

 

http://goldisking.blogspot.com/

Mon, 05/16/2011 - 14:30 | 1280050 macholatte
macholatte's picture

So the Chinese economy goes from warp 8 to warp 5 and it's panic time? I don't get it. I think that a little slowdown for them will bring some sanity into play.

Mon, 05/16/2011 - 14:41 | 1280083 strannick
strannick's picture

Having no accountability, I think the Chinese are masters at resource misallocation. Thats the game with US and Chinese QEasy money, no consequences now, cataclysmic consequences later.

Tue, 05/17/2011 - 00:33 | 1281953 TruthInSunshine
TruthInSunshine's picture

Confucious Say:

Many fools are separated from large sums of their former net wealth at the Mahjong Tables of Macau.

Mon, 05/16/2011 - 14:42 | 1280076 strannick
strannick's picture

Jim Chanos and unprintable hard money, Bitchez

Mon, 05/16/2011 - 16:11 | 1280448 indofear
indofear's picture

Interactive brokers does let you buy or sell cds's.

 

how would you mimic buy chinese cds with interactive brokers.

 

im new here but I haven't seen many people explain how you actually

can make these types of trades happen for the individual.

 

I would like to buy these hopefully black swans for pennies on the dollar.

 

thx you to those u can answer

Mon, 05/16/2011 - 19:18 | 1281006 Hard1
Hard1's picture

Buy China CDS????  What for??? From whommm???? China  will be the last one to fail.  First US would need to default, then EUR and they would still have gold and exports to cover their small external debt.  There may be a slowdown, but on the list of countries to default it is the last of the dominoes.  By the time China defaults, your guns and your gold will be worth a lot more than a stupid worthless OTC contract with a defaulted counterparty.

 

Sounds smarter to buy US 5yr CDS at 42 bps vs selling China at 72.  You earn 30 bps.  The only way for china to default, is if US defaults on it's debt, in which case you end up flat or probably still win on higher recovery!!! 

Mon, 05/16/2011 - 21:12 | 1281333 NIRee
NIRee's picture

"My precious" silver is not for sale !

Do NOT follow this link or you will be banned from the site!