The US had a credit bubble, China has a credit bubble. The US had a housing bubble, China has a housing/investment bubble. Will China eventually have to go down the same path as the U.S., and the Eurozone? The answer: yes.
When we arrived to Bangkok the other day, coming down the motorway from the airport we saw a huge billboard - and it floored us. The billboard was from the Bank of China. It said: “RMB: New Choice; The World Currency”
You wouldn't know it if you looked at the price of oil, but arguably the world's largest economy just unloaded a kitchen sink of fears, warnings, and downgrades on its economy; the most notable being:
*CHINA SETS 2015 GDP GROWTH TARGET AT ABOUT 7% (from 7.5% in 2014)
In a report to be delivered to the government tonight, Premier Li Keqiang warned China may face more economic difficulties in 2015 vs 2014 and downward economic pressure is still growing (despite Western 'analysts' proclaiming China fixed). The currency is weakening on the news and AsiaPac stocks are lower and as Chinese stocks open lower (despite hints at more easing), millions of newly minted "can't lose" Chinese investors begin to worry.
Financial systems that seem robust are more often than not inherently fragile - China is no exception!
"None dare call it a “currency war” because that would be counter to G-10/G-20 policy statements that stress cooperation as opposed to “every country for itself”, but an undeclared currency war is what the world is experiencing. Close to the same thing happened in the 1930’s, a period remarkably similar to what many countries’ policies resemble today.... Negative/zero bound interest rates may exacerbate, instead of stimulate low growth rates in all of these instances, by raising savings and deferring consumption... Asset prices for stocks, high yield bonds and other supposed 5-10% returning investments, become stretched and bubble sensitive; Debt accumulates instead of being paid off because rates are too low to pass up – corporate bond sales leading to stock buybacks being the best example. The financial system has become increasingly vulnerable only six years after its last collapse in 2009.... Central banks have gone and continue to go too far in their misguided efforts to support future economic growth."
And then there were 21. Hours ago on Saturday, the country whose currency is largely pegged to the dollar which itself is now anticipating a rate hike in the coming months, surprised the world by confirming its economic slowdown yet again following a recent rate cut just this past November when it lowered its benchmark rate by 40 bps, after it again cut benchmark lending and deposit rates by 25 bps starting on March 1. Specifically, the PBOC will lower the one-year lending rate to 5.35% from 5.6% and its one-year deposit rate to 2.5% from 2.75%. It also said it would raise the maximum interest rate on bank deposits to 130% of the benchmark rate from 120%.
US stock markets reached record highs last week. Question: does that make them riskier, or less risky? We think the former.
The signals are clear: the world has already entered a downturn in economic activity. Therefore we can expect accelerated money-printing and the imposition of more negative interest rates in a forlorn attempt to avert economic reality.
Everything has to come to an end, sometime...
Very few, it seems...
There is a bull market developing in gold and few are aware of it...
To say that the PBOC is confused at this moment is a very big understatement: on one hand, yesterday the PBOC moved its reference rate for the yuan outside the daily trading band for the first time in 21 months, forcing the currency to strengthen as authorities seek to limit volatility in capital flows. And then just hours later, as reported first thing this morning, the same PBOC announced its broad RRR cut - the first one since May 2012 - an attempt to ease ongoing, and thus tightening, capital outflows, and pushing the currency lower in the process. In short: unlike other central banks who hope that institutional and retail investors figure out their FX intentions and help them out by "frontrunning" their moves (which may never come) in what is now a clear and global currency war, China is certainly not making it easy for FX traders to figure out what will happen next.
The "big" move in the USD we have witnessed over the last 6 months is only just the start of a major move
We won't go into the specific details of China's burst housing bubble, the shady underworld of its pyramid scheme wealth-management products, the fact that any hard asset in China is rehypothecated literally a countless number of times, the nuances of its deflating shadow banking system, or even the complexities of its alleged capital controls (alleged, because as a reminder, they only exist for the common folks - the really wealthy Chinese are naturally exempt from any capital flow constraints). We will point out something even more disturbing. The Offshore Yuan just hit a two-year low, reaching a level not seen since September 2012.