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The Silent Crash of China’s Currency

Sprout Money's picture




 

The financial markets in the West are barely pulling themselves together these days and over the last few weeks and months we have discussed the underlying issues at length; especially in the United States the pressure is on as the Fed’s tapering program continues ruthlessly. The US is not the only part of the world, however, where the skies are grey above the markets. We have not read a lot of positive news about the East lately either, where specifically China’s economy is in a slump.

For months, if not years, we have listened to the story of the inflated Chinese real estate market, which is a bubble that could pop at any moment. But, until now we have not seen a large scale Chinese real estate crisis like the one we had in the US a few years ago, only local price fluctuations. That the Chinese real estate market is expanding rapidly has not been a secret for a long time, since significant economic growth usually goes hand in hand with a growing real estate market. Of course it also goes hand in hand with bubbles, especially in regions where the economy is developing the fastest. For example, real estate bubbles are forming in different places along the Chinese coast line, although it remains concentrated around those areas for now.

Another problem is burdening the Chinese real estate market, however, as banks become less and less willing to lend money; the Chinese credit market is floundering and this could have bigger consequences. The stress in the financial markets is caused by the hesitation of different players, and market watchers have underlined slowing economic activity as the cause of this phenomenon instead of rising debt positions. Indeed, although Chinese debt is very large in nominal terms, debt ratios remain within reason: government 53%, households 31%, the financial sector 17%, etc. That is not so bad compared to Western statistics that show percentages north of 100% in many cases. Of course, if the Chinese economy slows down significantly today these percentages will go up fast.

The fact that the Chinese economy is not running as smoothly as it did before the crisis became painstakingly obvious again when the latest Chinese PMI figures were posted this week. The ‘HSBC China manufacturing PMI’ ended up at 48.3 for April and although that figure is higher than the previous one from March (48), it still highlights a shrinking Chinese manufacturing industry (< 50). Considering the fact that the Chinese economy is mainly driven by output, rather than consumption, this is not good news.

China PMI april 2014

Meanwhile, the authorities in China get the message. The country is not an economic island, namely, but rather for the most part still dependent on the rest of the world where things are not going so well either, to phrase it gently. The Chinese government was probably hoping that their economy would be able to stand on its own two feet by now, with enough domestic demand to support production levels, but unfortunately that is not yet the case and, consequently, the leaders of China have taken to its currency. Since the beginning of 2014 there is a noticeable decline in China’s currency, which is known as the renminbi or the yuan. The Chinese yuan even went into crash mode against the American dollar, from 0.166 to 0.16 in a few months’ time; a drop of 3.5%. That may seem like a non-event to many readers, but in the world of currencies this is a huge deal. Especially when you know that China’s currency has been on the rise against the American dollar since January of 2010.

Chinese yuan

We suspect that the yuan’s decline is far from over. Chinese authorities will keep printing yuan (at a faster rate than the US central bank prints dollars) to make sure their products become even cheaper and only when these measures translate into a visible improvement in the economic figures, will China take its foot off the gas.

This could be the turnaround investors have been craving for, however, as the Chinese stock market has been struggling for years. Coincidence or not, the Shanghai index barely moved since 2010 when the yuan started to climb. Even more, the short revival after the crash of 2008 was immediately crushed, which is the opposite of the non-stop rise we have seen on the Western markets for the last five years. As a result a huge discrepancy arose between Chinese and Western stocks, but with the turnaround of the currency policy in China, Chinese stocks should finally start seeing the light of day. You do not have to look very far to understand what devaluing a currency can do to a stock market. In Japan, for example, they know all about it: when the Japanese central bank started printing yen en masse in the second half of 2012, the currency was under a lot of pressure (-30%), but the Nikkei 255 jumped up (+50%) in the months after.

Today almost every negative scenario has been priced into Chinese stocks. In other words, there is not a lot of downward risk left, which is evidenced by the reaction of local markets to bad news. It does not matter how disappointing the news from China is, the Shanghai index is stoically holding the 2,000 points level, which has been the line in the sand for about three years now. And our opinion is no secret: if there is no more room to the downside in general, the way up usually travels really fast when the turnaround comes. With Japan’s blueprint in hand, we are expecting fireworks from Chinese stocks if the trend of currency devaluation in China continues. When the Chinese markets wake up, things will probably move quickly and a climb of dozens of percentage points is definitely in the cards. Make sure a part of your portfolio is invested in China!

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Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report and the Technology Report.

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Mon, 05/12/2014 - 03:48 | 4750062 Alan John
Alan John's picture

The China is the current economic hub of the Asia and the world. It is the leading supplier and manufacturer of many big and small industries ranging from thread and electronic items and cars etc. As much as fluctuation is concerned it will soon overcome this inflation by more quality exports.Buy Essay Online.

 

 

Mon, 05/12/2014 - 04:38 | 4750082 hootowl
hootowl's picture

So you are recommending that we purchase stocks based upon currency manipulations that inflate their price rather than production/price/profit fundamentals sans currency devaluation.

You are suggesting that we help them blow another financial bubble.  If my broker gave me that kind of advice, I'd fire the sonofabitch.

Mon, 05/12/2014 - 13:24 | 4751335 Mojeaux18
Mojeaux18's picture

You know if you were in bonds during any run up on any of these bubbles (sans the bond bubble) you would lose out on money.  You don't automatically lose money investing in a bubble.  You lose out on money and get left in the dust if you don't participate.  If you do participate - bet only what you can afford to lose and be ready to pull out at the first hint of trouble IMHO.  And yes that is advice from my broker.

Mon, 05/12/2014 - 02:48 | 4750026 whidbey-2
whidbey-2's picture

Just wait, the main event is in the wings brewing.  Obozo has disconnected with reality again and he thinks he can live on lies.  Outside of that it is sell in 2014 have a few bonds for laughts. PS Repubs have problems - same old crazy men from the south want no company is their madness.

Mon, 05/12/2014 - 01:51 | 4749975 Rogue Economist
Rogue Economist's picture

Peak Credit now breached!

RE

Sun, 05/11/2014 - 23:40 | 4749799 starman
starman's picture

free fortune cookies for everyone!

Sun, 05/11/2014 - 22:36 | 4749687 robertocarlos
robertocarlos's picture

My money is safely in my mattress. I don't sleep too good though.

Sun, 05/11/2014 - 21:38 | 4749562 mobydick
mobydick's picture

The Chinks lie through their back teeth about everything, but HSBC is fair dinkum in the stats they produce?? HSBC lying, cheating, money laundering bankster crooks.

Sun, 05/11/2014 - 18:30 | 4749036 Grouchy Marx
Grouchy Marx's picture

This is one I refuse to worry about. And since I also refuse to invest in the Chinese stock market, regardless the lost profit potential, there is nothing actionable for me here. 

Sun, 05/11/2014 - 18:23 | 4749028 AdvancingTime
AdvancingTime's picture

You blew me away with, "there is not a lot of downward risk left" then you added, "make sure a part of your portfolio is invested in China!" Better you than me! Forever and a day corruption has been a huge issue within China and now more problems are brewing.

China has entered a great credit trap and is awash in overcapacity and debt. Much of the recent growth in China after 2008 came from a massive 6.6 trillion dollar stimulus program that expanded credit and poured massive amounts of money into the system. This money encouraged expansion and construction with little regard as to real demand or need.

After several years of growing debt concern is rising the whole unstable pyramid is about to come crashing down bringing China and possibly the global economy with it. This is not just about writing off a few bad loans. The shadow banking sector is so large that concerns exist about contagion and a domino series of defaults that might rack the economy as savers lose money. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html


Sun, 05/11/2014 - 17:15 | 4748857 GreatUncle
GreatUncle's picture

The Chinese government was probably hoping that their economy would be able to stand on its own two feet by now, with enough domestic demand to support production levels, but unfortunately that is not yet the case.

 

To be honest can't see any nation in the world that if you cut all trade could thrn stand on its own 2 feet where consumption actually matched production.

Sun, 05/11/2014 - 16:23 | 4748719 JamesBond
JamesBond's picture

pump monkey

Sun, 05/11/2014 - 16:07 | 4748685 Joenobody12
Joenobody12's picture

Bank of China pays 7.4 % dividend

ICBC, the worlds largest bank, pays 7.26% dividend 

The Chinese government will not let these two banks go under. 

China Mobile , Sinopac, CNOOC and PTR all worth looking into. 

 

Sun, 05/11/2014 - 14:50 | 4748497 CHX
CHX's picture

looks like a 5 minute silver chart to me

Sun, 05/11/2014 - 14:26 | 4748452 xavi1951
xavi1951's picture

Spam sandwiches and vodka martinis.  Mmmm good!

Sun, 05/11/2014 - 12:13 | 4748166 toadold
toadold's picture

Given that most economic information is loaded with "missinformation" these days and even the Chinese are not real sure what the situation is in their own economy, it would seem to me that any investment in mainland Chinese stocks is actually hope and pray speculation, not investing. You might be better off buying a warehouse full of canned Spam and Vodka.

Sun, 05/11/2014 - 12:10 | 4748156 Personality Disorder
Personality Disorder's picture

Lets see, food, fuel, my electric bill, rent or Chineese crap

Sun, 05/11/2014 - 11:12 | 4748034 new game
new game's picture

what good is all that gold if it never backs the currency? it won't, as then the controllers can't manipulate their currecy without market discipline. all this gold talk is just that-talk. false expectations parroted to another fool to buy sprouts gold as he makes money on transactions. fools fool or greater fool be you...

Sun, 05/11/2014 - 14:27 | 4748455 daveO
daveO's picture

The article said China was intent on devaluing it's currency. So, if I own gold, my purchasing power goes up. Since the FED's also devaluing, my purchasing power goes up more. Thank you for calling me a fool, genius. 

Sun, 05/11/2014 - 12:15 | 4748170 kchrisc
kchrisc's picture

Regardless, when the music stops they will have more gold and a manufacturing base to fall back on. The DC US won't.

"Those with the gold make the...

Mon, 05/12/2014 - 04:46 | 4750087 hootowl
hootowl's picture

When the music stops they will also have 100,000,000 angry, desperate, unemployed chinese workers, with little or no social safety net to catch them before they go to war on Beijing and the wealthy crooks who haven't escaped the country and moved their wealth to the West.

Sun, 05/11/2014 - 15:53 | 4748640 chumbawamba
chumbawamba's picture

...golden calf."

I am Chumbawamba.

Sun, 05/11/2014 - 14:52 | 4748501 CHX
CHX's picture

...world go round ?

Sun, 05/11/2014 - 10:39 | 4747974 philipat
philipat's picture

So what is the big surprise here? China joins the currency wars whilst still buying Gold at prices manipulated lower by The Fed for longer-term dominance. Simple if you can get away with it...

Sun, 05/11/2014 - 10:13 | 4747884 whidbey-2
whidbey-2's picture

Notice that the IRS is pumping all refunds out of a special processing station? No carry over of 2013 refunds?  The gov't, IRS, actor, wants more money in the economy, its no error.  Your government is force feeding you refunds for two reasons politics, and the money supply is falling in real terms.  HOld on.

 

https://us-mg6.mail.yahoo.com/ya/download?mid=2%5f0%5f0%5f1%5f193%5fANeti2IAAANQU243BQAAAPXGz%2bo&pid=11&fid=Inbox&inline=1&appid=yahoomail

Sun, 05/11/2014 - 23:30 | 4749779 Buck Johnson
Buck Johnson's picture

Please explain, I understand it a little but please explain.

Sun, 05/11/2014 - 11:33 | 4748096 I am Jobe
I am Jobe's picture

What idiot uses Yahoo ? 

Sun, 05/11/2014 - 13:04 | 4748234 Lord Koos
Lord Koos's picture

The ones that are smarter than Gmail users.

Sun, 05/11/2014 - 15:50 | 4748635 chumbawamba
chumbawamba's picture

Who are only smart enough to switch e-mail providers but not smart enough to realize that if you're on the web then your shit is being spied upon.

I run my own server, even that's not good enough anymore.

I am Chunbawamba.

Sun, 05/11/2014 - 21:13 | 4749492 GoldenTool
GoldenTool's picture

All your base are belong to us.

 

"sapere aude"

Sun, 05/11/2014 - 12:36 | 4748197 RafterManFMJ
RafterManFMJ's picture

Are you Serious?

Sun, 05/11/2014 - 10:49 | 4747988 SolarSystem1932
SolarSystem1932's picture

Does that link reference at attached item to your email?

That is just creepy. 

How can I read an attachment to an email in your account?

Answer: I can't.

 

 

Sun, 05/11/2014 - 13:53 | 4748355 economics9698
economics9698's picture

Did I read that right?  "Money supply falling."

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