This page has been archived and commenting is disabled.
Why Everyone Is So Nervous About What China Does Next, In One Chart
Whether the motive behind China's stunning August 11 devaluation announcement was to get one step closer to the SDR basket by promoting a market-based FX regime demanded by the IMF, to further ease financial conditions in China, to boost exports, or merely to telegraph to the Fed that with the US preparing to hike rates China will no longer be pegged to the USD, is unclear, but one thing that is certain is just how much everyone (if not this website) was shocked by the PBOC announcement. Goldman summarizes it best: "The sharp 3% devaluation in the CNY fix last week was a surprise to us."
What happens next? Clearly more devaluation, or else China would not have pursued this step, especially since the paltry 4% deval in one week will hardly move the needle on Chinese exports, which is the real reason why China did this move (weeks after it boosted its official gold holdings by 57%). Goldman also admits as much: "It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policymakers, and by extension the near-term direction of the CNY. But on a longer horizon, the risks are tilted towards further CNY weakness."
The weakness is further guaranteed when one considers that China has all but tapped out its credit capacity (where even the IMF admits China's debt/GDP is headed to 250%), forcing the country to seek growth not from within (via credit creation), but without, in the form of beggaring its neighbors and promoting its competitiveness using external devaluation (a similar internal devaluation to what Greece has undergone in the past 5 years would result in a very violent civil war), i.e. currency war, as much as the serious people want to avoid calling it for fear headlines such as these (from overnight) will become a daily event...
- TAIWAN DOLLAR FALLS TO WEAKEST SINCE NOV. 2009
- INDIA'S RUPEE DROPS TO LOWEST LEVEL SINCE SEPT. 6, 2013.
- TURKISH LIRA DROPS TO RECORD 2.85 PER DOLLAR, DOWN 0.6% TODAY
... and the FX war will spiral out of control.And yet that is precisely what will happen.
This is how Goldman pivots to the unpleasant reality of not only China now aggressively engaging fellow exporters, but those same fellow expoerters devaluing preemptively before China gets them:
It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policymakers, and by extension the near-term direction of the CNY. But on a longer horizon, the risks are tilted towards further CNY weakness. The core of this argument rests on our view that China’s bumpy downshift in growth is likely to extend, making for greater macro and market volatility along the way. China has experienced a substantial credit build-up, which will need to be unwound in coming years. As Andrew Tilton and team have discussed, unwinding such a large credit imbalance is typically associated with a period of below-trend domestic demand growth, and this is coinciding with slowing potential growth as the impulses from labour and capital deepening slow. China’s current account surplus is also not what it used to be, with a growing services deficit offsetting a still large trade surplus. Given this macro backdrop, where a greater contribution to growth from net exports would be very welcome, a 25% appreciation in trade-weighted terms – as the CNY has experienced over the past three years on account of its tight link to the USD – looks increasingly untenable.
And while nobody wants to admit it, the writing on the wall is clear: the age of all out FX warfare is upon us, and only the Fed believes it is immune... if only for the time being.
The clearest implication of China joining the currency depreciation train is that it further increases depreciation pressures on the rest of the EM FX complex. There are two important channels of transmission here: First, because China as a producer competes with several EMs in global markets, those EM exporters just became a touch less competitive relative to Chinese exporters; and second because China as a consumer is also a large destination for exports from the rest of EM, although in this case there is at least the possibility of a partial offset from any improvement in demand if an easing in financial conditions is delivered. So for EMs that have been trying to address their external balance, and have seen depreciating currencies since 2013, some of that relative price shift has just been undone. And if the recent CNY moves are the start of a journey, even undoing half of the accumulated trade-weighted appreciation of the last three years, this may provoke a meaningful additional bout of currency depreciation across the EM complex.
Translation: once begun, the currency war, which for the time being is being fought with conventional means, has no choice but to become nuclear.
Here, in one chart, is the reason why anyone following China's devaluation is very nervous. And if they aren't yet, they should be. Because if China is indeed intent on catching up with the rest of the EM complex - whose FX is trading about 30% lower - then the resulting devaluation will lead to nothing short of a global FX neutron bomb.
»
- 26622 reads
- Printer-friendly version
- Send to friend
- advertisements -
The U.S is basically issuing a margin call by threatening to raise rates in a global depression and the rest of the world is telling the fed to fuck off.
Yes Doc, thats why they will raise rates,
Defending the petrodollar, and their power, is all that matters now.
Fuck the economy and the RoW.
China might have another goal, namely to get rid of dollars in half-heartedly trying to keep the renminbi from depreciating. It's good cover, given the political pressure on it to keep the yuan from depreciating. They could just say they are giving the West what it wants.
Its all the FED has, but I don't think it'll work. What they do next will have a tinge of panic to it and that'll panic the markets and then the domino effect will really get going......
Last man standing principle, or the tactic you take when fighting cancer with chemo. You hope the host survives.
Last man standing on a pile of smoldering rubble is not an optimum outcome, but getting more likely every day.....
Fed knows the equity bubble in the US is about to take a bloody nose dive next year, that's why they are calling for all the suckers worldwide to bring their dollars into the US in order to keep the bubble from popping.
China literally lent a pin to the world to give the Fed a reality check.
My popcorn is ready
If your fiat currency is not backed up by illegal, infinite spying (say 100 billion pieces of intelligence a month), market manipulation, HFT computers, and a compliant, corrupt, captured financial media, you will always lose in the financial game.
All hail the mighty dollar. And trash gold, the only real threat to the dominance of the dollar.
Got Gold?
Yeah, but not as much as they do.
Ma Jun said more adjustments are unlikely
phew and yall had me worried.
A serious lie.
I am earnestly looking for opinions here. Is the currency devaluation going to be a bit like the credit crisis? It starts with Emerging Market(EM) currencies like the credit thing started with subprime...and the US Fed and ECB pooh pooh it saying "the currency devaluations are limited to the emreging markets" there is no reason to expect it to spread....and then something all of a sudden forces the BOJ to to devalue...then ECB and the US Fed liekly last? perhaps after a couple of ridiculous looking rate increases in the face of a economic contraction?
You can stick a fork (ouch) in Capitalism. It's done.
The prosperity of the big nation's middle classes not a concern to those players any more. No more than the collateral damage they constantly do when fighting somebody or other on foreign shores.
If you can't imagine that the prequel to '1984', is exactly what's happening today, you should have taken a couple of political science electives with your finance major.
the move was a warning shot across the bow of the the fed and the zionazi bankers to let them know who controls the game now. the fate of the zionazis rests in the hands of a bunch of unsophisticated, tryannical, pinko commie, corrupt, little inscrutable chinamen. too fn funny. mao is laughing his jolly ass off.
china bankers are on the same team as the fed and ECB....it is all the masses against the elites...silly to have too much hope in China or Putin sticking up for the average middle income american.
i have no illusions of what the pboc and putin are up to. i just hate the zionazis enough for what they have done to want them to burn in bubbling oil on youtube and i will root for whoever makes it happen since everyone is going to suffer in the end game anyway.
no problem, we've got an algo for that.
-yellen
Google "Global dollar credit - Bank for International Settlements" to get the doc on the offshore USD debt.
Basically the BRICS went hog-wild (like the PIIGS too LOL) on USD debt. Zulauf guesses it might be more than $10T of *OFFSHORE* dollar debt - representing a Ginormous USD short effectively. Needless to say this is a PROBLEM for the debtors.
The BTFD'ers are now those debtors frantically buying old buckee on every dip. Doesn't really matter what the Fed does, but if they actually grow a pair (LOL) and pop off of zero, that will only put the BRIC balls in a vice.
What fun. Currency wars mixed with Debt Dynamics.
Goldman doesn't control China?
LOLOLOL..............
wait wait...remind me, this is Marc "I'd rather be Chinese" Faber? "Because Bolsheviks and Maoists are smarter than the rest of us," Faber? In the end, the US sits between two very large moats and we can feed ourselves. The Mexican border may not be defensible but the Isthmus certainly is. The US should aspire to be Switzerland...wealthy, quiet, safe, discreet...and out of everyone else's circus. The sooner we get back to that vision the better. And dismissing everyone who sees that as a "fascist" is no longer going to cut it. (and Lindbergh was an American hero....).
If the US decides to aspire to be Switzerland it will have to sell all 20 of its aircraft carriers.
I suppose ISIL could buy a few. And North Korea.
Or maybe China will buy them all.
There is another option: recover the money spent on them (from munitions makers, Judeo-Bolshevik money lenders and anyone else that promoted their construction.
This, of course, can only be done by private men who use First-Amendment assemblies for such.
not,wrg
“The IMF admits China’s debt/GDP is headed to 250%”.
It’s worse than 250%; for, if China’s GDP is based on the same formula as used by the US government, probably half its GDP is pure fluff.
The truth is that all investments – plant, machinery or software – are examples of consumption of capital – and a component of the GDP. The money expended on them is no longer available to anyone else; the resources… the same. They are entered on accounting ledgers as delayed expenses, with the anticipation that they will be “expensed” (or recovered) annually over the next 5-30 years.
In other words, the money and resources represented by such investments are lost forever – unless the business in question can recover such money and resources over those 5-30 years.
If ineptitude or lack of foresight intervene, we are looking at a massive write-off of capital.
Then there is the component of government spending, which represents money spent on toilet seats, munitions and attendant bribery that will never be seen again – except what is stashed in off-shore banks… and that as a minus.
These two components mean that, fully, 35% of the US GDP index is pure fluff.
This is the ratio we get in a relatively perceptive society; China is a society where the average mentality barely registers above a Stone-Age level, which allows China’s witch doctors to fabricate falsehoods almost without limit.
This is so because those ghost cities built by China (some 20 to 30 of them) were counted as contributing to China’s GDP; and this translates to a fluff ratio substantially in excess of the 35% for the US. Is it 50%... 70% for China?
Who knows?
The fluff ratio certainly has to be greater than the one for the US, which means China’s debt/GDP ratio could well-be nearly astronomical… 500%... 1,000%.
Gee, we probably don’t want a ring-side seat for this one; we’ll get splattered with guts and gore.
China has stated that no further adjustments are needed - that's how I know this is only the beginning
They cant be trusted -
Yes this shows that China's leaders really have no idea of what they are doing.
These constant changes in policy are very unsettling to all.
And all this talk of currency wars really shows to me that the world really needs one currency. Sort of like the Euro only called it the WorldO.
Then there will be no foreign curency tarders leaching off us all.
And countires will not be able to start currency wars.