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"Utter, Utter Piffle" - Albert Edwards Lashes Out At The Media's China Groupthink

Tyler Durden's picture




 

Oh, the ignominy of thinking that China's widening of the Yuan trading band was anything other than uber-bullish and indicative of as soft a landing as can be imagined as the mainstream herd promptly, in a desperate attempt to seek affirmation from other members of the herd as always happens (see Jeremy Grantham's latest letter for more), said this would be a move that guaranteed no hard landing. SocGen's Albert Edwards takes the 'massive over-confidence in the ability of the Chinese authorities to achieve a soft landing' to task and furthermore indicates that between a rapidly diminishing current account surplus, a real effective exchange rate that is arguably (thank you IMF) not undervalued anymore, and the velocity with which nominal GDP has slowed recently (akin to 2007), the very fact that they widened the trading band suggests it is now a lot easier for them to achieve significant devaluation of their currency (to escape the hard landing) both technically and politically. Since widening the band, the PBOC has already devalued two days-in-a-row. Ironically, the bilateral imbalance with the US is reaching new records (seasonally adjusted) and will peak (seasonally unadjusted) just in time for some temperamental headlines right before the US election.

“For everybody who thought China was heading for a hard landing, it's over.”

What a dunce I am. So silly of me to think China might be hard-landing! I now stand corrected. I was reading about China’s widening of the yuan trading band and found a story with the above quote from an expert. Apparently widening the yuan trading band is proof that China is not hard-landing. Why? Because otherwise the authorities would not have sanctioned such a move. What utter, utter piffle. There remains massive market over-confidence in the ability of the Chinese authorities to achieve a soft landing. And as the IMF now agrees with Chinese Premier Wen Jiabao that the yuan is no longer overvalued, it seems to me that on both technical and political grounds, the likelihood of a yuan devaluation has just increased.

...at the other extreme Edwards like us just cannot comprehend the mainstream media's comments that the widening of the bands means, ipso facto, that the Chinese economy must now enjoy a soft-landing.

Just look at the recent tendency of the currency to weaken within the previous trading ±0.5% band (see chart below). With China’s mega current account surplus now virtually gone, the IMF has admitted they were wrong and the yuan is no longer overvalued. As we have long noted, downward forces on the yuan are mounting. Not only is a hard landing in China still likely, but the recent widening of the band makes devaluation even more likely.


In terms of the potential impact of the recent Chinese currency reforms on the future direction of the yuan, our own excellent China economist Wei Yao summed it up nicely: " opening up the capital account and improving yuan flexibility essentially gives incrementally more say to the market in determining the path of the yuan…...After the band widening, there is all the more reason to expect some small depreciation against the US dollar short term, given our expectation for further deceleration in China’s economic growth and the risk-off global backdrop." She goes on to explain that in her view the yuan should appreciate later in the year if, as she expects, there is increasing evidence that a hard landing has been avoided - link.

The concept of a harder landing is justfied by the longstanding observation that China’s external imbalance is virtually gone (see left hand chart below).

With reports of monthly deficits, as seen in February, becoming more frequent, this eliminates much of the argument that the yuan is undervalued.

 

The IMF in its latest Economic Outlook has done a special analysis of China’s external balance. It is, in part, a mea culpa on why it had previously incorrectly come to the conclusion that the yuan was 'substantially undervalued'. Indeed maybe it has scope to decline as it has been the strongest of all the major currencies (see right hand chart above).

The IMF also notes that while the external imbalances have lessened, this has been at the cost of growing internal imbalances.

From Martin Wolf at the FT "...the domestic adjustment now required is even bigger than before the crisislink. Wen Jiabao, the premier, has himself frequently described China’s development as 'unbalanced, unsustainable, and uncoordinated'. Plus ça change! With such extremes of internal imbalances, avoiding a hard landing will be extremely difficult.

and so in conclusion,

In that context it is notable just how sharply nominal GDP growth has slowed in China, as economy-wide inflation pressures – especially in property – go into sharp reverse (see charts below).

 

...

 

We saw exactly that overconfidence in the US in 2007 and we can see it again now.


If we are correct and a hard landing unfolds, the ability of the Chinese authorities to devalue the yuan has increased, both technically in the wake of recent reforms, and politically in the light of the IMF’s changed perspective. Yet from an American viewpoint little has changed. Despite the fall in China’s overall trade surplus, the bilateral imbalance with the US is reaching new records (on a seasonally adjusted basis). And when will this be most apparent in the headline data (seasonally unadjusted)? Just ahead of the US presidential election. Whoops!

 

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Thu, 04/19/2012 - 13:39 | 2358875 mayhem_korner
mayhem_korner's picture

 

 

So when does TOTUS plan to get to the podium to curse the Chinese for playing currency games and not doing their part?  In a twisted way, this might just give Ben some ground cover to print more...y'know, just so the U.S. exports have a fighting chance. 

Thu, 04/19/2012 - 13:43 | 2358880 markmotive
markmotive's picture

well said

Chinese real estate could implode the Chinese banking system...and lead to massive yuan printing.

China property valuation stats:

http://www.planbeconomics.com/2012/04/06/still-think-chinese-real-estate-isnt-in-a-bubble/

Thu, 04/19/2012 - 15:01 | 2359129 earleflorida
earleflorida's picture

china has a housing bubble - so what? japan and the ussa are exempt? the 'imf' is a joke, period! whereas, the 'wto' is the lone foot soldier on the global battlefield,... scouring the oblique sobering realities - as that of a sixth sense pragmatist,... burrowing underneath the zealous muckraker's dirty fingernails exposing a diaphanous litany of facts, and truth's-yet-be-told!

ref: [Pdf] Titular Principle - Esade.es ___   note: short read

http://itemsweb.esade.edu/research/esadegeo/120316_OMC_Gine_EN.pdf

Thu, 04/19/2012 - 20:33 | 2359968 philipat
philipat's picture

Better to build houses than derivatives?

Thu, 04/19/2012 - 13:52 | 2358916 tempo
tempo's picture

Remember the "Great Leap Forward" into economic hell several decades ago?? This a communist dictatorship w complete central planning and total lack of freedom (remember 1 child allowed and prison for those that disagree). This phony economic miracle will fail and bring on the next phase of pain.

Thu, 04/19/2012 - 14:00 | 2358941 GeneMarchbanks
GeneMarchbanks's picture

Nope. Cheap labour, no environmental restrictions and (still) giant surplus are corporate capitalism's wet dream. Phony? Compared to what? The BLS reporting? I think you might be projecting on that a little.

Thu, 04/19/2012 - 14:09 | 2358976 Michael
Michael's picture

The mega super duper Chinese housing bubble is going super nova. There will only be a crash landing for China, period.

Thu, 04/19/2012 - 15:16 | 2359218 markmotive
markmotive's picture

America once had a surplus

Thu, 04/19/2012 - 18:13 | 2359716 WhiteNight123129
WhiteNight123129's picture

China needs a velvet revolution, when that happens when the Yuan tanks and equities plunge, bug all you can eat Chinese equities and bonds because that will guarantee V shape recivery with 3-4% GDP while the West is in total morass.

Thu, 04/19/2012 - 13:54 | 2358920 HedgeAccordingly
HedgeAccordingly's picture

Atleast our president has it under control. i am confident - http://hedge.ly/HNYdT1 lolz!

Thu, 04/19/2012 - 13:39 | 2358877 LongSoupLine
LongSoupLine's picture

Cramer says "Buy Apple!!"

I'm sorry, what are we talking about...group think?

Thu, 04/19/2012 - 14:11 | 2358903 LouisDega
LouisDega's picture

 

 

Whats a piffle? I gots ta know.

 

piffle |?pif?l|

noun exclamation informal

nonsense.

ORIGIN mid 19th cent.diminutive of imitative piff-.

Thu, 04/19/2012 - 13:48 | 2358907 mayhem_korner
mayhem_korner's picture

 

 

"Muppet piffle" has a nice ring to it.

Thu, 04/19/2012 - 13:49 | 2358910 rosiescenario
rosiescenario's picture

At least the Chinese government took prior steps to warn its populace to protect themselves through its recommendation that people buy pm's.

 

 

Thu, 04/19/2012 - 13:50 | 2358911 Dick Darlington
Dick Darlington's picture

I heart Albert

Thu, 04/19/2012 - 14:01 | 2358930 Peter Pan
Peter Pan's picture

I believe we are witnessing great volatility and instability which when coupled with extreme debt, high unemployment etc as well as schizophrenic reactions whereby Europe embraces austerity and the USA adopts spend all you can policies, then the world's attempt to achieve reovery is about as useless as trying to catch a football with your mouth. As for China, her statistics are no less massaged than those of the USA and it is only tight control as well as the reality that you have work to eat that keeps her show going.

Thu, 04/19/2012 - 14:06 | 2358964 mayhem_korner
mayhem_korner's picture

 

 

Europe embraces austerity...?  Do you mean "Europe feigns embracing austerity on the hopes that the US and Japan beat them in the race to the bottom?"

Thu, 04/19/2012 - 14:42 | 2359098 Bam_Man
Bam_Man's picture

Didn't you hear? According to The Ministry of Truth, budget deficits of 6% of GDP are "the new austerity".

Thu, 04/19/2012 - 14:39 | 2359090 Levadiakos
Levadiakos's picture

Inverse handle SPX broken....YeeHaaa

Thu, 04/19/2012 - 20:28 | 2359958 DeadFred
DeadFred's picture

Don't trust it until it confirms tomorrow.

Thu, 04/19/2012 - 14:41 | 2359102 Bam_Man
Bam_Man's picture

Burrish!

Thu, 04/19/2012 - 16:15 | 2359412 ArrestBobRubin
ArrestBobRubin's picture

Ya mean Eddie Albert and Arnold Ziffel?

Thu, 04/19/2012 - 18:00 | 2359684 q99x2
q99x2's picture

A soft landing did not help the Hindenburg.

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