Chinese Stress
Pfäffikon SZ, Switzerland – In recent years, investors have more attention for the economic developments in China. The country is in transition and will provide growth for many decades. The latest GDP figures ––which admittedly are unreliable–– are pointing to a slowdown, but it is still growth. There seems nothing to worry about. So why have some prominent investors concerns?
Repression
Not the U.S., but China proved to be the land of unlimited possibilities the last decades. But China’s dirt-cheap workshop is slowly becoming a consumer society, and this will not be achieved easily. Investors are globally in a phase of financial repression; there is no freedom of choice anymore. Governments and central bankers are consciously pushing the general public into a corner. Negative interest rates, money printing and an overkill of supervision are phenomena that do not fit in a free market. Many people do not realize that they are locked into a system where there is no way out. Financial repression not only plays a role in the U.S., Japan, and Europe; also in China it is at an advanced stage. Due to the repression, investors and citizens are put on the wrong track extra fast.
Unbalanced
The recently increased Chinese steel prices, for example, are interpreted as a positive signal. However, the upturn in the steel price is not sustainable because it is a combination of speculation and seasonality. The same picture can be seen in most of the current growth rates in China, which only can be attributed to the significant injections of the Chinese government as China’s liquidity is getting worse and worse. And this is precisely the point here. The reserves of China are evaporating into thin air and will shortly be dangerously close to the minimum prescribed capital requirements of the IMF. After all, nobody can maintain pouring $100 billion dollars a month into an economy, not even China. The bond market of China is starting to show more stress, which is logical in a landscape that is full of financial imbalances.
Devaluation
However, the China Stress is best to be found back in its currency, the yuan. August last year, the Chinese authorities tried a mini-devaluation; the (negative) market reaction is history. Later on, China tried again, also without success. The depletion of China’s reserves has stabilized in March this year, and this gave hope and relief to investors. But the long-term trend is downwards, and the capital outflows from China continues unabated. China eventually has no choice and will have to devalue ––reluctantly–– its currency sooner or later.
In 1971 described U.S. Treasury Secretary, John Connally, it as follows; “The dollar is our currency, but your problem.” This saying is now applicable to China. The bulging debt mountain and the overvalued yuan belong to China; nevertheless, this has become everyone’s problem by now.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.
