If you do one thing this week, ignore the false sense of currency strength coming out of China. I told you that Chinese central bank governor Zhou Xiaochuan told the press there was no basis for further depreciation in the yuan. The market – as Charlie Morris has pointed out in the March issue of The Fleet Street Letter – is telling you that the yuan has to devalue more, whether China’s central bankers like it or not.
There is also the data and the debt to consider. Exports from China fell by 11.2% in January, according to official data. That followed a 1.4% decline in December. Imports fell by even more in January, at 18.8%. This is an economy in a structural slowdown. And the debt?
Where to begin!
Chinese banks created $385 billion in new loans … in January alone … according to Reuters. Money supply grew at the fastest rate in 19 months. And when you throw in “social financing” the new loan creation soars to an astonishing $520 billion. Truly extraordinary.
And truly terrifying. Possibly the biggest bubble/misallocation of capital yet. And you wonder why capital is fleeing China. You’d be in full flight too if you were trapped inside one enormous credit bubble being pumped up by central planners with a lot of confidence but very little experience dealing with market forces.
China’s 1994 devaluation triggered a series of aftershocks in Southeast Asia. China wasn’t fully integrated in the global supply chain then. It is now. The next Chinese devaluation could be far more disruptive for everyone. When will it come? Watch Zhou’s lips.
Category: Central Banks