The crux of the matter at hand - is this 2008 or 1998 echoing
- probably rests on exactly what percentage of Chinese loans are bad
. The official numbers are around 1.5%. That's a lie, and everybody knows it; the only question is what the number actually is.
A lot of people have been guessing 5-6%, and that's been enough to make people talk about the greatest opportunity at the moment being shorting the Yuan
- and make some major trading houses warn people about possible abrupt
- as in discontiguous
- moves. (Particularly over weekends.) All the devaluation noise is because the Chinese government may devalue rather than face the political instability that would come from shutting down all those zombie businesses if the pain from the latter grows too great.
And that's at 5-6%. But what if it's 10%? Or 20%?
Because if it's 20%, you're looking at a US$3.5 TRILLION shortfall
Carl Bass thinks you only need a 10% cut to get that effect on total liquidity, but we don't know. Regardless, the situation is bad. It's bad enough that the People's Daily has been publishing warnings about the need to cut off "zombie companes"
On Monday, January 4th, 2016, the People’s Daily published a front-page editorial of 9,000-plus words written by an anonymous authority on the supply-side reform.... The paper compared the current reform with the bold structural reform in 1998 that founded an ensuing decade of growth. But 1998 was also a year of more than 30 million SOE workers being laid off, bad loans being as much as 40% of GDP and plunging economic growth. With strong words such as “indecision now leads to trouble later”, “no more stimulus for a v-shaped recovery” and “must bury ‘zombie’ companies”, it shows strong resolve to reform... Any reform carries costs. Indeed, our long-held view has been that the more we look forward to from the reform, the higher short-term costs we must bear.
Complicating everything is that China's PPI has been running at -5.9% (annualised) for the last several months. A lot of this is drops in commodities, particularly energy. (Most particularly, oil.) But... no amtter how you spell it, there are problems under the hood. And devaluing the yuan, well, that has cascading effects as well. From Alphaville
Likewise, on the monetary side, if rates are cut to stem a downturn, the stress on the Yuan worsens. And however that is handled (via intervention, capital controls, band widening, or/and devaluation), it aggravates the US which is in the midst of a poisoned election campaign in which anti-China retaliation already features prominently. The leading Republican contender proposes a 45 percent tariff on all imports from China, before any of this Bull-comforting-China-monetary-stimulus has even begun. And the other Republicans and the leading Democrat have been silent on the subject.
...So alongside interest rate cuts, the PBOC would have to fully sterilize just to maintain the demand status quo, let alone to stimulate. Alternatively, if it lets the Yuan really float (down), it will be disorderly for lack of a policy framework to back a float, and it will set off major global currency shocks.
And we don't even have to talk about capital flight from all this - I'd think it'd have to be in the form of foreign currency reserves, given the restrictions on yuan exchange, but that will only put more
downward pressure on the Yuan - an unvirtuous cycle indeed.
Meanwhile, the Baltic Dry Index is just now bouncing off new lows since 2008 (even lower than last year, though not by a whole
lot - still, annual comparisons matter), and rail traffic loadings are well down vs. a year ago. No truck tonnage data for December yet; November was down about 0.9% year-to-year, but October had been up more than that - call it a wash. Money velocity (most particularly M1, but generally) continues to decline, but very slowly. None of this is setting off screaming alarms, just more of that welcome-to-another-Lost-Decade malaise.
Really, China has been the only thing powering the economy much through any of it. If they have a dislocation, well - that
won't be much fun, now, will it?
Regardless, let's hope this is more of a 1998 than a 2008, if we have to pick one. The currency dislocations of 1998 were bad, certainly, but they got ironed out over a few years and - more importantly - didn't cause either the dot-com bust or
the property boom, not really. It'd be bigger this time because China is bigger, but even that's easier to contain than another liquidity collapse with everybody's interest rates still at nearly zero from the last