China - is it derailing - will it devalue?

Intro

Competitive devaluations are here to stay unless there is a new, never seen before level of effort put into the coordination of the worlds governments on monetary and fiscal policies.
Tradewars and worse are a high probability outcome if they dont succeed.

A major factor in all of this is China. A centralised, non democratic country running a mixed economy. As with all defect structures and setups they all work very well during boom times and happy days. Once the tough times starts, however, weaknesses are quickly revealed.

We see it all around us. Our current corporate and political set up was not made for hard times like this. Imagine what it is like in a non democracy, where much of the crucial decisionmaking is centralised to a core entity, which is mainly politically and not commercially driven. Does sound like a very difficult set up for handling the current circumstances.



To the point

If Asia was the hope for an end to deflation and a revival for world growth, it looks quite hard at the moment. Chinese key trading partners are sliding. We all know about the Western ones. Lets look at the Asian ones this time around.

But first; Chinese GDP data almost resembles Madoff like numbers when it comes to outcome vs market expectations. It has gone from 12.6% growth in 2007 to 9.3% Q3 and most recently 6.8% in Q4. During this time almost all Asian trading partners economic data has surprised to the downside, despite democracies, despite open markets.

Last week South Korea reported Q4 GDP as -5.6%. The Reuters consensus was looking for -2.7%. However, that was not an annualised number. If one annualises it, the number is -20%. Sounds like a depression number to me. To top it off, Japanese exports to China declined at a record annual pace, to - 35% YOY. Last july they were expanding at 16% YOY.

Japan have now had five monthly trade deficits in a row since August last year. Any Japanese trade deficit prior to that was in December of 1981. It seems Japans trade surplus is unravelling at a quick pace.

The South Korean and Japanese numbers are part of a regional phenomenon and is obviously affecting China to a large extent.

What the real Chinese GDP number should be is anybodys guess, but it would seem likely that it is far lower than the official one. Probably with a minus in front of it.

With the Asian growth collapsing, Asian currencies barring the JPY, has also slipped on a slippery slope. The KRW(Korean Won), has dropped by roughly a third vs the CNY (Chinese Yuan). As a result, the trade weighted CNY has rocketed higher over the last few months, crushing exportgrowth in the process.

Add to that the rigid exchange rate regime, tied to a strengthening USD, and it would seem to me that the Chinese economy is under intense pressure. They basically have an infrastructure set up structured to serve the rest of the world with goods, which noone wants at the moment. They are supersized and the world only wants a diet portion.

Given the internal growth demands of the Chinese economy just to keep it socially stable, growth at any price could become the main priority on the agenda.

CNY devaluation risk
Mr Geithners (The recently appointed US Treasury secretary) nomination talk, demanding China to let go of currency manipulation might just happen, but not necessarily in the direction he was planning. China, just like any other nation, (and especially with a semi fixed currency regime in a deflationary environment) will probably look towards their currency for stimulation of domestic demand.

Lets just keep our fingers crossed that they dont, since a weaker CNY would unleash a deflation tsunami. Fortunately, there is a "terror balance" when it comes to the relationship with the USD due to the extremely large holdings of US government bonds that China possess. Towards the rest of the world, it is a different game though.


Summary;

The Chinese economy is most likely in dire straits. It should not be relied upon to bring the world out of the current economic state.

The Chinese tensions will increase towards the rest of the world as the trade weighted CNY increases in value, risking a let go of the current currencyregime. A let go could mean a weaker CNY on a trade weighted basis, exporting global deflation in the process. Not the extra dose the world would need right now.

The big questionmark would be whether China would also sell part of their US governments bonds as global and US trade would slow and Chinese surpluses were reduced?
Hopefully not, fingers crossed.




As always, good luck






The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.

Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
Errors and Omissions may occur.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.