The Chinese government is under intensifying financial stress as exports have receded from 35% of GDP in 2007 to 22% in 2014…and falling. At the same time domestic consumption has also shrunk despite every ‘stimulant’ trick in the policy book. Falling revenue and employment coupled with bursting bubbles in real estate and the stock market have all served to make Chinese consumers feel less confident and more vulnerable. The national saving rate has increased from an already high 25% in 2007 to about 30% today. Personal consumption as a percentage of GDP in China, by far the lowest in the G7 and BRIC nations, was just 34.1% in 2013 compared with 52 to 68% in all the other major economies.
In response, the Chinese Treasury has not surprisingly been selling down assets, including their stash of the world’s largest, most liquid asset–US Treasuries. See: China slashes US bonds. Ironically, some have been pointing to Chinese asset sales as evidence of US revulsion when in fact, good old fashioned desperation to raise cash remains the most obvious catalyst. The decision last night to relax the yuan’s peg to the steadily increasing US dollar, is the next desperate move to compete with other emerging markets (who’s export currencies have been plunging) and push Chinese products into a world of ever contracting demand (courtesy of aging boomers, increasing efficiencies and debt-laden households, companies and countries all over).
Global growth bulls had pegged all hopes on a voraciously growing China. That blind, irrational faith is once more proving to be the undoing of capital thoughtlessly wagered on wishful thinking. The Chinese ‘miracle’ of 2001-2007 is proving to be just another cycle that is now mean reverting.
Boris Schlossberg, BK Asset Management, thinks the leadership in China is trying to “plug a hole in a leaky boat.” Here is a direct video link.
Emerging markets have performed poorly against the developed world, with currencies at their weakest since 2003 and shares testing 2012 and 2013 lows. James Mackintosh, FT investment editor, says EMs are caught between a rock (the dollar) and a hard place (China). Here is a direct video link.