Poor old Ambrose is all over the shop on China:
The world has had a year to brace for monetary lift-off by the US Federal Reserve. A near certain rate rise next week will come almost as a relief.
Emerging markets have already endured a dollar shock. The currency has risen 20pc since July 2014 in expectation of this moment, based on the Fed’s trade-weighted “broad” dollar index.
…The greater risk for the world over coming months is that China stops trying to hold the line against devaluation, and sends a wave of corrosive deflation through the global economy.
Fear that China may join the world’s currency wars is what haunts the elite banks and funds in London. It is why there has been such a neuralgic response to the move this week to let the yuan slip to a five-year low of 6.4260 against the dollar.
Bank of America expects the yuan to reach 6.90 next year, setting off a complex chain reaction and a further downward spiral for oil and commodities. Daiwa fears a 20pc slide. My own view is that a fall of this magnitude would set off currency wars across Asia and beyond, replicating the 1998 crisis on a more dangerous scale.
I’m afraid, Ambrose, that you are quite confused. Over the past year you went too bearish on China having a cyclical bust, then when they pumped in some monetary easing you went too bullish. Now, you’re suddenly discovering that the yuan is at risk.
You’re analytic framework is wrong. China’s adjustment is not cyclical, it is structural. That means that it’s economy is both strong and weak at the same time. Strong in the ‘new economy’ areas for growth in services, weak in the ‘old economy’ areas of construction and industry. Stimulus is being used simply to manage down the net impact which is falling GDP.
Nor is this question somehow separate from the US. This is one half of the bigger picture which is the unwind of the global Chimerican business model as China shifts from industrial drivers and US towards them, the reversal of the past 15 years. These two may be fine but it means that everyone else that is still levered to the Chimerican model, that is anyone dependent upon commodities – emerging markets plus Australia, NZ and Canada – have broken business models.
As such, yes, a falling yuan is a calamity in the making as it will dramatically accelerate the commodity bust by restoring local Chinese commodity production. And the US rate rises make it inevitable.
