The World Bank cut its 2015 and 2016 growth forecasts for developing East Asia and Pacific, and said the outlook was clouded by the risk of a sharp slowdown in China and possible spillovers from expected increases in U.S. interest rates. (1)
Now the World Bank a tad late – yes the damage has already started and they are late to the party – my concern is in a few areas of the Chinese economic data (manufacturing) data – internal debt – and the Chinese currency on the international stage.
Yes – the debasement of the Yuan by the powers that be created an incredible situation – whereby the PBoC actually has been supporting the currency – at a huge cost to create an illusion of strength – and in the meantime telegraphed to the world that they have a problem being pegged to the USD.
The continuing strength of the USD being the problem – the global economic problems forcing cash to seek a safe haven.
But first let us look at my concerns – Chinese Economic Data.
Based on the ‘official’ Chinese figures I have a fair few queries and these were raised in prior posts. Basically the main area being the manufacturing data does not have any correlation whatsoever with energy output.
This means that China has a situation in which factories are being forced to stay open – maintain employment – have huge excess reserves in raw materials and have a large inventory of finished goods with no market.
The video in this post explains the situation brilliantly. Please take the time to watch and digest the problems that China faces.
Further one must look at the debt situation internally – this is chaotic.
From Macquarie Research on the debt – in 2014, everything (debt and debt servicing ability) just falls apart. Quote Macquarie, “more than half of the cumulative debt in this sector was EBIT-uncovered in 2014, and all sub-sectors have their share in the uncovered part, particularly for base metals (the big gray bar on the right stands for Chalco), coal, and steel.”
Compared with the situation in 2007 and through to 2013, while almost all sub-sectors did worse in 2014 – things appear to have worsened faster for coal companies as more red bars have moved beyond the 100% critical level for EBIT-coverage.
It means that last year about CNY2 trillion in debt was in danger of imminent default.
Charts courtesy of Macquarie Research – September 2015
The charts are self explanatory on the debt / servicing levels from 2007 to 2014. (Note that I have only selected two charts that matter – then and now)
Macquarie Research states emphatically that “Given the slumps in metal and coal prices so far this year, it’s quite likely the curve will have deteriorated further for commodity firms this year, with total debt getting better in the meantime.”
So stop looking at China as a whole – look at the debt problems and thereafter the servicing capacity internally.
These companies cannot repay their debts – they need to be nationalized – debts forgiven – debt to equity arrangements put in place or liquidated.
If one puts this in context the Massive Chinese stock market boom was not the result of any increase in the real value or productivity of the underlying assets.
This boom was fueled primarily by a cascade of debt pouring out of the Chinese central bank.(2)
Chart courtesy of Zero Hedge. Click on the chart to emblazon.
This chart shows the similarities of the 1929 U.S. Market collapse and the Shanghai Stock Market.
As I have stated in a prior article – this is the depression that China has to have – that process of economic evolution.
Then finally – one must look at the Chinese Yuan’s peg to the USD.
If China has the intention of allowing the Yuan to enter the international arena they must de-peg from the USD and allow the currency to float – the Chinese Government plus the PBoC must not intervene in these markets whatsoever – that will then allow the Yuan to find its own balance internationally.
That being said – the Yuan will be subject to immense selling pressure and those consequences are grim for Asian countries in particular- emerging economies – and globally.
Deflation will be exported globally – bankrupt those Central Banks that hold Yuan denominated Bonds – traumatize trade commodities countries who must address the ability to export product to China through the currency turbulence.
It will not be a pretty to watch.
It will not become reality – as the Chinese Government and PBoC know full well of the consequences of these actions.
In other words they will avoid the inevitable – at any cost.
In the meantime the PBoC will continue the currency wars – that useless loop of gradual devaluation against a strengthening USD.
And a strengthening USD cannot be stopped – Adam Smith’s invisible hand at work – those with money are seeking safety – the ludicrous policies of the Quantative Easing in Euro and Japan plus the debasement of all countries currencies is making everyone nervous.
Therefore there can only be one direction for the USD – then this will create problems on those countries with debt.
A cycle that cannot and will not be stopped.
Off topic – I was accused on all of my blogs of being overly pessimistic on assumptions and in the matters that I chose to write about.
It is a pity that the World Bank – in fact all Analysts / Economists for all major financial institutions and Governments – did not see this coming.
They are writing about this now – too little – too late.
Yes regret to inform you that a global economic collapse is inevitable – debt is the killer – no longer can they kick the 44 gallon drum filled with concrete down the road.
The global mess can only get worse – schumpeters theory on economic destruction being validated – wealth will not survive.