As the debate over how bad things in China are rages on, growing Sino-sceptic Albert Edwards offers his two pennies on the country’s latest statistics.
Well, to be accurate, he laughs out loud at them:
That this outturn was bang in line with the median estimate of economists surveyed by Bloomberg makes it all the more unbelievable in my mind. All other economic data worldwide have been surprising massively on the downside and China should be no exception. A few hours earlier, for example, South Korea reported Q4 GDP had declined a hefty 5.6% QoQ, massively worse than a Reuter’s consensus which looked for a contraction of 2.7%! I naively thought that this QoQ decline was already annualized, but it was not. On a US style of reporting, the South Korean economy contracted at a 20% annualised rate in Q4. Asia is in depression. Whatever the heavily manipulated Chinese GDP is telling us, that economy must now be contracting. The Yuan needs to be devalued.
So the key thing that’s fishy according to Edwards is just how bang on line the numbers were. As for Tim Geithner’s bizarre declaration on Thursday that China was manipulating its currency (presumably a call for China to allow the yuan to appreciate?) Alberts actually believes the reverse is needed. The yuan must be devalued.
And he’s got a point. As he highlights, inter-regional trade within Asia is what appears to be suffering the most (blowing all notions of “decoupling” firmly out the window). This is clearly reflected by the sharp fall in Japanese exports, which fell no less than 35 per cent year-on-year in the last quatrer according to the latest figures. As Alberts stresses (his emphasis):
…we cannot highlight strongly enough how truly mindboggling Japan’s collapse in exports to China are. Last July they were expanding at a 16% yoy pace. Now they are contracting at a 35% yoy rate! This is a phenomenon throughout the region. Hence despite the notoriously manipulated Chinese GDP data showing a shocking slowdown in GDP growth to 6.8% yoy, I would eat my hat if the Chinese economy was doing anything other than contracting right now.
So there you have it readers, if the Chinese economy proves not to be contracting Mr. Edwards will – for he has said so – eat his hat.
But that’s not all.
Albert Edwards reveals he is also feeling a strange sense of déjà vu. Could it be because of what is happening to the UK banks and sterling? Well sort of. It is actually the way the market is shrugging off the cataclysm of 30 per cent declines in UK bank stocks. It reminds Edwards of the hours leading to sterling’s ejection from the European exchange rate mechanism on 16th September 1992.
That doesn’t mean Edwards is even more bearish on sterling; it does, however mean he believes nationalisation could be the answer. As he explains (his emphasis):
Similarly the market (ex banks) is reacting positively to the increasing likelihood that the UK banking sector will be nationalised, despite the UK government’s desperate attempts to avoid this outcome. Reputable economic and political commentators now see that such an event is both inevitable and desirable. My old economics professor at Bristol University, Willem Buiter, wrote an interesting commentary comparing the UK banks with those in Iceland (too big to fail, but are they also too big to save? . He also calls for nationalisation.
And if the government really wants to turn on the lending taps, this is what it will have do. How? Get the nationalized banks to buy the coming tsunami of government bond issuance. Indeed commercial banks can do this in unlimited quantities as government bonds are regarded as riskless when calculating the capital required to be set aside as a percentage of the risk-weighted assets of the bank. Governments can force the nationalized banks to expand their balance sheets aggressively without capital adequacy constraints. And indeed it can use that funding to re-capitalise the banks themselves. This may be alchemy on a grand scale, but it is the mad, topsy-turvy world we are heading towards.
So there you have it, according to Edwards, bank nationalisation can actually save the day – if anything else – by guaranteeing appetite for all that lush gilt issuance coming our way this year.
Be that as it may, we are even more taken by the revelation that Albert was once a student of our very own Maverecon blogger Willem Buiter. Is that where he gets it from? Hmmm.
Related links:
Manipulation in China? – FT Alphaville
There’s some good news out of China too, really – FT Alphaville
Can the UK government stop the UK banking system going down the snyrting without risking a sovereign debt crisis? -
Maverecon/Ft.com