Is China About to Crash Financial Markets Again?
Trump is talking big about China being a ‘currency manipulator’ and applying a punitive 45% tax on Chinese goods. It has world leaders very very nervous as a few decades of globalisation looks set to be undone. But the other thing at play here is that ‘currency manipulation’s’ other consequences. When China devalues the Yuan because of a surging USD it is pegged to, it sparks a surge in capital outflows from China as the smart money gets out before it goes lower, including cashing out of their sharemarket en masse to liquidate that cash. If you recall August 2015 when they devalued the Yuan by a whopping 3% overnight it caused US shares to plummet 11%. Ainslie customers at that time will remember the line-up to buy and the incredible depletion of stock from one of Australia’s biggest bullion dealers. It was worldwide and extraordinary. We then saw China devalue again, albeit more stealthily from December 2015 to January 2016. Again shares dropped in the order of 12% and gold saw its strongest start to a year in 3 decades. Jim Rickards sees signs of this coming again….
“When China devalued the yuan in August 2015, capital outflows surged. Once the yuan stabilised against the dollar in early 2016, the capital outflows were greatly reduced. That’s since changed. Now, early in 2017, capital outflows from China have reached unsustainable levels. If it keeps selling US dollars to prop up the yuan, China will burn through all its US dollar reserves by the end of the year at the current rate.
I’m keeping a close eye on these outflows. They’re one of the main indications and warnings I’m watching to determine the timing of the next Chinese devaluation.
In the short run, US stocks could be headed for a fall since the Trump reflation trade is running out of steam, and renewed tough talk by some Fed officials — of additional hikes — suggests a stronger US dollar. Right now, it looks highly likely that the Fed is going to raise in March after raising in December.
The Fed is concerned that US stocks are in bubble territory. They suggest that the easier financial conditions caused by higher stock prices make this a good time to raise interest rates. The rate hike talk then makes the US dollar stronger and puts pressure on the yuan. An unstable yuan triggers capital flight, which causes a spill-over liquidity crunch, which in turn could lead to a correction in US stocks.
Once the correction takes place, the Fed can try to rescue the stock market again with more dovish signals. That would weaken the dollar and stabilise the yuan. But the risks are that the Fed has not learned from its past mistakes, and late March to April 2017 could be a replay of August 2015 and January 2016.
And after all these years of market intervention, the Fed may well be out of powder to handle another crisis.”