Andrew Roberts, the research chief for European economics and rates at RBS, says this is “Surely the most important chart in the world now?”
Referring to Giles Gale, RBS’s rates strategist, Roberts answers his own question (emphasis in the original):
Giles estimates that around $170bn of private capital left China in December (subject to confirmation from the c/a balance and FDI data).
Small wonder then that the USD is rising, since this is money going straight back into USD, whereas the offsetting flow — selling of reserves — is spread across many countries (though our FX colleagues do estimate that the biggest holding is in USD, it is certainly not 100% of the reserve holding).
For our purposes, what counts is that this outflow is accelerating.
Giles’ chart is surely now the most important chart in the world — it shows the extreme level of urgency for China to get its FX rate where it should be, toward a -20% depreciation. It has fallen -6.2% versus the USD since the summer when it started to move (and we started to discuss it every week in this weekly). I should repeat that everyone in RBS, from Sanjay Mathur our head of Asia economics who writes on China … to David Simmonds our head of global FX research, and we in rates strategy/global macro, feel very high conviction in remaining on the ‘more devaluation and quicker’ side of the debate.
The background here is that capital is fleeing China as the country’s economy slows, and no other large economy — the US or Europe — looks capable of picking up the pace to drag the others along. “There is no-one left to take up the baton of growth,” Roberts wails. This might not on its own be a problem except, Roberts says, China’s recent growth was fuelled by debt, about $28 trillion in all. Growing debt in a declining economy is “a terrible cocktail,” Roberts says.
That puts us at the end of a great economic cycle that began at the bottom of the 2008 recession.
His recommendation right now, famously, is to “Sell everything except high quality bonds.”