After a relative period of stability at the end of last year – coinciding with the so-called “Santa Rally” – risk assets have been thumped over the opening eight trading sessions for global markets, roiled by renewed, and growing, concerns surrounding the Chinese economy.
A more than 10% plunge in Chinese stocks, along with intense volatility in the Chinese renminbi, have been at the epicentre of concerns.
The question many investors are now asking is whether the chaotic price action in Chinese markets is a precursor to impending financial turmoil throughout the broader Chinese economy, or if it’s simply teething problems stemming from the government’s push towards market-based reforms.
Andrew Roberts is the RBS research chief for European economics and rates. You might know him better as the man now famous worldwide for telling investors to sell (almost) everything.
He says there is only one answer: the game is up and the world is in trouble.
Here’s Roberts on why he was, and still is, incredibly bearish on the outlook for the Chinese economy:
As it stands, we have been very wary of China indeed, and deeply sceptical of the suspiciously large consensus that has thought the authorities can ‘buy time’ by their heavy intervention in cutting reserve ratio requirements (RRR), rate cuts, and easing in fiscal policy.
Roberts’ rationale is outlined in the six points below.
- The baton of growth pre credit crunch was in the western world, and passed to Asia post credit crunch.
- But this has been a debt fuelled build up.
- We have come to the end of the willingness to build up such debt, especially as demand factors start to act against this build-up (e.g. especially demographics).
- I showed in the Year Ahead two facts, either of which would lead a visitor from Mars to conclude, knowing nothing else, that we are in global recession:
- This is a terrible cocktail. How consensus suggested a month ago that 2016 would be better than 2015 is a total mystery to me.
- And there is no-one left to take up the baton of growth.
– Negative world trade growth
– Negative world credit growth
In a nutshell, after powering global growth in the years following the financial crisis – almost entirely powered by a huge increase in indebtedness – Asia is no longer in a position to address a slowdown in global growth.
In Roberts’ view, there is no region to able to take Asia’s place as the engine room for global growth. Not even the world’s largest economy, the United States.
Amidst slowing global demand, heaping pressure on China’s secondary industries that are already plagued by severe overcapacity, Roberts believes that strengthening in the Chinese renminbi over recent years – courtesy of its peg to the US dollar – exacerbated the slowdown in the Chinese economy, tightening financial conditions when it needed the exact opposite.
He suggests the renminbi needs to be “significantly lower”, pointing to the chart below.
It tracks private capital flow in and out of China, shown in blue, against China’s official FX reserves, shown in grey.
According to RBS analysis, an estimated $US170 billion of private capital left China in December, accelerating the pattern seen throughout the past two years.
Here’s why Roberts believes that it’s the “most important chart in the world right now”.
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. 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.
Should this weakening take place, allowing China a competitive advantage in pure price terms over their international rivals, it would leaving every corporate facing tougher conditions as prices for their goods and services become more less competitive.
Roberts suggests that such a scenario would be bad for global earnings, bad for global equities, bad for corporate balance sheets, bad for global credit spreads and bad for commodities.
That’s why he has been telling investors worldwide that they need to sell everything.