Trading is reported to be quiet today, and especially so in the usually less-liquid CDS markets. Consumer confidence numbers, and trade balance data have boosted sentiment on the USD, and led to some improvement in the performance of U.S. stocks. Europe also performed satisfactorily, while Asia was weaker once again on the back of worries about new Chinese interest rate rises.
The blog section of Financial Times is drawing attention to the large improvement in the U.S.-China trade balance.
As it can be seen in the list, exports to China registered a big jump in October, bringing the bilateral deficit significantly down, and contributing to the final tally resulting in today`s positive U.S. Trade deficit. Although we strongly believe that the U.S.trade deficit peaked in the Bush years, as the Financial Times says, the sudden jump is too large and disproportionate to the improvement in the American position against any other trade partner during the same period to be explained as a simple part of this process. In absolute dollar terms, the jump is the largest since 1985.
The newspaper offers no explanation, for now, to the improvement, and we wonder if it is possible that the Chinese government will actively shift the purchases of state-owned companies to U.S. based firms from, for example, European firms in order to actively reduce the deficit while keeping the yuan stable. Such a scenario is purely speculative, of course, and wouldn`t make sense in a liberalized economy, but it does provide meaningful benefits to the Chinese without burdening them with the unpredictable costs of a rapid yuan appreciation.
The improvement in the U.S. trade balance is a favorable development for the USD, but taken in the context of the Fed`s actions, it is unlikely to have a significant impact on market direction. At the same time, we expect the dollar to rally into the year-end and perhaps beyond, so it is possible that the data will boost dollar-bullish sentiment in the meantime.
Today Bloomberg has published an article on which of the Fed orthe PBOC is easier on monetary policy. We quote the relevant sections.
China’s economy is history’s biggest bubble and may be headed for collapse, according to Richard Duncan, chief economist at Blackhorse Asset Management Pte., who predicted a credit boom would trigger a global recession.
A more than 50 percent surge in China’s money supply since 2008 helped fuel economic growth in excess of 9 percent per year, even as trading partners sank into recession. The expansion also saddled the country with factories that produce three times more goods than can be bought by China’s workers, 80 percent of whom make less than $5 a day, said Duncan.
“China has the greatest economic bubble in history,” said Duncan, author of “The Dollar Crisis” first published in 2003. “There’s a real risk it’s going to collapse in a Great Depression-style scenario.”
“It’s hugely hypocritical for the Chinese to say anything about the U.S. doing quantitative easing because they’re the kings of quantitative easing,” Duncan said in a phone interview this week from Bangkok.
Premier Wen Jiabao’s government has been creating about $250 billion worth of yuan each year “out of thin air,” Duncan said. To keep its currency from appreciating, the People’s Bank of China has been printing yuan to offset the dollars flowing in from a trade surplus that expanded to $27.2 billion in October, the most since July.
China’s gross domestic product will by expand by 9.2 percent this year, according to the median estimate of 17 economists surveyed by Bloomberg News, poised to overtake Japan as the world’s second-largest economy.
Readers of this site are familiar with our pessimistic point of view on the political economic stability of China in the next decade or so, and we strongly agree with the terms of Mr. Duncan`s analysis. At the same time, of course, the monetary policy of the Chinese is that of a developing nation, and is only surprising because of the large size of the country, and its economy. Developing nations are generally expected to pursue more inflationary policies to finance their larger modernization needs in many fields, so it may not be altogether fair to pick on China`s monetary policy alone to the exclusion of most other developing economies. The Chinese are only following the common Asian export-based model which helped Korea and Japan reach world power, and the problem is really rooted in central banks` calculation of CPI numbers from which asset price inflation is excluded, leading to the extreme monetary policy choices of our day. The question of who is easier with rates and money supply is akin to the chicken-and-question, and is not very productive at the moment. That the Asian model seems bankrupt at the moment further complicates the picture.
The future of China is not only critical for stock markets and risk sentiment, but it is also crucial for the gold price, since the market has been rallying over the past year, at least in part, on the momentum created by Chinese demand and rumors about the reallocation of Chinese reserves. The role of China in the overall commodities market is of course well-known to anyone with a little knowledge of the finance world. A Chinese downturn is, in short, a critical sign for anyone involved in the short-dollar, long-risk trade, and it is one of our main indicators of global economic performance, in addition to the interest rates of major nations at the moment.
The week is over, and after next week it is possible that trading activity will become even more subdued as we had to 2011, and market actors reevaluate their positioning and strategies. For now, however, we will keep our eyes on the dollar and the stock market in anticipation of a corrective dollar rally that may ensue towards year-end.
