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Are You Worried About China? Not Nearly Enough, Albert Edwards Reckons

Wary eyes are being cast in the right direction. 

On Thursday, the offshore yuan weakened past 6.80 for the first time in a year, underscoring the fact that the policy divergence between the Fed and the PBoC is likely to widen, as the latter continues to deemphasize tightening amid ongoing signs of economic deceleration and credit contraction.

The PBoC looks like they are prepared to tolerate the FX weakness as it ostensibly helps to cushion the blow from the trade frictions. Apparently, authorities believe they have adequate measures in place to avoid capital outflows.

“Our usual preferred gauge of FX flows shows a net outflow of US$17bn in June, reversing in direction from April-May as expected given the CNY depreciation, exporters’ propensity to bring proceeds back onshore slowed”, Goldman’s MK Tang writes, in a note dated Thursday, before emphasizing that “the amount of net FX outflow was still moderate, and the risk of massive outflow remains low at this point.”

Flows

This is China we’re talking about, so they’re going to manage the message and massage the data, but a quick look under the hood in, for instance, last month’s credit numbers, reveals that the effort to squeeze leverage out of the shadow banking complex remains a precarious exercise.

The threat of escalating trade tensions with the U.S. only serves to exacerbate concerns about the glide path for China’s economy – in other words, the “hard landing” discussion is back in vogue.

With that as the backdrop, SocGen’s Albert Edwards is out with his latest missive and he reminds you that while the tariffs threat is real, the China story predates Donald Trump (well, Trump has been complaining about “Gyna” for years, so it’s probably more appropriate to say that the China story predates President Trump).

The market, Albert notes, has a short memory. “Only recently China had been global investors’ no.1 concern in the aftermath of the sudden devaluation of the renminbi in October 2015”, he writes, before noting that “following the February 2016 Shanghai G20 meeting the renminbi began to stabilise, and by end 2017 it had clawed back most of its earlier losses against the US dollar.” Investors, emboldened by seemingly stable growth, “removed China from their worry list.”

But fears have resurfaced amid i) the trade tension, ii) the concurrent slide in the yuan (which is weakening against the dollar at the fastest pace since the 2015 devaluation) and iii) data that betray a continued deceleration in activity.

WeakData

Overall, Edwards suggests that irrespective of whether markets are obsessing too much over Trump’s tariff threats and not enough over China’s underlying problems (i.e., problems that existed before the trade war), the fact that China is once again “near the top of investors’ key concerns” list is a welcome development in that it indicates wary eyes are being cast in the right direction.

Here’s Albert:

The latest IMF World Economic Outlook is notable, as it clearly states that financial markets are bathing in complacency and “susceptible to sudden re-pricing if growth and expected corporate profits stall”. But where will these shocks come from? The two primary candidates remain Chinese economic growth and market fears over the pace of Fed tightening. Maybe the unfolding US/Chinese trade war is distracting our attention from the global growth slowdown lurking just beneath the surface.

Maybe. But as BNP noted recently, the biggest threat when it comes to what might catalyze a synchronized global downturn is an-out global trade war.

“MERA”!

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