How and where to allocate funds when yields remain lower than they were at the time of the Black Death, and when almost everything seems to hinge on what’s going on inside the China black box is, as a mathematician would put it, ‘non trivial.’
China is being unfairly blamed for upsetting an already upset global economy by slowing down. How could it not? But perception equals reality.
Meanwhile, the consensus seems to be that major stock markets will levitate gently like gliders while remaining vulnerable to drone attack from a fragile real world rattling with overcapacity, lacking in aggregate final demand, bent double under a hefty debt burden and thus in poor shape to yield robust corprate profits’ growth and rising, well covered dividends.
Fund managers with white knuckles will be relying on central bank reflation, rising M&A and share buybacks to keep market riding on a kind of financial Maglev magnetic cushion.
And so it goes: more voodoo economics.
The elastic will keep on being stretched until it snaps back, maybe by 2017 if then.
And then, run for the hills with some gold, some 8-carat diamonds, tinned food and a gun.
But returning to the China issue, it probably won’t come to that, come to that, assuming China is in a less parlous state than consensus opinion has it.
Let’s test that assumption.
First, and this is front and center of understanding China. It is a ‘market-Leninist’ system. Politics and the Party-state come first and foremost and control the ‘commanding heights’ and strategic sectors of the economy, including the internet superstars Baidu, Alibaba and Tencent. Each is a ward of State.
In this context, the Xi Jinping regime has put natonal security and ‘cleansing the Party’, at least of the factional threats to Xi’s leadership, above hoped for economic reforms. In fact, much of the Chinese economy has stalled because Party officials are sitting on projects fearing visits from Xi’s dreaded auditors looking to uncover bribery and corruption.
At the same time, Xi is obsessed with ensuring that the Party doesn’t make the same mistake as happened in Gorbachev’s Soviet Union when the Party lost control of the economy, and the Party and with the Soviet Union blew up.
This is the background to the fortification of the ‘Great Firewall of China’ and ever tougher conditions for foreign companies operating in China.
And it’s all happening as the global economy slows with China as one of several proximate causes of the slowdown having been a distal cause of the pre-2007/8 upswing.
After thirty years of hectic phase 1 growth, China was going to slow anyway whatever happened to the global economy as its relative labour costs rose, capital spending reached saturation and it had to start making the protracted generational phase change to an urban consumer society to avoid the ‘middle income’ trap: all within the context of the clenched fist of Xi’s Party-state.
So GDP growth, a pretty lousy measure, is running at ground level 4pc to 5pc vs an official 7pc+ hence in no small degree the collapse in key commodity prices and a general slowdown in the global economy.
The extreme gyrations of the Chinese stock market are not to do with this, but with a badly executed Party-State policy of funding Chinese enterprise, notably State-owned enterprises <SOEs> outside the ‘shadow banking system’ and launching an alternative to the punctured real estate bubble for the middle class. In the event, it all went haywire with a surge in margin trading in a casino atmosphere. Poor management by inexperienced authorities on a steep ‘learning curve.’ But the Chinese stock market is a pimple on the dragon’s tail.
In terms of the global economy, commodity markets, and global stock markets the key China watch is the degree to which the economy will be pump primed—it’s already started with a succession of bank rate and bank reserve ratio requirement cuts and central and provincial government projects to upgrade infrastructure—in the case of the latter, a bit of the painting of the Golden Gate Bridge phenomenon involved here.
There are plenty of shots left in the locker to boost the economy without going beserk as in 2008. Always bearing in mind that ‘social stability’ is the very top of the Politburo Standing Committee’s policy agenda and that the necessary will be done to stop economic slowdown from jeopardizing it. So markets are arguably too bearish about the one to two year outlook for China.
But and a big ‘but’ this: a real spectre looms in the form of whether China may feel itself forced by downward global pressures and currency manipulation by the ECB and the BoJ to devalue the Yuan by more than the 2pc-3pc it’s done recently in collaboration with the IMF. Because the Yuan is and has been pegged to the US dollar, which keeps going up, it’s still 20pc overvalued. If further appreciable devaluation(s) happen: again run for the hills.
China won’t want to do this, though, because any appreciable devaluation would spike Chinese domestic inflation, play havoc with capital flows and hold back the Yuan’s already postponed participation in the IMF SDR curency basket.
Much of it comes down to the management skills of the Chinese authorities, found lacking over stock market matters, but strong in currency matters, and their ability to learn and learn quickly.
For asset class players, meanwhile, short oil and go long the dollar—the former for geological and technological as well as supply-demand forecasts.
For those in the stock markets we offer our subscribers specific advice.