China's rebalancing. This may or may not be the year for it, but either way investors can't afford to be blindsided
. There won't be any announcement if/when it happens, and recognition will be a process rather than an event, but the risk is getting pretty severe and it is, I think, under-appreciated by investors.
Rebalancing is a heated discussion in China, and the IMF / World Bank have weighed in, but the Street seems more concerned with Europe and politics in Washington.
Chinese purchases of Treasury bonds are a well-known phenomenon, but by depressing the price of consumer goods in this country, the Chinese export model also plays an important role in containing dollar inflation. In my opinion, the Fed's blindness toward China and the other Asian Tigers -- and all of the currency games pre-2008 -- caused the Fed to misinterpret low inflation during the housing bubble, and was a factor leading to the easy monetary policy that had such momentous effects. They don't appear any less blind now, despite the fact that a rebalancing overseas has so many monetary, as well as economic implications.
Minyanville's authors often discuss the relationship between social unrest and economic upheaval. There is a great deal of the former in China. You've probably seen in the news that the new regime is (or appears to be) cracking down on corruption, banning lavish political party galas, etc. Capital flight has also made the headlines. And last year there was some well-publicized unrest over eminent domain abuse, as well as some notable worker strikes, i.e, at Foxconn
. The fact that we're hearing about all this is significant. Chinese citizens, savers, and workers are demanding a more equitable model, party leaders appear to be taking these complaints seriously, and the large SOEs and subsidized exporters are losing the argument.
Real deposit rates in China have recently turned positive (see chart
from Advisor Perspectives), largely thanks to fallout from the property bubble. What's a boon for savers is a real problem for Chinese corporations who, for much of the last 10 years, have relied on cheap credit -- and depositors' pain -- to fund questionable investments. Add in the desire to reorient the economy toward personal consumption, which has declined for many years; international demand for a stronger yuan; and an Asian block that is looking to China for cues -- Michael Pettis is a compelling read
on this -- and you get a pretty volatile recipe.
I could say more but the upshot is that a trading environment is becoming visible where prices are up, the dollar down, and commodities also down -- commodity prices being pretty dependent on Chinese growth, as we saw a few months ago with iron and copper. This would be an environment more favorable for domestic manufacturers and exporters, and less so for financials -- something we haven't really seen in decades. Apple
(NASDAQ:AAPL) has established a reputation for clairvoyance; I wonder whether its recently-announced decision
to move some production back to the US won't add to this legacy.
No positions in stocks mentioned.