“The risk that Chinese policy makers lose control is very high indeed, not just in relation to the risk of capital flight such as we saw in 2016, but also the clear and present vulnerability of the banking sector that we have witnessed in recent weeks”.
Cross-posted from Zero Hedge
Having repeatedly praised Albert Edwards in the past month for correctly predicting the creeping ice age that has now sent $15.2 trillion in global debt, or almost 30% of total, into negative yield territory…
… we were certainly expecting some much deserved gloating at the expense of all those who said the 30 year bond bull market was over, in his latest letter. However, we were surprised when instead, Edwards – clearly aware what was expected of him – said that he “resisted the obvious temptation to write about the incredible bond market rally that has unfolded before our eyes” although even he couldn’t help himself to note “that more high profile names are now seriously contemplating a negative US 10y bond yield, with the folks at PIMCO also now seeing it as a plausible outcome in the next recession.”
So instead of pointing out charts such as this one, which shows the parabolic price increase in ultra high duration bonds such as Austrian 100Ys…
… what Edwards focused on in his latest periodic report was China in the wake of the intensification of the trade/currency war and the recent historic breach of the 7.00 Yuan floor, and in typical style, Edwards cautioned that “investors may be underestimating the turmoil that is now stirring under the surface in China. All may not be as stable as investors suppose.”
One of Edwards’ key argument is, as we said earlier today, that contrary to popular opinion, it is not China that is winning the trade war – after all it has the benefit of time, while Trump has to win (or lose) the war ahead of the 2020 presidential election – but rather it is Trump who has the upper hand (today’s news of a 3rd major Chinese bank failure/bailout in as months certainly underscores Edwards’ claim). In this context, he asks the following rhetorical question:
… what happens if this consensus is wrong? What if China is in a far more vulnerable situation than investors realise? US economic data has been poor of late but it hasnt been great in China either. I think the chart below showing a rapidly contracting jobs market will be a key concern to the Chinese authorities. Indeed, our own China economist, Wei Yao, described the economy being on “shaky ground” in a recent note.
Next, since we already bored readers with our take on the 3rd consecutive bank failure in China earlier this morning, we will only touch on Edwards’ next point, which not surprisingly, refers to China’s growing bank instability, and which notes that “more concerning are the ructions in the banking sector after the recent bailout of Baoshang Bank. Wei writes:
“It would not be an overstatement to say that Baoshang’s fallout is a milestone in China’s deleveraging reform and financial liberalisation. The deleveraging process is bound to expose weak institutions along the way, and it is only a matter of time before counter-party risk reaches the interbank market. …When the deleveraging process enters the very core of the financial system, the risk of things going terribly wrong rises [ZH: just as we said earlier today]. We still think China has a chance to pull through without a financial crisis, given the Chinese government’s control over many things…but we will be keeping a close eye on interbank developments, as this may be the source of under-appreciated risk for the global economy. We are not yet convinced of a clear recovery trend. Against a backdrop of continued trade uncertainties and deterioration in the liquidity conditions of small financial institutions after the PBoC’s takeover of Baoshang Bank, the economy remains on shaky ground”…