George Soros drew the ire of Beijing last month when he basically said that China's already in a hard landing. He could have qualified it by adding, "in US dollar terms" - that would have made it even more starkly clear that he was singularly focused on a yuan collapse, and made his "China's already crashing" thesis much more credible.
Some basic figures I've crunched are illuminating. In 2014, China's GDP was RMB 63.614 trillion, which translates to USD $10.251 trillion at the 12/31/2014 closing exchange rate of $0.16115 per yuan; in 2015, China's GDP of roughly RMB 67.67 trillion translated to USD $10.422 trillion at the 12/31/2015 closing rate of $0.15401 per yuan.
This means that despite nominal and real GDP growth of 6.4 and 6.9 percent, respectively, in FY 2015, the Chinese economy grew by less than 1.7 percent in nominal US dollar terms last year.
This was actually a stellar performance compared to other emerging markets besides India: these predominantly commodity-producing and exporting economies averaged 4 to 5 percent growth in their own currencies but contracted substantially in dollar terms as their local tenders crashed in the region of 15 to 30 percent against the greenback. Russia and Venezuela, among others worst-hit by the oil slump coupled with their own mismanagement and/or sanctions, have in fact hit the ground with a thud even in their native currencies (i.e. registered contractions in local GDP) and a much louder boom (catastrophic GDP contraction over 20 percent) in dollar terms.
As of yesterday, however, the yuan dipped to a new low of $0.15126 since its descent began last year and, more to the point, since its new year 2016 travails have shocked the world in the first two weeks of January.
At this exchange rate, China's 2015 GDP in US dollar terms has dipped below its 2014 GDP in dollar terms at end-2014, or only $10.236 trillion as against $10.251 trillion.
In other words, China has already stalled in US dollar terms, in what looks like the start of a dollar-denominated crash that it can only hope to keep slow and orderly - if it proves impossible to stop it.
Even if Beijing engineers a gradual yuan depreciation thru the rest of 2016, this alone strains its ability to generate even a single extra US dollar of GDP - a far cry from 2014, when its US dollar growth by itself was bigger than Turkey's entire economy.
A yuan of 7.0 to the dollar at year-end 2016 means that China must register nominal GDP growth - in local yuan terms - of 7.8 percent simply to match its 2015 US dollar GDP. At 7.3 to the dollar, this required nominal local growth rises to a whopping 12.4 percent.
Given that China is set to struggle all year with industrial deflation and overcapacity, its nominal GDP growth in yuan is unlikely to top 6.0-6.5 percent, even if the targeted real growth of 6.5-7.0 percent is met.
So unless Beijing aggressively tackles and manages its transition as never before with the much-touted "supply-side reforms", it's all but assured that China's economy is set to contract in USD terms this year for the first time in over two decades - and the only question is by how much.
To compare an optimistic scenario of small devaluation to 7.0 with nominal local growth of between 5.5 to 6.0 - let's say 5.8 percent - against a pessimistic scenario of big devaluation to 8.3 - the mid-1990s to mid-2000s dollar peg - with juiced-up nominal local growth of 6.5 percent, the following are the potential dollar-denominated 2016 GDP and year-on-year dollar GDP change from 2015:
Optimistic: $10.228 trillion, minus -1.9 percent
Pessimistic: $8.683 trillion, minus -16.7 percent
Quite telling, eh? Anywhere from a 2 to 17 percent contraction in US dollar terms is reasonably in the cards for the Chinese economy this year - per normal international commercial rationale (exclusive of political manipulation and interventionism).
Given Beijing's ambitions to challenge Washington's global hegemony, the size of its economy is most appropriately measured in dollars - and by this measure, it's already looking at a small crash or a big one. By this point, it had better be thinking long and hard about what yuan-boosting bazookas it may have to pull out to prevent what could amount to a catastrophic loss of face, prestige, and credibility.
If recent hints from the communist regime are any indication, the base case now is to delay as long as possible even a mild further slide towards 7.0 per dollar, at least until the RMB is actually officially added to the SDR basket in October - at which time some desperately needed support and appreciation pressure will come from large international banks; quite possibly the ideal outcome is now considered to be an appreciative stabilization in the 6.3 to 6.5 range late this year.
Just about everything will have to go very, very right for Beijing from here on out. Conversely, at PBOC's urging there could be an unprecedented new round of currency cooperation between major central banks - in collusion with their largest commercial and investment vassals and the big transnational corporates - to keep the yuan stable, even at the expense of what are probably the last remaining shreds of the myth of a "free market" in a blatantly rigged and manipulated global credit system.
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