China approaches yet another critical juncture, and the world is hostage

There can be no denying it: China is approaching yet another critical juncture, and unlike in the past, the entire world appears hostage now to how Beijing feels out the stones in the ever-deeper mid-breadth of the modernization stream it's attempting to cross via "socialism with Chinese characteristics."

The economy's apparent semi-recovery of late has quelled fears of an imminent collapse, but the question hanging over the entire post-post-Cold War global order as we enter mid-2016 is, Just how much of this is for real, as opposed to a mere spurt of positive sentiment caused by both actual and expected global monetary accommodativeness?

Take George Soros. In his latest warning, even as he makes yet another comparison between China today and the US on the eve of the 2008 crash, he's actually backed off on his earlier statement in January that, "I'm not predicting it [a Chinese hard landing]; I'm observing it." But even more, he also makes the following more sanguine observations (my emphasis):

Soros was more positive about China’s foreign-exchange policy, saying efforts to link the yuan to a broad basket of currencies rather than just the dollar are a healthy development, and that the threat of competitive devaluation is greatly diminished.

He also cited growing cooperation between the U.S. and China as a reason for calming markets after the turmoil at the start of the year. Soros said China’s service industry is gaining momentum but that productivity increases are harder to come by than in manufacturing.

This gives him just enough wiggle room to quietly slip off his bear mask and don the bull one back on which has been stashed away in his closet. This is what makes him a legendary speculator - he always keeps every option open to himself.

By contrast, more committed China "permabears" like Gordon Chang, Jim Chanos, and Anne Stevenson-Yang of J Capital Research remain far too devoted to what's effectively an ideology of a permanently declining communist system to see little other than ever darker machinations and deceptions behind any glimmer of light that perhaps China's not about to go bang after all.

In her latest tirade against official Chinese statistics, Ms. Stevenson-Yang effectively paints as pure fabrications not only the foreign reserve figures from PBOC and GDP figures from the National Bureau of Statistics (NBS), but also recent evidence of pickups in construction and car sales. Of course, having published a mid-March Wall Street Journal editorial, "China's Looming Currency Crisis", she's a little anxious for validation. Last week, she again gave China a dire timetable of just 9 months until a 15 percent currency devaluation.

Even so, this is also a retraction: last year she forecast that China's economy would soon be a full one-third smaller in US dollar terms, implying a massive 33 percent collapse of the yuan (as I remember on US conservative talk radio). But that was before all the global market turmoil in the first six weeks of the year (in the wake of the Fed's December rate hike) and the stellar US Q1 growth of 0.1 percent (0.3 percent in the latest revision) exposed the fiction that America will blast off as China comes apart.

China bulls, on the other hand, have by now long since abandoned their notions that the good old days of rapid credit-fueled growth can come back in any sustainable fashion. We're crossing our fingers that should something have to give, it will be the headline GDP figure before the currency - that would indicate Xi Jinping's "new normal" has teeth, i.e. that the vested interests of the SOEs have been reined in.

In fact, comparing apples to apples by using the US quarter-on-quarter GDP metric instead of China's year-on-year, we're already there. At barely 1.1 percent quarter-on-quarter growth in Q1, annualized Chinese GDP was less than 4.5 percent: the aforementioned US equivalent was 0.3 percent. That's a much smaller differential than 6.7 to 0.3 percent, but it squares well with other spreads like the paltry 1+ percentage point yield premium of the Chinese sovereign 10-year bond over the 10-year US Treasury. International investors can now expect no more than 200-250 basis points gain from reasonably safe yuan-denominated instruments (i.e. big corporate or local government bonds) in return for at least some residual currency risk regardless of increasingly coordinated global monetary policy.

Yet both US and Chinese growth were hampered by the sheer financial volatility in January and February, and it's likely that the horrid Chinese industrial production figures before Lunar New Year (February 8) in tandem with low oil prices (which rebounded February 11) contributed directly to the likewise horrid US consumption stats in March. The cumulative result has been to make it a foregone conclusion that the Fed will keep an accommodative monetary environment (i.e. looser global dollar supply) for everyone well into 2017, so there's reason to expect a Q2 rebound on both sides of the Pacific.

Beyond this, however, Beijing has merely gained a longer window of opportunity to actually carry out reforms and restructuring - a proposition that, even if one optimistically thinks the Xi administration remains fully committed to in theory, can only continue to play out gradually and haltingly in practice, if only because local governments still bear the grunt work of policy execution. Echoing previous iterations of Chinese reform, Xi and co. at the central government level can only hope to be able to adapt or promote measures that, after being successfully piloted in some part of the country, might work elsewhere too. Extraordinarily difficult, to say the least.

As unsettling as this might be, not buckling the status quo is far worse: better that the world finds itself hostage to a China that stumbles forward than shrinks back.