China's massive capital outflows apparently reversed in March, a much-needed respite for the yuan and for general sentiment concerning the country's prospects. The big boost? A faltering US.
It turns out that the whole notion that China was about to collapse, pushed by the likes of Gordon Chang, was dependent on another story: that things were decisively turning around on the other side of the Pacific. Obviously that no longer appears to be true. While China's situation remains dire, for now at least, it's clear just how misguided were any perceptions that things were looking up for investment returns in the US as the Fed began to "normalize" interest rates. Longtime Fed naysayers like Zero Hedge and Alhambra Partners have been right all along.
In fact, the markets began to price in no more than two Fed rate hikes this year vice the originally intended four as soon as the Fed coordinated with the ECB and BOE to rescue stocks (especially bank stocks) from total collapse on February 11; in hindsight, it appears the global central banking cartel then deliberately vacillated between hawkishness and dovishness for over a month afterwards, so that when Janet Yellen finally did officially acknowledge a longer rate normalization timetable on March 16-17, it gave the markets an additional sugar high. Needless to say, the global economy has long since become more about optics than fundamentals - where perception of reality matters much more than reality itself.
Additionally, currency expert Jim Rickards has conjectured from global financial developments that a "Shanghai accord" was secretly reached at February's G-20 whereby the central bankers of the US, Europe, Japan and China agreed to shore up the yuan by stealthily weakening the dollar via unexpected Fed dovishness in concert with unexpected ECB and BOJ hawkishness. In other words, what was pursued was a weaker dollar versus a stronger euro and yen, which shores up the yuan against the greenback, against which it was widely feared to plunge badly at some point in the not-so-distant future, while weakening it against the euro and yen, against which it was still elevated despite devaluation pressure since summer 2015, as it had earlier risen in tandem with the dollar from mid-2014 into 2015 (both on the back of sliding oil and commodity prices).
This theory is highly plausible, but Rickards doesn't make a compelling case for his argument - in fact, none at all - that this amounts to China benefiting at the expense of the other currency regions. In fact, this is simply an acknowledgement and reflection of intractable global realities. The world simply can't handle a weak RMB or a Chinese hard landing, as I posted recently about its outsize global impact.
Whether or not some understanding actually took place between a secretive financier monopoly has little bearing on the fundamental underlying fact: the yuan is the last line of defense for the global economy which, if it fails to hold, could drag everyone down into a deflationary spiral from which there won't be an easy escape, let alone recovery.
And even so, whatever the global monetary authorities work out individually or collectively, they're only buying some time - possibly a year or two - for badly needed structural reforms to be undertaken by the politicians that have badly underwhelmed to date.
So China's gotten a much-needed short-term boost, but if all that means is that its debt bubble will keep outstripping GDP growth, the jury's out on just how much better Beijing can do in the remainder of 2016 (and into 2017) in cushioning further globally destabilizing growth shocks than it did last summer and at the start of the year.
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