By Henny Sender at The Financial Times
China’s foreign exchange reserves fell alarmingly in August, anywhere from $94bn to as much as $150bn according to various calculations. That was just another in a series of dramatic data points that are leading to an increasing sense both within the Middle Kingdom and without that all is not well.
For a long time now many hedge funds have been short Macau, once the main beneficiary of both the Chinese propensity to gamble and the rise of China as a market for luxury goods. Then the anti-corruption campaign put a big chill on the junkets to the former Portuguese enclave, as it did on sales of everything from Rolex watches to shark fin soup and abalone in top restaurants.
But now there is another strand to the story. Macau has long been one of the more porous parts of the wall meant to keep capital flows in and out of China under strict control. For example, those who wanted to get significant amounts of money out of China would purchase a dozen watches, using their renminbi credit cards, only to return the time pieces instantly and receive cash refunds, with a discount for the jeweller’s trouble. The currency would then be converted and go straight into bank accounts and investments abroad.
Today, the thesis of hedge fund managers putting on the Macau trade is that regulators will tighten up on such practices, causing further damage to Macau’s wounded economy.
Suddenly, the debate in China has shifted from a perception of too much money sloshing round and too many reserves earning meagre returns, to a concern about the adequacy of reserves given the extent of debt — much of it hidden. After all, the downdraft in the stock market was all about the use of borrowed money, invisible to regulators and almost everyone else.
Meanwhile, the capital flows out of China continue. It is difficult to calculate what is prudent diversification and what is capital flight. At the same time, more alarmingly, the signs of distress in the real economy are deepening, with ripple effects far beyond the mainland.
Greek shipyards, for example, report that the yards in China are desperately discounting the containers they construct. The Chinese shipbuilders have to discount to compensate for the fact they are competing against builders whose currencies have fallen dramatically against the renminbi.
China has been roiling global markets all summer as its authoritarian leaders try to stop a huge stock bubble from bursting and its slowing economy from stalling
Soon, if the Japanese prime minister, Shinzo Abe, has his way, the yen will fall even further, reviving industries such as textiles that a more expensive yen had long discouraged, which will then steal market share from Bangladesh.
Meanwhile, across the Pacific, financial markets have won the latest round in their game of chicken with the Federal Reserve, as the central bank decided (surprise!) not to raise rates. The sense of relief, though, does not address the fundamental issues now plaguing the global economy — which is why there was little sign of a relief rally in global equity markets.
It is not so much that the Fed has lost credibility as that its actions have come to matter less. The efficacy of monetary policy that acts only on financial asset prices eventually loses its power.
More importantly, the Fed matters far less for world growth than China does. Indeed, the US as a market generally also matters less. In spite of the fact that the Fed’s low rates were meant to trigger a new corporate investment cycle, the only thing that corporate financial officers have been signing off on is share buybacks — and those too are dwindling.
In emerging Asia outside China, industrial activity contracted by more than 7 per cent in the second quarter. Tech spending by US corporates, which was one of the big catalysts for growth in Asia in the past, has dropped, dramatically. In August alone, exports fell almost 15 per cent in Taiwan.
“In recent years [tech product] launches have tended to raise output and then fade quickly, and we expect a similar pattern this time around,” JPMorgan’s Global Data Watch noted on Friday, adding that it is consumer demand rather than business demand that supports the technological supply chain that is so crucial for Asia.
The Fed has helped China and many emerging markets by not raising rates. Yet neither the Fed nor anyone else has a clue where global growth will come from in future. One safe bet, though, is that it will not come from the Fed’s printing press.