Wednesday, 12 August 2015
China, a peg on which to hang your bear hat.
I don’t think I’ve ever seen a 1.8% FX move cause such global consternation.
But of course it isn’t the move itself that is causing the problem, but the implication that they can do it again with the predictable now becoming the unpredictable. It opens up the ruler and pencil cupboard to the extrapolatinists who are now free to draw future conclusions as to where this action can lead with little other than fresh air to stop them predicting the end of the financial world. Yet this also raises the spectre of 'availability heuristic' and ‘recency' behavioural biases associated with recent events, which can be encapsulated into overestimating the probability of a recent event reoccurring and underestimating the probability of distant past events reoccurring. Earthquakes and terrorist events are good examples. The vacuum of other financial news in an August market leaves the landscape clear for these biases to propagate.
The China devaluation is being employed as an excuse for every wild market move and accepted as such by a willing global audience - to the point that I wonder if those accused of Libor and FX fix fixing were to cite ‘China devaluation’ in their defence they would be instantly acquitted. I was thinking of rerunning the cartoons I did here depicting oil price falls taking the blame for everything, only substituting in 'China deval’.
China news is big but is it THAT big? Quite often markets are set for a move but just need a trigger, so we also have to add in to the equation the background situation into the interpretation before we apply all causality to China. Oil prices trending down anyway, equity market directionless yet in wild ranges in a quiet August and the expectation of grief in September via high yield, Fed rates, Greece re-ignition and global slow down which includes a China function anyway. China can be seen as the trigger rather than the bullet.
One statistic being banded around is the impact the 1.8% move has on Chinese oversea debt. Costs of $10bio are cited but this really is nothing in the great scheme of things. There is also the other side of the equation. State figures and private sector figures are regularly cited separately to highlight arguments. In a country such as China it may be more appropriate to look at the net 'China Inc'. China holds +$3 trillion in foreign reserves so in the net balance for China Inc things are fine.
I stand on a limb in thinking that China will be fine and it has enough control over itself to get through. The Chinese long game is long with short term fluctuations often working to long term advantage. I have talked before here about the opportunities China has to acquire commodity infrastructure due to the collapse in commodity prices. Shifting reserves from US treasuries to purchasing the structure to supply your future needs seems eminantly sensible, even if the balance sheet accountants of the world feel ‘reserves' should only be overseas debt.
China has opened up a new front for intervention but the response by the market appears extreme. it reminds me of the classic Daily Mash spoof with regards to global warming - 'I’ll be just fine says planet’. As with Earth and global warming, China will be just fine, it’s just you that may not survive.