Silver Lining

Yesterday morning I watched a compelling interview on CNBC with Kyle Bass, a hedge fund manager who has shorted the Chinese yuan. His argument was that China is just months away from having to devalue it currency by not just 10% but more like 30-40% ... for his reasoning see: CNBC Interview. Then later I read an article that made a convincing case that the Chinese banking system has as much as 5 trillion dollars of nonperforming loans and the government might soon be required to bail them out using its huge sovereign reserves ... for the details see: New York Times Article.

This all sounds like awful news ... not so fast! If the yuan were to be devalued by the amount that Kyle Bass expects, then Chinese products would have enormous price advantages around the world ... and its economy would soar. Also a bailout of the Chinese banking system would clear the decks for a number of new loans to Chinese industry ... matching its explosive industrial expansion with equivalent liquidity. The result would be that China would likely once again be the world's growth engine ... quickly using up the world's existing commodity surpluses. And this would solve much of the deflationary pressures that now overhang the world's stock markets.

Therefore, once again, every cloud has a gold, copper, oil, steel and silver lining.

Chinese Checkers

It seems that all is not lotus blossoms and shark-fin soup in China these days … as one respected analyst has estimated that the economic growth rate there fell to 1.7% in the fourth quarter of 2014 versus the official rate of 7.4% … see: Breitbart Article. And one reason to believe that China might be experiencing such a GNP paroxysm is that the world-wide demand for commodities … oil, copper, steel, etc. … has also fallen off the shelf. If China, one of the primary drivers of the growth in such commodities, has experienced such an indicated slowdown, then it would follow that its requirements for these materials would also plummet.

As indicated in this very interesting article referenced above, the side effects of this economic slowdown in China is that it is exporting deflation and is beset by capital and labor outflows which put its large internal debt burden in a precarious position. China’s ability to manage its way through its current economic problems is far more consequential to world economic health than today’s political theater in Greece. As indicated, if China is forced to sell much of the $1.3 trillion of United States sovereign debt it now holds, interest rates here will naturally elevate … independent of the machinations of the U.S. Federal Reserve Bank. This would also strengthen the dollar more which, in turn, would then depress commodity prices even further.

It appears to this investor that the key to continued strength in world economies and stock markets is now held in Beijing and not in Washington and Brussels … or even in Riyadh,Saudi Arabia.