Monday, February 15, 2016

Worried about a Chinese devaluation and currency war?

I had been meaning to write about this earlier, but I didn`t find the time. Kyle Bass caused a stir last week with his letter to his investors when he wrote that China was on the verge of a major devaluation and financial blow-up (via Valuewalk):
Our research suggests that China does not have the financial arsenal to continue on without restructuring many of its banks and undergoing a large devaluation of its currency. It is normal for economies and markets to experience cycles, and a near-term downturn that works to correct the current economic imbalances does not qualitatively change China’s longer-term growth outlook and transition to a service economy. However, credit in China has reached its near-term limit, and the Chinese banking system will experience a loss cycle that will have profound implications for the rest of the world. What we are witnessing is the resetting of the largest macro imbalance the world has ever seen.
Then on the weekend, PBoC Governor Zhou Xiaochuan said in a Caixin interview that claimed that everything was fine and there was no basis for continued CNY devaluation. In response, CNYUSD rallied by 4.5% on Monday, which was the biggest move since 2005.

What's the real story? How serious is the capital flight problem in China and what's the likelihood of a major Chinese devaluation?

The full post is at our new site here.

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