Monday, December 6, 2010

Now Warnings on China's Sovereign Debt

The nutty Chinese monetary policy of printing renminbi to prop up the dollar and maintain a steady yuan-dollar exchange rate is creating huge blow back in the Chinese economy.

Chinese inflation is near hyper-inflation levels.  Last month alone food-prices climbed near 20%. The Chinese are now starting to tighten monetary policy to slow the price inflation. There remains a question of whether they will fully stop printing or just merely slow it down. A slow down would mean stagflation.

The Royal Bank of Scotland sees what's coming. It has advised clients to take out protection against the risk of a financial crisis in China as one of its top trade trades for 2011, reports Ambrose Evan-Pritchard.

The thinking is that China will have to severely cut back on its money printing to prevent hyper-inflation and a huge financial crisis will hit the country.

Tim Ash, the emerging markets chief at RBS says:
Many see China’s monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning.

According to Pritchard, RBS recommends credit default swaps on China’s five-year debt. This is not a forecast that China will default. It is insurance against the "fat tail risk" of a hard landing, with ramifications across Asia.


  1. Mr. Wenzel, do you think a Chinese crisis would bring a temporary rebound in the dollar and treasury debt?

  2. The exact opposite. A Chinese crisis would mean less support of the dollar and Treasury securities by the Chinese.

  3. Monetary tightening will only bring a crisis if there is malinvestment in China, which will have to be liquidated. But do you think there is a lot of malinvestment in China? I mean, if the Chinese economy is fundamentally sound (as e.g. Schiff has been saying) and the malinvestment is not that much, the crisis could be short and not "huge" as reported. What do you think?