Is the Renminbi going to crash?
People wonder where is a safe place to invest. Should they buy gold, foreign currency or something else? Looking at foreign currencies the old paradigm is that when the world goes into a recession then the rest of the world suffers more than the U.S. so the dollar goes up in value and the other currencies go down in value.
However, time has come for a paradigm shift. The Asian Emerging Markets countries have lower levels of debt and are more solvent than the developed countries.
Point I: The Chinese real estate bubble financing is not as dangerous as in America, Europe or Japan
People wonder if China’s economy is a bubble that will crash, resulting in the Renminbi currency dropping in value. China’s economy has debt of about 100% of GDP. But roughly half of that could be offset by China’s huge $3 trillion foreign currency holdings, making China’s debts the lowest of any major country in proportion to GDP. Further the Renminbi is a blocked currency and there have been only a few Renminbi denominated bonds issued in Hong Kong that the rest of world can buy. So it is unlikely that there would be a selloff of the Renminbi if China’s economy suffered from a crash.
Many of the debts in China are simply private placement of debts where a wealthy person gave up the ability to spend by lending funds to a business that will spend the funds. So if the debtor fails then a wealthy investor will lose some of the value of his bonds or Notes, but if the investor is not leveraged and does not experience his own crisis then the Chinese economy can keep going despite the loss that the investor suffered. By contrast, in the U.S., the Shadow Banking system often sold bad loans (fraudulently rated by rating agencies) to commercial banks that were highly leveraged, resulting in the bank failing because the bad loans failed. This resulted in banks becoming unable to loan money to new borrowers.
Assuming China’s real estate bubble is only financed by cash buyers then China will not be too badly hurt by the coming China real estate crash. Unfortunately some real estate is financed by debt.
Money from debt is risky
Point II: Cash flow from China's exports is more important than balance sheet items like real estate
China’s economy has made (and saved) a lot of money exporting things to the developed world. The cash flow from that is a more meaningful economic statistic than a balance sheet item such as debt or assets. If cash flow is the most important analytical tool for investments then it should also be so for looking at a country’s ability to keep its currency strong. Criticism of China has been made that they reinvest too much in building unneeded buildings and are thus wasting money while (giving the appearance of) increasing the GNP. But China makes money from exporting and you can’t export a building. So if even if China’s real estate crashes Chinese businesses can still keep making money in exports and will be able to hire workers at lower wages who lost their jobs in the construction industry.
The imbalance of exports over imports and the lower level of debt are some of the key reasons why a country has a good currency. The whole world has a lot of debt and the part of the world that has the least amount of net debt when counting foreign currency reserves, is China.
I do not expect the Renminbi to be devalued if China suffers a hard real estate crash.
I wrote a blog post “China’s hidden loan bubble” and “China crash what are the risks?”.
Investors should seek independent financial advice.