Global Macro Quagmire or Cosmic Soup?
The global macroeconomic picture has undoubtedly been mired with a great deal of confusion as markets quickly react to critical negotiations underway in Greece, at ASEAN over Chinese currency policy and whether Crude has bottomed out around a price level that can be maintained for the foreseeable future as OPEC tries to squeeze alternative sources, mainly the massive Fracking in the US which puts the country on a trajectory to become self-sufficient regarding domestic petroleum consumption, as well as becoming the largest Crude exporter in the world in the next five to seven years. As Jim Rogers, the former partner of George Soros and author of “Adventure Capitalist”, “Street Smarts”, “Hot Commodities” and “A Bull in China” has repeatedly stated in his books: “If you want to understand the true condition of any emerging market economy, check the exchange rates offered in the black market compared with official nationally published exchange rates”
Currency traders will price exchange rates to reflect reality, whereas the State will price exchange rates to reflect their desire of what reality should be. At present, the Chinese Yuan has declined significantly over the past year, dropping over 8% with talks of widening the allowable trading band to let the Yuan trade lower. The currency is constantly trading at the edge of or just below the lower band of the envelope already. The one-way bet on the Yuan continually rising is over and traders know it, which is why major hedge funds have been using offshore Yuan to short the Chinese currency aggressively. China has wisely used only a small fraction of their massive forex reserves to support the Yuan. A weaker currency is precisely what their fledgling manufacturing sector needs at the moment. This little tidbit might seem shocking to some of you, since China has always been portrayed as the evil trading partner of the US, amassing a mountain of US Dollar reserves due to a trade imbalance between the US and China blamed on an artificially weak currency and even allegations of currency manipulation. What most investors never hear is the fact that China is now running a national debt of $5.2 Trillion USD or the equivalent of 32 Trillion Yuan. This amounts to $3,830 per citizen in a country with the largest population of any country on earth. Every second, the interest China owes on that debt is $5,539 and growing.
(Source: NationalDebtClocks.org and WSJ Feb. 19th).
While there are some important distinctions to be made here relative to economies of western nations whose national debt's run close to 100% of GDP, Chinese debt relative to GDP is approaching 60%. Moreover, the national debt figure includes total local-level debts because in China, the government is ultimately responsible for local debt. As such, all local debt is added to total national debt.
What Makes China Different?
While one can look at the difference and say this debt level is manageable relative to first world economies, the underlying truth is based on continuing GDP growth in excess of 9%.
