China is the most interesting country both east and west of the Mississippi. Beijing is trying to have its cake and eat it too. It would like to pump as much credit as necessary to keep the economy running, while attempting to divert money to its sectors of choice. It can’t do this without a closed capital account, and although the account has been on the margin more closed off than previously, it is still by no means a steel trap.
The Chinese could learn an important lesson from the latest debacle in American infrastructure.
On the ground level it may seem like China has a closed capital account. The dam’s walls reach through the thick clouds of smog and must surely continue to infinity. Of course we know this is not to be true. The height of the walls, although unseen, is actually quite limited.
As China continues to pump credit into the system, the water level will continue to rise. In this case, the bubbles will grow bigger and bigger. Prices we find ridiculously high today, could get even more absurd. The rise in commodities, housing prices although under pressure for Chinese authorities could continue to rise as well.
The stock market which everyone believes left for dead, may rise from its shallow grave and roar like never before. Pension funds will begin allocating additional holdings to the stock market as soon as this week. This is pretty serious development. The last thing Beijing wants to do, is torpedo the pensions of millions of workers. On the back of this move, Chinese authorities have cut equity margin requirements from 40% to 20%.
Apart from another bubble in Chinese stocks, I think there’s an interesting plan here to push equity prices higher and then swap debt for the inflated equity prices. Whether or not this is the ultimate goal, it will be something to watch going forward.
And of course as these bubbles rise through the clouds and come out the other side they will be within reach of the wall’s towering heights. And once again, despite patching up most of the leaks in the dam, China will find itself in the midst of a capital outflow dilemma.
But before the water level reaches the wall’s towering heights, the pressure on the few remaining leaks in the walls will continue to build. The leak of my particular curiosity is bitcoin. Despite the Chinese Authorities trying the darndest to clamp down on bitcoin in China, the price has continued to rise.
In short, as the one of the few remaining pressure valves left to Chinese capital flight, this currency/commodity should continue to benefit immensely from the recent shift in Chinese policy to a more closed capital account and rising credit levels.
DISCLAIMER: This blog is the diary of a twenty something hedge fund manager who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (for which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, what follows is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!