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China's year of the bear

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People predicting a China crash for 15 years? Can that really be called "predicting"? I guess of you keep "predicting" anything and it eventually happens, then you can say you "predicted" it, even if it is 50 years later. That is why economics is called the "dismal science"?

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Capital is fully global and, like water moving inexorably downhill, will flow to the location of highest return. The alarm many have over China's large purchases of US debt is ironic given how China has relied so heavily on inflows of foreign capital to fund not only its modernization but its asset inflation. UBS estimates that at least US$150 billion was added to China's foreign exchange reserves of US$433 billion in 2013 alone.

The problem comes when asset managers decide that returns elsewhere trump those in China and shift assets out, with the end of the Fed's QE program and consequential rising interest rates hastening this effect. The RMB is already experiencing these effects, falling relatively rapidly in recent days, and if it continues to depreciate, it will shatter the market's confidence in China's economic outlook and might result in the a housing market bubble burst. However, if China's central bank intervenes to stem the downtrend in the yuan, it will have to sell the US dollar and buy the yuan, which will still tighten the currency and result in the same negative effects triggered by capital outflow.

So, yeah, China is in a very delicate position. Really, the only question I see is whether the landing will be soft or hard.

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