While the world has been watching Brexit and the British pound’s meltdown, China’s currency devaluation has gone relatively unnoticed, although Société Générale’s Albert Edwards has been keeping a watchful eye on developments within China. China’s yuan devaluation and the further slowdown in the country’s economy is the topic of Edwards’ weekly Global Strategy research note this week, specifically about the yuan and has some potential good news for hedge funds.

The Chinese have accelerated the renminbi devaluation, taking it to six-year lows versus the US dollar this week, which is a much more important story for the global economy than the troubles of the UK. As Edwards notes, even though Chinese policy makers have accelerated the yuan’s depreciation, they have taken no action to curb borrowing levels in the country.

The IMF recently became the latest organization to warn that China is edging towards “financial calamity” and must wean itself off its debt addiction.


Albert Edwards: China’s Yuan Could Fall To 9.1

Edwards believes Chinese authorities will continue to let the yuan fall. The currency had already breached the psychological 6.7 yuan to the dollar level earlier this week before Chinese trade data showed exports falling 10% year-on-year in September. The weak trade data just accelerated the decline.

[drizzle]As the yuan ticks lower, the authorities are, at the same time, facing the prospect of another Chinese property bubble.

As I reported a few weeks ago, it’s clear a property bubble has been inflating within China over the past six months. A report from Deutsche Bank published at the end of September showed that in a group of 19 large and medium-sized Chinese cities, property price rose almost 20% on average during the past 12 months. In some key cities, property prices are up 30% year-to-date in some districts property prices are up over 50%. Price-affordability ratios in a few big cities have risen to record levels of nearly 20 years of annual income.

Authorities have brought in measures to cool the housing market recently and Edwards’ colleague, Wei Yao believes that from past experience, these measurers could successfully drive a contraction, “to the tune of 15-20% in housing sales nationwide at some point during the next six months.” He continues, “Since early 2000, the Chinese economy has never been able to avoid a slowdown when real estate investment decelerates. We do not expect this time to be an exception.”

How might the Chinese authorities seek to counter this a property driven economic slowdown? Edwards has the answer, “devaluation.”

He believes that the yuan could fall much further in value against the dollar as authorities grapple with an economic slowdown and re-ignite export growth. Société Générale Asian currency strategist Jason Daw believes the USD-CNY rate could fall to 7.1 by the third quarter of next year, but Edwards believes it could fall to 8.1 or 9.1, which would help a lot of hedge funds.

With this dismal forecast in place, Edwards ends his weekly note with the following signoff:

“Investors are underestimating the magnitude and deflationary impact of renminbi devaluation. Sterling, meh!”