Outflow of Chinese cash will transform world economy

A virtual tidal wave of Chinese money will be the “biggest transformation event” for world markets over the next five years, according to Charles Dumas, chairman and chief economist at Lombard Street Research.

Nearly $4.5trn is expected to exit China as exchange controls are gradually removed. Although the capital outflows will not be an immediate inundation, Dumas expects the Chinese authorities to remove and relax controls over several years. The amount is double the amount of money available from US savers.

The outflow of funds will target real assets and real estate, according to Dumas, speaking on day two at Gaim 2013 in Monaco. “This flow of money will be the single transformable factor over the next few years, more than what central banks do,” he says. “When Chinese money comes out, you will see a sharp downswing of Chinese real estate prices. Commodities and minerals that did not adjust since the crisis began [will suffer].”

In the long term Dumas believes the US dollar will remain “extraordinarily strong and will take us back to the same problems we faced at the end of the 1990s: a shrinkage of US profit margins through the rising dollar and almost non-existent investment values in the Pacific Rim”.

“There are huge and violent shifts of prices to come,” he adds.

Dumas is upbeat about the US economy. “The US deficit has already adjusted to sustainable long-term management,” he says. “What we now have is a debt-to-GDP ratio that is below the sustainable level of the 1990s. Household debt servicing is under control.”

The US alone of the major world economies has made a full adjustment. “The US is going to be okay. Real estate and the stockmarket are the only places to be committed on anything except a short-term trading basis,” he advises. 

Loose monetary policy can only compensate for tight fiscal policy where an adjustment of the debt-to-GDP ratio has been made, says Dumas, “otherwise it causes some weird results”.

The real exchange rate for the US dollar is at its lowest level since World War II and 5% lower than its most recent low in the 1970s. He expects a substantial appreciation of the yen, now reversed, and an ongoing appreciation of the real Chinese exchange rate.

The US’s relatively strong position is the work of US Fed chairman Ben Benanke. Dumas says his policies have revived the economy with relative success. However, he expects weak growth in the third and fourth quarters of this year as large spending cuts put a “huge drag” on the economy. Because wages are not rising, consumer spending is likely to remain low for the rest of the year. Because of this and other factors, Dumas believes Benanke will “not be doing any tapering [of quantitative easing] for the next six months because the economy will be slowing. Profits are likely to be hit.”

In the medium term Dumas expects strong growth in the US with housing, the auto sector and energy to be particularly favoured.

Looking at Japan, Dumas dismisses the stimulus package introduced by prime minister Shinzo Abe as “carefully calculated not to deal with the chief problem: a lack of consumer spending”. This, he says, is a problem throughout the Pacific Rim where disposable income is roughly 14% below that of US consumers.

Dumas also says Japan is “exporting deflation” to China. Slow growth in China will affect all emerging markets except India, where economic development is not export led. He expects the Pacific Rim and mineral/commodity countries to bear the brunt of the Chinese slowdown.


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