Bears on Chinese Economy Start Growling

News is starting to trickle through the financial press this morning that several well known hedge fund managers are placing bets against the Chinese Yuan.  That’s a fancy way of saying that they expect the value of the Yuan to decline.  Such a thing would be in conjunction with a Chinese economic bubble popping and collapsing Chinese gross domestic product (GDP).

What does this mean?

When a country has attractive goods, services and investments for sale then the rest of the world has demand for that country’s currency.  After all, if they want to purchase those goods, services and investments then they need to buy them in that country’s currency.

So typically high demand for that country’s product leads to an increase in that country’s currency.  The reverse is also true.

Yet, most pundits have been saying for years and years to expect the Chinese yuan to appreciate relative to the dollar.  Why has this been the case?

It has been the case because the Chinese forever (yes, practically forever) have artificially kept their currency cheap.  Think about it.  You can’t buy anything anymore without it being Chinese.  Knowledge of this has permeated the popular culture and to such a degree that many smart people are calling for the end of U.S. economic preeminence.

All of that crazy demand and buying for Chinese products should have led to a currency appreciation.  That, in turn, would tend to make Chinese goods more expensive.  Then folks in the United States would tend to buy those products less.  That, in turn, would tend to equilibrate the two economies.

In fact, this issue has been around since I was possessed of far fewer gray hairs and was much less educated – yup, I was in college two decades ago when the first rumblings of this gigantic economic distortion were being talked about.

Tremendous pressure from the international community has been applied to the Chinese.  And finally last year <gasp!> the Chinese let the yuan drift upward in value…barely.  That international pressure is still present.  So, ergo, the yuan ought to be biased to appreciated.

Ahh, but here’s the rub.  Remember that currencies should fall if that country’s economy sucks…or is about to suck.  And that would be the Chinese economy.  Yup, that same Chinese economy that is in a gigantic economic bubble.  How big is the bubble?

The bubble is so large that those master of the Big Economic Lie, the Chinese, have even disclosed that they are worried about the bubble.  Starting in the autumn of 2010 they began trying to reign in their overheated economy.  This very issue is something that I have been tracking nearly continuously.  See, for example:

• Rumor of Another Rise in Chinese Interest Rates
• 2011 Predictions
• Chinese Interest Rate Rise
• More Evidence of Chinese Inflation
• Effect of a Chinese Bubble Burst

And so forth…

So news of a growing number of major, intelligent investors betting against a rise in the yuan relative to the dollar is strong evidence that the Chinese Economic Kool Aid is not so sweet any longer.  Perhaps, it is even being recognized that its taste is a bit watery.  Perhaps, enhanced artificially.  Perhaps, even a little arsenic is in the Kool Aid.

Vigilance!

Jason