Yuan devaluation in the cards

Albert Edwards believes a depreciating yuan is a black swan event, I disagree and believe that actually it is a high probability event coming as soon as the current cyclical inventory led GDP growth ends and contraction begins anew.

Civil unrest and fears of revolution are very palpable in an undemocratic China and the government there will do whatever is necessary to stay in power. This means keeping people employed and the Ponzi economy going.

This will be a very important part of what I believe is the coming final wave of deflation. Chinese companies will sell at losses to gain market share and keep factories running- think lower prices at your local Chinese store -Wal Mart.

Expect Yuan Devaluation Following Deep 2010 Downturn

"With everyone and their grandmother screeching that it is about time for China to inflate the renminbi, despite that such an action would be economic and social suicide for the world's most populous country, SocGen's Albert Edwards once again stalks out the Black Swan in left field and posits the contrarian view de jour: China will aggressively devalue the yuan following a deep 2010 downturn coupled with escalating trade wars. As Edwards says: "I think the next 18 months will see major ructions in the financial markets. The consequences of a double-dip back into recession next year require some lateral thinking. If the carry trade unwind results in a turbo-charged dollar, any collapse in the China economic bubble will be doubly destructive to commodity prices. A surging dollar, coupled with China moving into sustained trade deficit through 2010, could prompt the Chinese authorities to acquiesce to US pressure for a more flexible exchange rate. But why does no-one expect a yuan devaluation?"

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