The REAL Story In Spring 2022 Is China, Not Twitter

The financial press and the online commentating hordes continues to be fixated on Elon Musk and his now-successful acquisition of Twitter.

The gnashing of teeth and wailing from many of the (liberal) academic/journalistic/political elite on Twitter itself have somewhat obscured the fact that, actually, most regular Americans approve of Musk's purchase and believe that he will improve the social media company.

Less discussed, including by that very same narcissistic elite, has been the fact that one of the world's most important countries, economies and even political systems is undergoing a major crisis at the moment.

China is in trouble. We should pay attention to it.

China matters.


Food hoarding in Beijing, incredible repression in Shanghai, people (and companies) fleeing Hong Kong, the list goes on and on and there is precious little real information coming out of many poorer, isolated rural regions.

So, China (to say nothing of the Chinese people) finds itself in a tough situation.

By "situation" we mean that it seems that China is trying to achieve the impossible at present.

It simply cannot:

  1. Grow economically.

  2. Keep a lid on debt.

  3. Achieve "dynamic zero-Covid."

All at once.

The impossibility of this predicament is one of the most significant drivers of market volatility (and overall lower stock prices) as investors adjust to the uneven and frankly scary information coming out of China.

The world's largest or second largest economy re-entering serious economy-killing lockdowns is unsurprisingly causing economists to lower their global growth expectations and re-adjust their models for global demand and also, raise the likelihood supply chain issues.

In tandem, global companies are also reporting problems with the latter and falling sales in the region. Apple and other tech hardware companies provided some insight this week.

Can China do anything other than give up the ghost on zero-Covid? Is there a way to thread this needle and resolve this dilemma?

Not really.

That doesn't mean they are doing nothing however. To the contrary, they are attempting a few policies but one in particular is only adding to investors' concern about China's economy.

As a few analysts have pointed out, China is presently weakening their currency pretty steadily. It hit a 1 year low this past week.

Here is the Chinese currency vs the US Dollar:

Until very recently the Chinese yuan tracked USD very closely post pandemic but that has changed in a hurry during April. It has begun to decouple.

The weakness makes sense to a degree.

  • A cheaper currency helps drive exports by making China relatively competitive on the global market.

There is a significant downside as well, however.

  • It also raises local prices as well. And acts as a subtle source of domestic inflation.

The cost of living is hurt by a cheaper currency that simply buys less on the global market. For a country that imports a lot of food, fuel, raw commodities and high end durable goods, this will be a tough headwind for people and companies alike.

Net-net, Chinese economic growth will suffer further as will its beleaguered population.

As a result of this trade off, the realization that China is letting its currency break from the US Dollar has not alleviated but rather accelerated investors' concern about China and the overall direction of the global economy.

Here is why:

China typically prefers a strong currency to go with their "strong country" political narrative and also to incentivize domestic spending - something they are keen to encourage.

  • And so China's leaders only devalue their currency when they are truly concerned about their growth prospects. This has happened before, in 201 and serves as a red flag about economic trajectory for investors.

This episode superficially looks remarkably similar, see here:

A sudden weakening is therefore a red flag for watchful observers of the country's economy and political direction.

Here is another viewpoint with similar outcome:

Why is this currency move so important?

At the best of times, it is difficult to get accurate, let alone consistently accurate information out of the Chinese economy which means that the highly managed but globally traded currency is one of the most visible and most reliable indicators of the government's desires and policy choices.

So, the sudden weakening yuan is causing greater focus on the country and fears of a full devaluation. This last happened in the summer of 2015 and was a rude shock for global markets as it signaled that, clearly, all was not well in the country's economy.

These days you don't need to just watch currency markets either. All you have to do is watch the news and see the incredible scenes in a country that, two years into a pandemic, doesn't have the right vaccines, doesn't have the right policies and can't stop driving off the cliff.

Is it any wonder that markets have been jumpy?

There are some sectors, however, that have been sailing through the current turbulence. Here is a look at one of the less noticed industries and businesses.


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