THE GREATEST UNWIND IN ECONOMIC HISTORY 75are determined to prop it up as long as they can. Like central
banks everywhere, the People’s Bank of China is using easy
money to reflate asset bubbles.
Last November, China cut interest rates for the first time
in two years. On Feb. 4, China cut its reserve requirements for
banks, a technical move that allows banks to make more loans
with the same amount of capital. Both of these moves are intend-
ed to ease credit conditions. Another rate cut is expected soon.
China is also likely to join the global currency wars now
raging in Europe and Japan. A devaluation in the yuan will
help Chinese exports relative to competition from Japan, Korea
and Taiwan. Since 2012, China has been quiet in the currency
while its Asian trading partners and competitors have engaged
in repeated devaluations. Now China has had enough and is
ready to shoot back.
If you’re a U.S. investor and use dollars as a reference
currency, China offers three ways to win. China has weak
national fundamentals. Certain companies have weak sector
fundamentals, especially those in financial services with large
loan and investment portfolios. And the Chinese currency will
weaken.
This means that a short position in the Chinese financial
sector, including the purchase of put options, can produce prof-
its from a slowing economy, cheapening currency and higher
credit losses.
■ A Bigger Bubble Than the U.S.
China, believe it or not, has a bigger credit bubble than the United
States does. The United States has lots and lots of problems and
I could go on at length about them, but China is actually worse.
That may be because they haven’t experienced as many credit
bubbles as we have.
China is coming out of four hundred years of decline and