The arguments of Crescat Capital are the following:
China’s once-booming housing market is about to burst. The economy is suffering from the Covid lockdowns. And the People's Bank of China reduced interest rates while central banks around the world raised them, giving investors even more reasons to transfer money abroad.
All these measures have resulted in yuan depreciation against the U.S. dollar by more than 8% this year. It leads to the biggest annual drop since 1994, which may be just the beginning.
China is facing a financial crisis that is much more serious than even the global financial crisis in the United States.
There is nothing new in the warnings of an imminent Chinese currency crash. Bearish investors have been warning for years that Chinese banks have lent out too much money, especially to finance a real estate frenzy. They have been forecasting that it will lead to a surge in bad loans so large that Beijing would have to print money to save banks, which will cause currency to devalue.
The argument seems to have come up at a favourable time. China's housing market may burden banks with mountains of non-performing loans. Meanwhile, Beijing's strict zero-Covid policy has led to long-term lockdowns that threatens China with one of the slowest periods of economic growth in modern history. China's economy contracted in the second quarter, the GPD fell by 2.6% compared with the previous three months, marking the first contraction since early 2020 at the beginning of the pandemic outbreak.
In response, the People's Bank of China is easing monetary policy, reducing the attractiveness of the yuan by widening the gap between interest rates in China and other countries. This year, foreign investors have withdrawn a record amount of money from China's bond market.
This content is for informational purposes only and is not intended to be investing advice.
