IMF rumours may be the scare South Africa needs

The threat of an International Monetary Fund (IMF) bailout, unthinkable a few years ago, may force South Africa’s government to push through the reforms it needs to rescue the economy. An expanded bailout for struggling power utility Eskom Holdings and calls from other State companies for support have strained the nation’s budget, prompting business groups and analysts to warn the country could be pressed to ask the IMF to help keep a lid on ballooning debt.

Why China’s a Paper Tiger

This post Why China’s a Paper Tiger appeared first on Daily Reckoning.

Markets are still digesting last week’s Chinese devaluation that sent the Dow crashing over 700 points last Monday.

And as everyone knows by now, the Trump administration labelled China a currency manipulator.

The ironic part of it is that China has been manipulating its currency to strengthen it against the dollar.

Here’s the dynamic you need to understand…

The Chinese yuan is softly pegged to the dollar. To maintain the soft peg, the People’s Bank of China (PBoC) sells dollars and buys yuan.

That props up the yuan. It’s basic supply and demand economics.

One of the primary reasons China tries to strengthen the yuan is to prevent capital flight out of the country. If the yuan depreciates too rapidly, massive amounts of Chinese money would look to flee abroad where it can get much higher returns.

After all, would you want to hold a rapidly deteriorating asset that constantly loses value? Or if you were a Chinese investor, would you try to convert your money into a currency that holds its value?

That’s the question Chinese investors have been facing.

A capital drain could devastate the Chinese economy, which badly needs the capital to remain in China to support its massive Ponzi schemes, ghost cities and overinvestment.

That’s why the PBoC has been trying to support the yuan, even though a cheaper yuan helps Chinese exports.

That’s the conundrum China faces. It wants a cheap yuan — but not too cheap.

I wouldn’t call last Monday’s devaluation  the sort of “max devaluation” I’ve warned my readers about before. That would have been a devaluation of 5% or more in a single day, and that’s not what happened last week. I would classify it as a “red line” devaluation.

The yuan temporarily broke through the 7.00:1 “red line” dollar peg. It has since returned to normalized levels.

It’s actually ironic that China is being labelled a currency manipulator, if manipulating your currency means cheapening it.

That’s because China was manipulating its currency to strengthen it against the dollar. And when the yuan/dollar exchange rate crossed the 7.00:1 “red line,” that meant China temporarily stopped manipulating its currency higher.

If China didn’t manipulate the yuan higher, it would depreciate even more against the dollar. And the exchange rate stabilized last week when China resumed the manipulation. In other words, when China strengthened the yuan.

Welcome to the currency wars! They take on a logic all their own. In many ways it’s a race to the bottom.

I explained it all years ago in my 2011 book Currency Wars.

As soon as one country devalues, its trading partners devalue in retaliation and nothing is gained. China’s case is complicated by its desires for both a strengthened and weakened yuan.

But the ultimate reality is that currency wars produce no winners, just continual devaluation until they are followed by trade wars. That’s exactly what has happened in the global economy over the past 10 years.

Currency wars and trade wars go hand in hand. Often they lead to actual shooting wars, as I have repeatedly pointed out.

Let’s hope the currency wars and trade wars don’t turn into shooting wars as they have in the past.

But below, I show you why China is more of a paper tiger than an actual one. Why do I say that? Read on.

Regards,

Jim Rickards
for The Daily Reckoning

The post Why China’s a Paper Tiger appeared first on Daily Reckoning.

Fixing Eskom will result in higher taxes, electricity prices – economist

There is little doubt that the taxpayer will be left footing the bill for the problems experienced at power supplier Eskom, and probably so through higher electricity prices and increased taxes. Over the last decade-plus, Eskom has seen generation capacity increase only slightly, with the amount of electricity sold declining and the parastatal’s debt load going up by more than a factor of ten, said Absa research head and chief economist Jeff Gable at a Ford media breakfast in Pretoria on Wednesday.

Trade war uncertainty is ‘enemy’ of global growth, Gurria says

Trade tensions have cost the world close to 1 percentage point in terms of growth, according to Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development. “It’s gotten very bad,” Gurria said in an interview with Bloomberg Television’s Kathleen Hays in Fukuoka, Japan, on Friday, referring to the uncertainty created by trade tensions. “Uncertainty is the enemy of growth.”

World Bank cuts global outlook as trade tumbles to decade low

The World Bank cut its 2019 global growth forecast, citing a slowdown in trade growth to the weakest since the financial crisis a decade ago and a drop in global investment. The bank forecast that the world economy will expand 2.6% this year, compared with a projection of 2.9% it made in January and easing from an estimated 3% last year, the bank said in its twice-yearly Global Economic Prospects report released Tuesday. The pace will pick up to 2.7% next year.

GDP contracts by 3.2% in first quarter

South Africa’s gross domestic product contracted by 3.2% in the first quarter, Statistics South Africa revealed at a press briefing on Tuesday, in Pretoria. The manufacturing and the mining and quarrying industries were the biggest negative contributors to GDP. The manufacturing industry decreased by 8.8% and contributed -1.1 percentage points to GDP growth. Meanwhile, expenditure on real GDP fell by 3.4% in the period, Stats SA reported.

Parsons warns of possible ‘technical recession’ after first-quarter GDP contraction

South Africa’s gross domestic product (GDP) is unlikely to grow by more than about 1% this year, North West University Business School economist Professor Raymond Parsons said on Tuesday, following the announcement by Statistics South Africa (Stats SA) that GDP had contracted by 3.2% in the first quarter. Stats SA statistician-general Risenga Maluleke earlier on Tuesday said this had been the largest quarterly decline since the 2008/9 global financial crisis.