Hong Kong, China and the new macro game

The biggest credit bubble in human history will require massive money and credit reflation in the Middle Kingdom, writes Matein Khalid.

Hong kong now trades at 9.6 times earnings and 0.86 book value. Hang Seng valuations were gutted by the protest movements in Central and the Shanghai financial meltdown. The Hang Seng index is down 25 per cent since late May and now trades at six times forward earnings, its post-Lehman, post-2014 bottom. Hong Kong trades at its lowest price/book value since the Asian flu in 1998. My favourite Hang Seng megacaps? HSBC at HK$60 or a near six per cent dividend yield. China Mobile, a play on 4G/data average revenue per user. Hutchison Whampoa, the flagship listed vehicle of Asian zillionaire Li Ka-Shing. Kerry Properties, a property developer trading at a 60 per cent discount to NAV. The "noble hong" Swire, parent of the Scottish taipans who own Cathay Pacific. Deng Xiaoping promised "one country, two systems" in Hong Kong, the financial golden goose of the PRC. Hong Kong is now on sale in the stock market. Remember my old motto. The big money is made when things go from Godawful to just plain awful.
As I expected, the Chinese yuan devaluation shock triggered a global financial panic whose epicentre was Shanghai but whose shock waves were felt from Wall Street to the desert money souks of the Arabian Gulf. What next in China? I believe the biggest credit bubble in human history (250 per cent debt/GDP in a $10.4 trillion economy) will require a massive money and credit reflation in the Middle Kingdom.
After all, Chiang Kai Shek tried this in the late 1940s and lost China to Mao's peasant armies. Deng reflated China after Tiananmen Square Zhu Rongi/Jiang Xemin reflated after the 1998 Asian flu, as did Hu/Wen Jiabao after Lehman's failure in 2008.
The Beijing put has proven impotent to stabilise a self-created Shanghai stock market bubble. The myth of Politburo and State Council omnipotence has been cruelly shattered (10 per cent GDP growth forever, Comrade Chopsticks, hiyaa! Chunghua Number One, Marxist Son of Heaven!).
If Chinese money supply surges as I expect, the yuan could well depreciate 20 per cent against the US dollar in the next 12 months. China's reserves have fallen by $600 billion, meaning the smart money is fleeing China. If I am right, this means China will drastically reduce its holdings of US Treasury bonds at the same time as does the Federal Reserve (end of QE) and Gulf petrodollar recycling funds ($40 oil and Saudi budget deficit at 20 per cent of GDP). This means the world must wait for an ugly liquidity shock and bond market sell off as US Treasury yields soar at a time when junk (okay, let be polite, high yield and Third World sovereign) bonds are in deep distress. This means debt deflation, a credit crunch, bank failures and epic volatility (think Chicago VIX at 50-60) in financial markets. August was just the appetiser, the main course is coming this autumn/winter. Please channel the ghost of Dr Friedrich von Hayek and the Austrian School's theories on real world credit cycles. The laws of credit destruction that once ruined Habsburg Vienna will wreck havoc on global risk assets in 2016. Cash is not just king in a financial panic, as we learnt last week, it is king of kings. The real risk in life, as in the markets, are the risk you never knew even existed, the black swans of Wall Street.
China credit/property/stock market/shadow (that is, Ponzi) banking system bubbles are blowing up in real time. A 1.9 per cent yuan devaluation will do nothing to defuse such a monumental, irrational financial time bomb created by the Red Emperor's mandarins in Beijing. Shanghai shares are down 40 per cent since June, with margin debt that had risen 30-fold since summer 2014. This is China's Black Monday, 1929 moment and its financial contagion will gut the world money markets, as Lehman/subprime did in 2008. Sadly, this time the wolf is here.
A Chinese devaluation makes a global equities bear market certain. Note Hong Kong, the German DAX, Apple and Yahoo have all fallen 20-30 per cent since June. Coincidence? Absolutely not. The new macroeconomic cross-asset correlation equation. The new macro game.
I doubt if China will achieve two per cent, let alone seven per cent, GDP growth next year. King Dollar will reign supreme and cast a malign deflation shadow on the world. I agree with Citigroup that crude oil could fall to $32 and even hit new post Lehman lows below $28. To rephrase Tallyrand, the yuan devaluation was worse than a crime. It was a mistake. Now the world will pay the price for the Politburo's blunder. Emerging markets currency devaluations never stop at three to four per cent. Just ask the next Turkish, Brazilian, South African, Indian, Malaysian or Russian citizen you meet. I was calling currency markets to preserve my family's wealth as a teenager in General Zia's Pakistan. We are bred to play six dimensional macro financial chess on Planet Forex.