Chinese overcapacity could spell trouble for the US – 6th January 2016
Chinese overcapacity could spell trouble for the US
Following manufacturing the PMI’S earlier in the week, it has become apparent that the global economy is suffering from severe over capacity with particular problems for China where it is estimated to have about 300 million tonnes of excess steel production. So what to do about it? You could dump excess stock or sell it at much discounted prices. Selling so much for so little will impact steel production globally so China’s problem becomes a global problem. The increased competition from China means that the US may enter a manufacturing recession by early February.
The over capacity problem is affecting the Chinese Yuan as well. It was fixed today at its lowest level for 5 years as the Chinese authorities changed tack from interest reductions and liquidity pumping to backing a currency peg. In August 2015 they considered devaluation but backed off as their stock market tumbled. Now they are employing the ‘crawling peg’ which has moved the Yuan to 6.55 versus the US Dollar from a high point in 2013 close to 6.00. They appear to be targeting 7.00 at least.
Away from the Chinese Yuan, the US Dollar has been mighty on the basis that there will be four interest rate rises from the FOMC this year. Investor confidence in the interest rate rises will be challenged as the year unfolds; indeed a senior economist from Morgan Stanley stated this morning that their running GDP for the US economy is down to 0.5% and contracting.
Almost a classic economic dilemma with the supply side being totally reliant on demand which is probably creating an artificial picture. The Fed funds rate will probably rise again in March but as to whether this is followed by three more rises, highly debatable. Thus we could easily see early confidence in the US Dollar dissipate and a surprising bounce in the Euro as the year unfolds.
Two weeks ago the UK was led to believe that a referendum regarding our continued membership of the EU would be held in September. Yesterday in a flurry of activity perception changed. Firstly David Cameron indicated that negotiations with our EU neighbours would be completed in weeks not months. He then went on to say that once negotiations are completed and announced members of his Government would be free to join the In or Out campaigns free of government direction. The referendum could therefore be held as early as May but more likely in June so as not to compete with Mayoral and local elections. Strangely this could become a positive for Sterling later this year as the boil is lanced earlier.