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Here’s Why China “Economic Hard-Landing” Worries Are Overblown

Economics / China Economy Jun 24, 2016 - 03:24 PM GMT

By: John_Mauldin

Economics

Although a number of well-known hedge fund managers such as Kyle Bass and George Soros have publicly stated they believe some kind of a “hard landing” in China is coming, not everyone agrees.

Mark Yusko of Morgan Creek Capital is not in the China “hard-landing” camp. He says while the Chinese economy is facing a number of headwinds and risks as it tries to adjust to a consumer-based model, the authorities are wisely taking a balanced, long-term view.


He thinks there is a minimal risk of serious economic problems in China in the next few years.

The Western Media Is Hyping China Problems

Yusko says the biased reporting of American and European media has created major misperceptions about China on Wall Street and among the general public.

According to Yusko, the Chinese government has recently had to take a number of steps to rein in corruption and minimize asset bubbles, and this does have short-term macroeconomic consequences. He believes the Western media is doing its best to make a mountain out of what is really no more than a mid-size molehill.

Yusko offered his point of view on the Chinese economy in a recent interview with Mauldin Economics. “There have been worries about the renminbi and capital flight… I just think people are blowing out of proportion what is actually happening.”

Of interest, Yusko also suggests that while Chinese stock markets are cheap, his firm focuses more on investments in private Chinese companies. That allows them to vet the management more thoroughly, which significantly reduces the risk of fraud or corruption.

China’s Long-Term Goal Is to Make Renminbi a Gold-Backed Global Reserve Currency

Chinese policymakers are taking a long-term perspective. Yusko thinks their primary long-term goal is turning the renminbi into a global reserve currency.

He goes on to say Chinese government is looking to gold to help stabilize the renminbi and create a global reserve currency to compete with and eventually even supplant the US dollar.

According to Yusko: “Quietly, since 2013, China has become the world’s largest gold market… the PBOC (China’s Central Bank) has been buying massive amounts of gold. I believe they are moving toward a partial gold backing of the renminbi.”

Chart by www.goldchartsrus.com

Yusko, therefore, thinks that worries about a large-scale devaluation of the Chinese currency in the near future are misplaced.  He believes that the Chinese government will eventually set up a stable, “safe” currency system where the renminbi is around one-third backed by gold.

He also points to the fact the Chinese are now true global market makers for the gold market as the government has finally authorized the pricing of gold in renminbi.

“As of April 24th, the Chinese Mercantile Exchange will now price gold in renminbi. That is a huge, monster development.”

Will China Muddle through?

China has always been a conundrum. Whether you are in the “hard-landing” camp with Bass and Soros, or agree with Yusko that the Middle Kingdom will “muddle on through,” it is clear that the next year or two is a crucial transition period for the Chinese economy.

We’ll soon know if conservative economic policy and all the gold China has been hoarding will be enough to make the transition without a major hiccup.

Watch Mauldin Economics’s full interview with Mark Yusko (5:56) below for more:

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