trader ignores an animated colleague, much like how Wall Street
strategists are ignoring what’s happening in
Societe Generale’s notoriously bearish strategist Albert
Edwards says that investors are ignoring the “most underrated
risk” in markets right now.
Edwarsds says no one seems to be expecting a hard landing in
China, but the risk is much higher than most people believe.
You just need to look carefully at the data to see how
troubled China looks.
China’s slowing economy is being overlooked by investors
worldwide as the potential source of a major global economic bust
in the near future, according to one of the most famously bearish
strategists in the industry.
Writing to clients on Thursday, Societe Generale strategist
Albert Edwards argued that a
“hard landing” in the Chinese economy could be considered the
“most underrated risk of complacent markets.”
Edwards, who is well known on Wall Street for his doom-laden
predictions for the markets, argues that China’s ability to
navigate the 2008 crisis fairly unscathed has blinded investors,
and made them ignore signs that a crash may be imment.
“China’’s policymakers are regarded as having had a very
‘good’ crisis in 2008,” he wrote to
“Since then, naysayers, such as
myself, have been consistently wrong in projecting that
policymakers would lose control and that a grotesque credit
bubble would burst and lay the economy low.”
He continued: “Once again fears are mounting about the
Chinese economy slowing rapidly, but few fear a bust.”
His basic argument is that
while Chinese stocks are selling off amid fears of a slowing
economy, the market simply expects a moderate and managable
slowdown, rather than a hard landing. This, he says, is misplaced
when you look at the actual data.
Edwards has long warned clients to be particularly vigilant about
economic developments in China, and said that recent data
coming out of the world’s second-largest economy should be of
much greater worry to the markets than it seems to be right
Among the most worrying signs from China is that it has now
dropped into current account deficit after years of surpluses.
“The swing,” Edwards says, is “likely to be permanent.”
This will, in turn, “increase the fragility of the renminbi at a
time when economic growth is slowing sharply, led by the
industrial (secondary) sector.”
“And with export growth to the US only temporarily buoyed to
avoid tariff hikes, this slowdown is likely to intensify,” he
Signs are already there that this is happening, particularly when
looking at the country’s job market.
“Most worrying of all for Chinese policymakers is that the
economy has slowed to the point that employment has begun to
fall, most visibly in the slump in the latest employment
component of the PMIs,” he wrote.
“The shedding of manufacturing jobs has been apparent for a
few years now (ie sub 50), but if the services sector is also now
shedding labour again, then that is really serious for
policymakers,” he added, pointing to the chart below:
Edwards compares what he thinks may be going on in China right
now to the aftermath of the 2001 bubble in tech stocks, which
prompted a recession in the US economy.
In that aftermath, the Federal Reserve, and then Chairman Alan
Greenspan, were seen to have had a “good crisis” — and were
effectively credited with stopping the crash from having an even
“Alan Greenspan and the Fed were seen by investors to have had a
good crisis, and together with Greenspan’s mythical equity market
put, investors became overcomplacent,” Edwards said.
“The bust, when it came, was worse, precisely because
over-confidence in policymakers’ ability to control events led to
excessive risk and debt being taken on,” he added, referring to
the 2008 crisis.
Don’t be surprised if the same happens in China.