Albert Edwards currently works for French investment banker Societe Generale as a global strategist, a job he also held at Dresdner Kleinwort for 20 years. Recently he wrote about conditions he sees in Asia that are strikingly similar to the environment in the region in 1997, right before the Asian currency crisis.
IndexUniverse U.S. Editor-in-Chief Drew Voros spoke with Edwards about the two main ingredients to his worry: China’s deflationary risk and Japan’s currency intervention. And as troubling as these developments are to him, Edwards feels most investors are either ignoring what’s occurring or not even mindful of the potential of history repeating itself in a negative economic way.
IndexUniverse: You recently wrote that Japan’s currency intervention is setting up a repeat of the 1997 Asian currency crisis. Why do you think that’s the case?
Albert Edwards: We’ve observed quite clearly over the last year or so that growth in China’s foreign exchange reserves were really slowing down very, very rapidly. The growth has gone from 40 percent in 2007 to barely any growth today. That has been a huge stimulus of Chinese assets, Chinese inflation and Chinese growth over the last few years. So when it slows down this much—and actually in the middle of last year, foreign exchanges have started contracting—it doesn’t tend to attract the headlines. When it’s not rising, it’s not really a story and it doesn’t really get noticed, it doesn’t get reported. But something really interesting and very important is going on here.
Growth In Chinese Foreign Exchange Reserves
In 2011, when there was a very rapid global-food-price inflation and the Chinese were seeing unrest, you had the Arab Spring going as well. For Chinese authorities, their No. 1 priority is for the regime to remain in power. And economics is all shaped toward doing that. What you saw is some very rapid wage rises, especially in the foreign companies. As far as the Chinese authorities were concerned, let the foreign companies pick up the tab for this.
It’s exactly the same as we saw in the run-up to the eurozone crisis: Spain and Ireland, etc., had the wrong interest rate. And even though their normal exchange rate is fixed—or even abolished, in their case—there’s still a very rapid loss of competitiveness, their real exchange rate rises very rapidly indeed. And you become less competitive. And that changes around the trade situation.
So what you see in China is a lot of U.S. manufacturers are returning factories and equipment back to the U.S. saying, “Well, it’s not the no-brainer anymore it was five or 10 years ago.” I think we’re seeing plenty of that, which certainly reminds me exactly of what happened right up to the Asian currency collapse in 1997.
You saw fixed-exchange regimes, very rapid inflation in places like South Korea and Thailand and Malaysia, and a loss of competitiveness taking place. What you saw in 1997 taking place is the yen falling so far that Japanese companies were taking tons of equipment back to Japan from places like South Korea, Indonesia, Malaysia. That really is an indication that something is wrong.
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