The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trade trades for 2011. This is a new twist. Please read the article in The Telegraph here:
It warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. This in turn may open a can of worms.
Officially, inflation was 4.4pc in October, and may reach 5pc in November, but it is to hard find anybody in China who believes it is that low. Vegetables have risen 20pc in a month.
The Politburo said on Friday that China would move from “relatively loose” money to a “prudent” policy next year, a recognition that credit rationing, price controls, and other forms of Medieval restraint are not enough. The question is whether Beijing has already left it too late.
“Many see China’s monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning,” said Tim Ash, the bank’s emerging markets chief.
The Communist Party learned from Tiananmen in 1989 how surging prices can seed dissent. “Inflation is a redistributive mechanism in favour of the few that can protect living standards, against the large majority who cannot. The political leadership cannot, will not, take risks in that regard,” said Mr Ash.
RBS recommends credit default swaps on China’s five-year debt. This is not a forecast that China will default. It is insurance against the “fat tail risk” of a hard landing, with ramifications across Asia.
