Chinese recovery offers “springboard”, with a revalued yuan boosting post-virus global economy

China

A stronger revalued yuan is vital to any post-coronavirus global economic recovery, with reinvigorated Chinese financial firepower helping to swerve a deep recession in the next year, according to Toscafund Asset Management’s Savvas Savouri.

Savouri, chief economist and partner at Toscafund, the renowned GBP4 billion multi-strategy London-based hedge fund founded by Martin Hughes, said China is “an engine which will fire up again and far sooner and more powerfully” than the current consensus indicates.

As global stock markets went into freefall this week on the back of the Covid-19 pandemic, Savouri believes Beijing’s response is “the only response that matters”.

Savouri told Hedgeweek: “I have every confidence it will be a response which does much not merely to avoid a deep 2021 recession but provides a springboard for a new growth paradigm.”

He struck a particularly bullish tone on future outlook for the UK, describing its prospects as “far brighter” than those of the eurozone, the US and Japan, adding it can capitalise on China’s response “in a way no other nation across Europe can and will.”

In a deep-dive research note this week, Savouri indicated that global macroeconomic data all points to a sharp downwards trajectory following the Covid-19 outbreak, reflected in a backdrop of “eerily quiet” airports, bars and restaurants. But drawing on the experience of the SARS, Ebola, swine flu and bird flu outbreaks, Savouri suggested a Covid-19 containment and roll-back will be seen in 2020: “What went up came down.”

He said the UK and EU27 must work “tirelessly” to reach a final Brexit agreement ahead of the 31 December transition deadline - which would avoid making economic matters worse and bolster the recovery time - and called on the US and China to end their protracted trade war.

“A big and pressing economic problem requires a big and timely economic answer, and there is no economy with a larger consumption-investment latent potential to answer this problem than China,” he wrote. “Nothing will unleash this latent ability into potent reality more than a strengthened yuan.”

The prospect of an upwardly revalued yuan has been made virtually certain by the fallout from the coronavirus outbreak, and he said it was “exactly the solution/concession that Washington wants” in order to end the trade war and remove tariffs.

“We have one dramatic event solving two problems,” Savouri added. “Indeed, I will confidently claim that China’s currency revaluation will be timed to follow closely once the coronavirus all-clear has finally sounded.”

China’s financial and banking muscle will be strengthened once the coronavirus outbreak has been resolved, Savouri predicted, with Canada and Australia also emerging as more formidable players, while the EU will face continued structural challenges.

Turning to the UK, he said neither its revised relationship with the EU27 nor its economic engagement with a dollar-devalued US offer “anything close to the near or long term future economic good” that a currency-enriched China can deliver.

“From Beijing’s perspective the UK is a perfect Western-Hub from which to operate when the sun falls and its own working day ends.

“Once coronavirus travel restrictions have been lifted this year, as they inevitably will be, and sooner than many fear, watch as Chinese families travel and spend with a renewed urgency thanks to their upwardly revalued wealth. Watch too as Chinese firms and financials apply themselves and their money on doing much the same.”