China is running out of money and will have to float the renminbi as a free currency, according to notoriously pessimistic economist Albert Edwards.

Societe Generale’s Edwards is about as bearish as they come. Already this year he has predicted that the US stock market will fall by 75% and argued that we might be heading for another massive global recession.

As the voice of the market bears — people who think imbalances in the financial system will lead to a collapse — Edwards is given to grand statements about what will happen to the global economy.

His latest prediction, in a note from Societe Generale out Thursday morning, is that China is about to run out of spare capacity in its foreign-exchange reserves and will be forced to float the renminbi as a free currency, saying the scenario is “entirely plausible and indeed likely.”

China’s FX reserves peaked at about $4 trillion (£2.7 trillion) in the middle of 2014, but since then the country has burned through about $800 billion of its foreign cash.

China will announce its latest forex reserve numbers this weekend, and as Business Insider’s Ben Moshinsky reported Wednesday, Barclays expects that reserves will see the biggest single-month fall on record, dropping by about $140 billion to just under $3.2 trillion. Here’s how FX reserves in China look right now:China FX SocGen

For most people in the markets, that’s plenty of cash to see China through any currency troubles, but not for Edwards. Here’s what he has to say (emphasis ours):

At $3.2bn the market remains content that massive firepower remains to support the renminbi. It does not. Our economists estimate that when FX reserves reach $2.8 trillion — which should only take a few more months at this rate — FX reserves will fall below the IMF’s recommended lower bound. If that occurs in the next few months, expect to see a tidal wave of speculative selling, forcing the PBoC to throw in the towel and let the market decide the level of the renminbi exchange rate.

As Edwards argues, the renminbi’s fall in 2015 — which saw it weaken from about 6.2 per dollar, to about 6.55 — was hugely correlated with the continuing slide in the amount of foreign money China is holding. Here’s the chart:

China FX reserves

Edwards argument, at its most basic level, is that the IMF recommends that countries should maintain certain levels of foreign currencies. If China keeps spending the reserves at current rates, it will fall below that level by early summer, which in turn will cause markets to panic and sell off while making it harder for the Chinese central bank, the People’s Bank of China, to deal with any price shocks.

As a recent note from SocGen’s China economist Wei Yao puts it: “If China’s reserves fell to $2.8tn, they would reach the lower end of the recommended range and could start to undermine confidence in the PBOC’s ability to resist currency depreciation and manage future balance of payments shocks.”

Here’s Edwards again:

The market is likely to become increasingly transfixed by both the rate of decline in its FX reserves and with the approach of the key $2.8 trillion level. Even in the absence of actual currency weakness, any further large falls in reserves will only generate additional selling pressure in a frenzy of speculation of an imminent devaluation.

Edwards finishes by saying: “Approaching and breaching this [the IMF reserve recommendation] will, in itself, accelerate capital outflows and bring about the inevitable.”

So there we have it, China floating the renminbi is “inevitable.”

Join the conversation about this story »

NOW WATCH: Here’s how Shark Tank’s Daymond John beats out the other Sharks to score a deal