The first rule of currency wars is: you always talk about currency wars.
The second rule is: you can always find one to talk about if you look hard enough.
This month’s FX war location of choice is Asia, and here with its proximate cause is BNP Paribas (our emphasis): Read more
More on that Friday PBoC rate cut — and just as China goes ahead and cuts its 14-day repo operation rate by another 20bp to 3.20 per cent too. That move on Tuesday, according to Nomura, suggests that the PBoC will continue to ease monetary policy… which would be true to form.
As Barc note, “the policy rate cut suggests that China is once again following the typical sequence in a monetary easing cycle – the pace of CNY appreciation is often slowed in advanced, followed later by the same directional moves in the policy rate and banks’ required reserve ratio.” Read more
Indeed, nobody expects the PBoC…
But, despite Friday’s surprise announcement, as SocGen’s Wei Yao says: “due to the further rate liberalisation announced at the same time, there is actually no de facto rate cut.”
She continues, (with our emphasis): Read more
The People’s Bank of China likes to act unexpectedly. And Friday’s surprise announcement of a Chinese rate cut only confirms that being unexpected is indeed the PBOC’s preferred communications strategy.
As Reuters noted, this is the first Chinese rate cut in two years and lowers the benchmark lending rate by 40 basis points to 5.6 per cent. One-year benchmark deposit rates were lowered by a smaller 25 basis points.
But, as Marc Ostwald at ADM Investor Services International commented in an email, the timing of this move looks to be as much about the sharp appreciation of the Chinese currency versus the yen as the fact that China’s economy is experiencing difficulties, with both Chinese CPI and PPI remaining very benign. Read more
Rumours of stabilisation in China’s property sector abound…
From UBS’s Wang Tao (our emphasis):
New property starts leapt up by 43%y/y in October reversing September’s marginal 0.2%y/y decline, as sales narrowed their pace of contraction from 10.3%y/y previously to 1.6%y/y…
State Owned Enterprise reform optimism in one chart, courtesy of Bernstein:
And here’s at least part of its foundation:
While investors can get impatient with the pace of change, it is worth pointing out that corporate China today looks similar to pre-privatized Europe of the 1980′s.
This man is in charge of China. Like, really in charge:
And he wants to make sure everyone he’s in charge of remains nice and calm. So he’d like them kept busy. That, for the most part, means they should be working — call it a social compact or call it a security measure, it doesn’t really matter. Read more
A sad demise or just an over-hyped concept from its Wikileaks conception? Either way, the below is sensible stuff from Gavekal’s Chen Long and Andrew Batson on analysts’ favourite growth proxy for waning Chinese growth. Read more
The latest from SocGen’s Albert Edwards features this eye-catching chart:
Chart du jour from BCA Research:
If there’s one sure bet in China it’s that money, uh, finds a way and that shadow banking (or whatever less objectionable name you wish to apply) will do its damndest to help. Otherwise, what’s the point?
In this episode, crowd funding. Read more
With a h/t to Marginal Revolution, here’s Larry Summers and Lant Pritchett on why — for the same reason the USSR didn’t overtake the US, and Shinzo Abe has a tough job on his hands — “excessive extrapolation of performance in the recent past and treating a country’s growth rate as a permanent characteristic rather than a transient condition” is a bad idea.
Most particularly where China is concerned. Read more
For a couple of years now we’ve made the case that the Chinese currency isn’t undervalued as many people believe, but rather, overvalued — especially, once all the other fundamentals are considered.
But, of course, the mantra that the Chinese renminbi is being repressed by the government is so ingrained in investor consciousness, it’s the sort of “whacky” out of the box thinking that tends to draw sceptical denial.
In the last few days, however, a number of analysts seem to have realised that something has changed in the nature of global capital flows, which may mean views that were taken for granted for years no longer really apply. Read more
Sometime tennis partner of Larry Summers and People’s Bank of China governor Zhou Xiaochuan looks to be on the way out, according to a detailed WSJ report. Read more
Oh look, China’s property market has worsened again:
Evidence of something — even if it’s not necessarily reform — from Deutsche:
Noteworthy announcements about SOE reform and deregulation have appeared about every two days since the Third Party Plenum in November 2013…
Some thoughts from Nomura a little while back on where exactly all of this anti-corruption cash being swept up in China on the orders of Xi Jinping might end up.
Potentially, in the coffers of local and central government:
Our anecdotal checks reveal that for cases involving cooperation among various local and central governments, distribution of any recovered funds has largely been based on negotiation among the governments involved.
… a billion here, a billion there
There’s an abundance of dollars in the Eurosystem with nowhere useful to go.
We think, as we argued earlier, this is down, at least in part, to the Fed busting apart the money-market arbitrage for non-FDIC insured foreign entities.
In any case, note the following chart (via the Bank of England) of the euro/dollar cross-currency swap, which shows how much cheaper dollars in Europe got since reverse repos kicked into action in September 2013 (the nearer zero the cheaper dollars are):
Can just one product deliver a 1 per cent boost to Chinese export growth?
If that product is Apple’s iPhone 6, then potentially yes.
So says BoAML’s China Economist Ting Lu, who presents the iPhone 6 case for Chinese exports as follows (our emphasis):
Though iPhone is an American product, it’s assembled in Mainland China (henceforth China) and all iPhones, except those sold in China, and are counted as China’s exports. The iPhone 6 is also important for Taiwan because the economy provides a significant amount of iPhone components including producing processors.
As a brief follow-up to yesterday’s post on the impact of US trade with China on US employment and incomes, we thought it would be useful to visualize a few interesting facts about the evolution of the bilateral trade balance over time.
First, look at how the deficit in the trade of goods swamps the modest surplus in the trade of services. Whilst the data on services are annual and stop in 2012, the general picture would probably not look much different even if it were more up to date: Read more
We might just strip out one more thing from Deutsche’s recent report on Bretton Woods 2.o, namely the bit about how the growth of Chinese “reserve holdings associated with export-led growth provided de facto protection for foreign private investors in emerging markets and thereby caused the gross flows” needed for China’s growth strategy.
The point being that private capital flows generate political risk — “haha, all your FDI are belong to us” — and, without some sort of collateral, flows from rich countries to poor countries will be held back. Think of China’s reserves as a $4tn hostage which stops China from throwing its weight around and stands in the way of a geopolitical breakdown. With it in place, foreign capital becomes more comfortable heading into China. The idea from Deutsche is that this was the only way to get China’s development model to work on the scale it has. Read more
Polled in March 2012, top academic economists overwhelmingly agreed that “freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.”
This academic consensus has penetrated popular opinion to the extent that some people believe increasing cross-border trade flows is unambiguously good for everyone. Likewise, there is a relatively common — and wrong — belief that the Hawley-Smoot tariffs were a significant factor in the severity of the Great Depression.
We don’t want to suggest that trade is bad, but it is worth highlighting that the actual views of the experts who study these issues are much more nuanced than what the “pop internationalists” often spew out.
For example, a new paper by Daron Acemoglu, David Autor, David Dorn, Gordon H Hanson, and Brendan Price estimates that the sharp increase in bilateral trade between China and the US cost somewhere between 2 and 2.4 million jobs between 1999 and 2011 — about 1 percent of the entire civilian population in 2011. Less than half of those jobs were in manufacturing sectors that directly competed with Chinese businesses. Read more
This retrospective on predictions made in the 2003 Essay on the Revived Bretton Woods System by Deutsche’s Dooley, Folkerts-Landau, and Garber is brought to you by Deutsche’s Dooley, Folkerts-Landau, and Garber.
Their premise was and is that we are part of an international system characterised by newly industrialised countries pegging their currencies to the dollar at an undervalued exchange rate in pursuit of export-led growth furnished by an excess supply of labour. Those developing countries then ship their gains back to the US et al as a form of collateral against new lending as the net foreign assets of poor countries support the risks taken by their richer brethren.
More so, they suggested that we were in the China phase of this system, that it would last for 10 years-ish… Read more
Have a China rebalancing update in the face of a property downturn, the corruption crackdown and a reversion to type by Chinese leaders as they seek to prop up the economy.
To restate the obvious, China needs to rebalance its economy towards consumption over the next while if it’s to shift the economy away from a reliance on debt-driven investment and all of the “this is nuts” type excess that it can bring about.
And as UBS’s Wang Tao says: Read more
We had feared that one of most famous of Chinese statistical quirks might have abandoned us forever.
The reported combined GDP of China’s provinces came in only slightly above its national GDP in the first quarter, amid reports that more than 70 smaller Chinese cities were dropping GDP as a performance metric.
Perhaps as China stopped evaluating its local government officials on a narrow GDP basis, the officials would stop doing the obvious and fiddling their GDP numbers.
That would in turn stop the sum of China’s regional GDPs always coming in ahead of the national figure… as well as helping with things like unequal income distribution, problems with the social welfare system and environmental costs. Read more
From UBS’s Wang Tao on the sharp slowdown in Chinese credit creation last month (with our emphasis):
China’s July credit data came in sharply weaker than expected. July new RMB lending declined to 385 billion from 1.1 trillion in June. More importantly, new total social financing (TSF) was only RMB 273 billion, led by the drop in new bank lending and a 400 billion shrinkage of bank bill acceptances. As a result, credit growth slowed visibly and our credit impulse plummeted (Figure 1).
Given recent signs of further policy easing and persistently low interbank rates, the market has been expecting additional monetary and credit support. Today’s credit data are therefore a negative surprise. However, we do not believe these data reflect a credit tightening by the PBC – as evidenced by recent policy intentions expressed by the Politburo and the central bank, as well as ample interbank liquidity and strong credit growth in June which surprised on the upside.
For a little while it looked as though demand for China property related charts was moving in the same direction as demand for China property, but that pattern appears to have broken recently.
With that in mind, here’s StanChart’s quarterly survey of 30 senior managers — most of them small, unlisted developers — in six cities (Hangzhou, Lanzhou, Baoding, Foshan, Huangshi, Nanchong). Read more
Money managers have been stung hard this year due to US government bonds not performing the way their traditional mean-reverting strategies suggested they would. Taper was supposed to imply sell-off. That didn’t happen. And now everyone is trying to understand why not.
At FT Alphaville we’ve presented the flow explanation on a number of occasions. The theory is that taper talk prompts dumb money to sell safety, and the smart money — which knows there’s no such thing as underpriced principal safety these days and that taper implies risk-off — to pile into safety at an even faster rate.
In this theory the whole process is then exacerbated by a feedback loop. Sellers of safety buy risky assets, like emerging market debt, instead. But the sellers/issuers of that debt then recycle that cash back into safe US dollar securities, rather than goods or services in the emerging market. So every risk-on signal from the Fed only ends up creating more buyers for dollar denominated bonds. Read more
You can’t shake everything up at once. Some sensible paragraphs from Bank of America Merrill Lynch’s China team who are searching for explanations in place of the trust defaults they expected:
..it’s understandable why local officials do not want to see any default and try all they can to avoid one. Given the amount of resources they command and how much influence they can exert on local financial institutions, it’s not a surprise to us that they have managed to do so. However, the central government, supposedly having broader interests and a longer horizon in mind, could have stepped in to force some defaults, make investors more aware of the hidden risks, address the implicit-guarantee moral hazard and improve resources allocation.