Chinese GDP or employment data, meh.
These days the only data that really matters are Chinese FX reserve statistics. The latest month’s position is due to be released overnight, and Daniel Tenengauzer of RBC Capital Markets expects we could be in for another episode of declining coffers:
We believe China will continue to post outflows for two reasons. First, interest rate differentials against the US declined by 200-250bp since January 2014. Even assuming no imminent lift-off in the Unites States any time soon, the flows will likely pull USD/CNY higher. We believe there is about USD400-500bn of pipeline demand in short-term international claims just to reverse some of the flows observed since 2010.
We estimate that in August there were about USD100bn of outflows. As global FX reserves accumulation turns around, the same things FX reserve managers aimed to buy in the past ten years or so will also turn around as well; this includes a variety of short duration fixed income products and alternative currencies to diversify trade weighted index baskets.
By Christopher Balding, Professor of Economics at Peking University, HSBC Business School, and blogger at Balding’s World. The TL;DR of this post might be that rebalancing the Chinese economy without a hard landing will be… difficult. Read more
Consider these educational stereotypes, all entirely accurate:
The US is led by a Harvard-trained lawyer. Read more
From Goldman’s latest Top of Mind report:
Do click to enlarge but note that not (fully) pictured are the massed elites that make reform a less than linear process, particularly when objective number one is almost certainly the continuing control of the CCP. Read more
The tale of Chinese State Owned Enterprise reform is long and ongoing. So we’re going to break it down via an individual “reform” effort that has more than a passing resemblance to the Sinopec Conjecture…
It also reminds us that however you cut it China isn’t about to let go of control. Bit beyond us why anyone was shocked by this kind of thing:
China’s Communist party must tighten its grip on state-owned enterprises in order to maintain the “socialist direction of their development”, the country’s leadership said, an edict which chafes with reforms aimed at improving efficiency and profitability in the lumbering sector…
This particular tale though, whence wider lessons can be drawn, concerns Jiangxi Salt and comes via Gavekal’s Chen Long (bit chunky but very worthwhile, our emphasis): Read more
So, hypothetically, the world has reached its current credit limit. Which, again hypothetically, explains this kind of thing. From Citi’s credit maven, Matt King:
Just watching this with a sort of grim fascination…
Glencore stock was struggling (and failing) to hold above 108p at pixel, down 9.5 per cent. Read more
When your correspondent visited pawnshops in Macau this week and asked whether they could help him shift 1m yuan ($157,000) out of China—three times what one can legally withdraw in a year—most demurred.
- Anon (ish), Economist, Sept 19
Sad really to see them in such decline, even if said correspondent did find a brave few who would help.
Nervous times is the headline reason for their nervousness, what with all those police raids and a general chill redescending along China’s capital-borders as flows out of the country continue to make the government nervous — even if some of the headline outflow (a record of over $150bn or so in August according to estimates) is probably just dollars being hoarded by Chinese corporates, it’s very clearly a point of stress for China’s leaders.
Which is fair when you consider what it would mean for Chinese reserves if it chooses to absorb the capital outflows and what it means for the CNY if it doesn’t. Read more
You know where price discovery is less obvious than in the stock market?
Anyway… As Patrick McGee says, China property is once again becoming the asset of choice in China.
It’s not super evenly spread but that’s always been an issue and the point is well taken…
And here’s that paragraph, from JPM’s Niko Panigirtzoglou and team, with our emphasis:
- First, we disagree with the description that FX reserve depletion is QE in reverse. This is because the FX reserve depletion that is happening currently is not an exogenous policy action but represents a policy reaction to capital flows out of EM. But the capital that leaves EM does not disappear from the financial system. In fact, the capital that flows out of EM could find its way back into DM bonds. For example three major manifestations of capital flowing out of EM are 1) the reduction of dollar denominated debt previously issued by EM corporates, 2) the accumulation of dollar deposits by domestic EM corporates or other entities who try to protect themselves against further dollar appreciation, and 3) the withdrawal of EM currency (e.g. Renminbi deposits) by foreign investors who in turn convert them back into dollar deposits.
The SEC, the DoJ and the FBI are going hard after those who allegedly thought it was fun (and profitable) to manipulate the stock of Chinese entities reversing into US listed shell companies.
Benjamin Wey, chief executive of an entity called New York Global Group, was arrested in Manhattan on Thursday. Various family members and business associates are also in the frame, while Wey’s Switzerland-based banker/broker, Seref Dogan Erbek, apparently “remains at large” (which probably just means he’s in Geneva). Read more
Everyone has been trying to figure out why the PBoC shed a record $94bn in FX reserves in August.
But did you know their own spokesman has been offering an explanation to the market directly? Read more
From Barc on what’s happened since the PBoC got messy at band camp, devalued, and followed up with a “dirty peg”:
So you bought an EM fund. Maybe it was an ETF, or maybe it was just a regular fund?
Either way it gave you exposure to EM. And it was great. You could trade in and out of your EM fund as often as you wanted. There was proper unrestricted liquidity. It was awesome.
And then some random EM country decided to suspend its stock market. But hey, it was still great for you, because you could continue to trade in and out of your fund as if nothing ever happened. Read more
Yes, this is the news that China has recently put in place a RMB 16tn cap on its, dangerously expanded, local government debt. Per Xinhua, and via the WSJ:
The Standing Committee of China’s National People’s Congress imposed a 600 billion yuan limit on the direct debt local governments are allowed to run up this year, the official Xinhua News Agency said late Saturday. That would be on top of 15.4 trillion yuan on debt owed by local governments as of the end of 2014, Xinhua said. The moves are the result of a new law requiring the government to limit local debt, it said.
It’s also the news that this is less than expected and, importantly, doesn’t include indirect liabilities . Hence…
By Christopher Balding, Professor of Economics at Peking University, HSBC Business School, and blogger at Balding’s World.
Throughout the Chinese stock market run up and subsequent collapse, the most fundamental question revolved around the robustness of the overall economy. Read more
From UBS’s Tao Wang on what, post China’s surprise revaluation, is now an oft used phrase, the impossible trinity — AKA the corner China finds itself in:
The impossible trinity says that a country cannot simultaneously have an open capital account, independent monetary policy, and stable tightly managed exchange rate. Some academics (such as Hélène Rey) argue that since capital controls are no longer as effective in the current day world, complete monetary policy independence is still not possible without some degree of exchange rate flexibility, even without a fully open capital account – or impossibly duality.
Regardless of whether it is an impossible trinity or duality, the fact is that in recent years, as a result of substantial capital controls relaxation, China has found it increasingly difficult to manage independent monetary policy while simultaneously maintaining a fixed exchange rate.
Whether the yuan is technically or fundamentally overvalued doesn’t really matter. China has reached the point in its growth cycle where it can no longer defend the yuan’s valuation against the USD without shedding reserves, something FT Alphaville readers may have heard us warning about since 2012. That was the moment it became obvious (to us at least) that something had changed in China. Enough external private debt had built up in the system to compromise the pegging regime unless it was accompanied with offsetting FX reserve dumps, or new capital inflows.
While it’s true FX reserves continued to build (chart below from Kit Juckes at SocGen), what was of greater interest was the overall UST position which — a better proxy for how many dollars are in the system — and the theoretical portion of those FX inflows which are coming into China on essentially leveraged terms: Read more
Things that are not infinite include… China’s FX reserves. Even at $3.7trn.
It’s an obvious point, but maybe the point is worth remaking.
From Soc Gen’s Wei Yao: Read more
It’s indeed a major correction, say Goldman, surprising precisely nobody:
Whilst there’s nothing like a Black Monday bloodbath in China to invigorate the bear case, it is worth bearing in mind that the Chinese stock market isn’t quite the NYSE.
Yes, Chinese investors have been turning to stock market investing at accelerating rates over the past decade, but despite all that growth, stock ownership is still the exception not the norm in China. And because it isn’t the norm, the feed through to the real economy is unlikely to be as significant as it would be in say, America, where every man and his dog is taught from birth to watch CNBC and to own a portfolio. Read more
As you’ve surely just seen, China has cut its reserve requirement ratio, by 50bps with effect from Sept 6, and its 1yr lending rate by 25bps to 4.6 per cent with immediate effect.
Markets will like this. And the timing suggests that the ongoing stock market puke did have something to do with the decision.
But there’s also certainly a broader rationale to these moves. Read more
China, walloped again — Shanghai is off another 7.6 per cent and below 3000 points — even if the rest of
Asia the world doesn’t seem to care quite as much as it did on Monday.
Have a compulsory longer term, context heavy, chart which shows that the index is still well up over 1yr but down 8 per cent YTD and 42 per cent since June:
The obvious question now is, what’s next? For the stock market and for the economy. The actions taken with regard to the former will contain a non-zero amount of information about the latter — which, to be extra obvious, is the important bit. After all, for EM at least, China matter this much according to BofAML Read more
From on high, via Alberto Gallo and RBS:
By Christopher Balding, Professor of Economics at Peking University, HSBC Business School, and blogger at Balding’s World.
The job of the modern economic and financial policy maker is a difficult one. Markets are being created at breakneck pace to trade incredible varieties of financial products and the complexity of major modern economies is dizzying. Considering the constraints of managing enormous economies and financial products, the most important asset of the economic regulator is not perfect decision making but credibility.
As China has battled a variety of financial pressures this year — from a falling stock market to capital outflows pressuring its US dollar peg — Beijing’s lack of a credible coordinated policy response worsened their public reception. Rather than articulate a clear vision of how to address a falling stock market and slowing economy and proceed to methodically execute that plan, Beijing swerves between conflicting announcements and less than credible positions that the market discounts. Read more
Xinhua’s words, so it’s official:
Some thought-provoking paragraphs on China this Friday from Stephen Lewis, chief economist, at ADM Investor Services International, regarding the reliability of the country’s jobs data. He starts with this useful reminder:
Of the ten conflicts in human history with the highest death tolls, five were civil wars in China. Chief among these was the Three Kingdoms War (184-280 CE) when up to 40 million are reckoned to have perished in military operations and from the destructive consequences of warfare. This is an enormous number, considering that the global population at that time is unlikely to have exceeded 400 million. More recently, the Taiping Rebellion (1850-1864) claimed more than 20 million lives while the civil war that brought the Communist Party to power in 1949 resulted in 7.5 million deaths, over and above the 20 million estimated to have been killed in the roughly contemporary Japanese invasion. This is not the history we were taught at school but Chinese leaders are well aware of these facts. When disorder breaks out in China, things turn very nasty indeed. It is best, therefore, to avoid disorder at almost any cost.
Jim Reid at Deutsche assesses the damage so far. As he says, this has something of a taper tantrum feel to it but seperating out China from Fed fear is a tough job even if given “that the odds of a September hike are fading again (32% this morning, down 16% over the last 48 hours)” it seems “China and the impact on EM is the overriding driver”.
With our emphasis:
One of the big problems with China’s FX move is that although they’ve ‘only’ seen a 3% currency fall (in the onshore Yuan) since their announcement last week, others have subsequently followed suit either deliberately or via market [and oil based] pressure. The following countries have seen their currency depreciate at least 4% since last Monday (and using last night’s closing prices): Kazakhstan (leading the way with a huge 26% devaluation following the removal of the trading band), Russia, Ghana, Guinea, Colombia, Belarus, Turkey, Malaysia and Algeria. In fact, if we extended the analysis to include those that have seen at least a 3% depreciation then the number of countries hits 17 and unsurprisingly all sit in the EM bracket.
Oh yes, that was when the Shanghai index hit its “nadir of 3,507 points” and “when the government announced measures to prop up a market that had collapsed more than 30 per cent in less than a month.”
And oh look. We’re back there again. Well, a bit lower actually: Read more
An unspecified number of tenge (not excluding zero) to those who can spot when Kazakhstan decided to let go of its currency band: