A unicorn is a legendary mystical animal with a single spiralling horn that is both highly sought after and impossible to find.
In techland, however, it represents the hunt for something even more elusive: a start-up with the potential to become a multi-billion dollar company on the back of the winner-takes-all monopolistic eco-system superpower effect.
Given that unicorns are supposed to be rare, it’s weird there are so many of them these days. Read more
Nobody knows China like Michael Pettis, and his latest post on the RMB doesn’t disappoint.
Before we get to the crux of his argument we should point out that FT Alphaville has long argued that the RMB was probably over rather than under valued, based on its capital account position.
Understandably we were feeling a bit chipper with our analysis following last week’s depreciation, until we read Pettis this morning.
The Beijing-based academic argues convincingly that the RMB is still under valued because there’s a big difference between a technical misvaluation and a fundamental one. Read more
Wanted: A go-getting, self starter with no appetite for tautology and with a mandate to fully count unemployment in the world’s second largest economy. Must leak to press if not allowed to report findings.
Remember Xi who must keep you employed? The idea that social stability, rather then employment per se, is what the Party really cares about. Remember also how the unemployment stats we and, very possibly, they are working with are a bit rubbish? And that it’s possible the Party will be reacting to problems rather than preempting them?
Well, an attempt by Shuaizhang Feng, Yingyao Hu and Robert Moffitt to add some clarity to China’s dodgy unemployment numbers raises some fresh questions about the Party’s control of the economy. Read more
Sensible sentences from Citi’s Buiter et al on China’s valuation shock (with our emphasis):
This decision by the PBOC is a significant event, even if its implications and motivations are not yet fully clear. It appears that the Chinese government has moved from operating a pretty stable peg to something closer to a managed float, raising questions about how strongly it will manage it. As liberalization proceeds, (sterilized) foreign exchange market intervention will effectively only work through signaling and announcement effects. However, ‘domestic’ interest rate policies, credit and other financial and/or fiscal policies are likely to gain strength as well as they affect the ‘market-determined’ exchange rates. As such, monetary policy and exchange rates will work in tandem as there is no such thing as a policy independent exchange rate, regardless of how freely it floats…
Late last week the Financial Stability Board completed its peer review of the Chinese financial market.
For anyone who’s ever wondered about the structure of China’s shadow banking industry or the evolution of the wealth management product sector the whole report really is worth a read.
But most interesting, especially given last week’s depreciation, was the following recommendation from the FSB:
The authorities should continue to promote a more diversified and resilient financial system by: (1) increasing reliance on market-based pricing mechanisms via the removal of implicit guarantees; and (2) further developing capital markets and an institutional investor base as an alternative pillar to bank financing.
Herein lies the crux of the challenge for China. Removing implicit guarantees and effective market subsidies. Read more
…so long as it catches value
– Deng Xiaoping (sort of)
We’ve already theorised that China depreciating the yuan against the dollar in stages will have helped to shake-out the short-term dollar leverage in the system before a Fed rate hike later this year.
But, as PRC Macro, a Hong-Kong based advisory, noted late last week, with dollar deposits at commercial banks still leaving the system, we may not be home-free on China’s private sector dollar and capital outflow exposure just yet:
Today the PBOC released foreign reserve data for July that provides evidence of an additional motive behind the Bank’s sudden devaluation of the RMB/ USD exchange rate earlier this week. Specifically, the outflow of foreign exchange from commercial banks – as shown by the net monthly change to foreign exchange deposits – gathered pace in July. On a month-over-month basis, net capital outflows increased from RMB 93 billion (US$ 15 billion) in June to RMB 257 billion (US$ 41 billion) in July, with total FX deposits down by 2% YoY. This decline to China’s foreign reserves also highlights the difficulties that the PBOC has faced where it comes to managing systemic liquidity and this may also have contributed to the timing of the Bank’s decision to devalue the RMB earlier this week.
Here follows the second in a series of posts explaining why this week’s RMB depreciation is akin to the Great China Money Market fund breaking the buck.
But first a disclaimer! Whilst our analysis errs to the view that the depreciation was driven by market forces and thus inevitable, that’s not to suggest China “the market economy” is bust or about to face a hard landing. We’re very specifically talking about the state-managed part of the external capital account.
So, let’s continue from where we left off, namely, the point when the commodity super-cycle was sending the message that for China to have its rebalancing cake and eat it some major global restructuring probably would have to take place. Read more
To understand what happened in China this week we think the best financial analogy for China’s management of its economy and its external capital account is this: think of it as a giant money market fund.
So when the currency was officially devalued three times, it was equivalent to the Great China Money Market (GCMM) fund “breaking the buck”, a rare event when presumed safe investments turn out to not be so safe as thought.
We’re going to explain what that means in two posts, the first of which is the extended history of China’s economic management needed to realise how the world got to this point in the first place. Read more
China weakened the renminbi fixing by 1.86 per cent overnight, an unexpected move followed by the biggest one-day change in the value of the renminbi since the country abandoned its dollar peg for a managed trading band.
There are two schools of thought on this: Either balance of payment problems are forcing China’s hand, or the move is just another step in the slow and benign process of capital liberalisation.
On the first, well hey, they would depreciate in the current environment wouldn’t they? Exports are weak, the economy is sputtering, and the stock market can’t stay up without the state introducing a ban on it going down.
Move to a free-floating currency system? Meh. This is just another desperate devaluation story in the style of Nigeria, Russia before them and even peg busting Saudi Arabia on the back of a hard-currency drought in the offshore FX market. (FT Alphaville has predicted this for like ages, yeah?). Read more
Can China, which has announced 24 separate policy measures since the start of July, save its stock markets through intervention?
To help think about ways to answer the question, Nikolaos Panigirtzoglou and team at JP Morgan have looked at two previous interventions by the authorities in Japan and Hong Kong.
Perhaps unsurprising, it depends. Read more
Estimates of how much cash China has flung at its stock market, in the hope that some sticks, vary.
As the FT says, the “government has not disclosed either the amount of rescue funds it has allocated to the coalition of state financial institutions — known as the “national team” — or how much of this total has already been invested.”
But all estimates tend to settle, roughly, on different quantities of “lots”.
First up then, a Goldman note out on Wednesday which estimates that said ‘national team’ “has potentially spent Rmb860-900bn [some $144bn] to support the stock market in June-July 2015… equivalent to 1.6%/2.2% of total market cap/free float market cap”:
Policy banks are apparently the new local local government investment vehicles — and they’re being used to push more stimulus out into a struggling economy. Via infra investment. Shocking, we know.
A suggested, updated, investment-driven-policy-schematic from Credit Suisse:
Or: Read more
Look! More attention!
Both the FT and Bloomberg have weighed in on one of the larger China Rorschach tests — capital outflows.
So, what exactly do you see when you look at this?
Pragmatic sentences about the Chinese slowdown are often in short supply, so…
In our view, the worst thing about China’s slowdown is not the risk of some kind of cataclysmic economic meltdown or financial crisis but that – in sector after sector – the investable ways to “play” China shrink to the local names on the right side.
There’s a wild new theory going around that China’s (new and old) stock market slide is less down to this kind of thing….
Speaking before the investigation [into Avic Heibao, a listed manufacturing subsidiary of Mr Lin's company Avic, by the securities regulator on suspicion of illegal and irregular share transactions] was revealed, Mr Lin cast his company’s actions as part of a heroic struggle against foreign aggression.
“This stock disaster was a premeditated plot, a well-prepared case of malicious short selling and part of a powerful, tumultuous economic war launched against China,” Mr Lin said in an interview with state media. “The war launched against [the Chinese stock market] is an attack on the five-starred red [Chinese national] flag.”
In an editorial he penned for a state-run nationalist newspaper, Mr Lin also blamed US plots for the problems in the Japanese economy in the early 1990s and for the 1997 Asian financial crisis.
… and more down to distortions in China’s own markets. Now, particularly, those distortions introduced by China’s powers-that-be while trying to put a floor under the slide and target a level of 4,500 for the index, using a raft of measures. Read more
Only 20 per cent or so of investors polled by BofAML thought that Chinese growth was even approaching the official 7 per cent, ignoring the National Stats bureau’s claims that the figures for Q2 growth “objectively reflect the real situation.” Read more
Consider the following two charts:
The chart on the right shows the price changes of the Shanghai composite stock index since the beginning of 2014 and the one on the left shows the price changes of a different stock index, decades earlier, that appears to have behaved very similarly, albeit with a bigger boom over a slightly longer time frame. We removed the labels and time scales to heighten their similarities, and normalised both to start at 100.
In both cases there was a period when basically nothing happened to stocks, followed by an extreme appreciation, followed by a sharp drawdown of about one-third.
Courtesy of RBS:
Click to enlarge. Read more
Chinese equity markets are nuts. And the search for a narrative to explain this week’s moves is becoming ever nuttier. As Deutsche said: “It ceased to be a free market a long time ago so analysing it is tough”. Read more
Chinese equity markets have continued puking. Yes, they’re still up on a longer timeframe, but were off a sudden 8.5 per cent on Monday, the worst fall since 2007. The Shanghai Comp now looks like this:
As the FT said, the Shenzhen Composite sank 7 per cent, and the ChiNext start-up board dropped 7.4 per cent. Significantly, more than 1,700 stocks fell by the maximum daily amount of 10 per cent, while only 78 rose. Large caps like PetroChina, the country’s largest company by index weighting, lost 9.6 per cent. Xinhua has thus declared the “The return of debacle!”.
So a reminder of the constraints that China’s powers-that-be are labouring under seems more than appropriate. The point is that, as quoted below, “what just happened in the A-share market will likely have profound impact on China’s economy and financial system one way or another”. Read more
It was the worst fall since 2007 and the second worst fall since 2000, chart courtesy of the FT’s Peter Wells:
Or as China’s Xinhua is putting it — “The return of debacle!”: Read more
We hate to concentrate on the dives alone, but this is getting serious. We’re off 8 per cent at pixel and on track for the biggest one day fall since 2007 — there was an 8.23 per cent drop on April 6, 2007 according to Fast — click through for the live Google finance price:
The Shenzhen Comp is off 7 per cent, CSI300 is also off by the same amount and Asian equities are generally looking unwell. We’ll update this post as we go, particularly as this could rally into the close.
UPDATE: Or not, Shanghai Comp closes down 8.5 per cent — the worst fall since February 2007 — with the the Shenzhen down 7 per cent and the ChiNext of 7.4 per cent. Read more
Bigger than Greece, bigger than China (or at least one of the most significant parts of the China story) is the massive shift occurring in global currency reserves. Long story short: they’re being depleted, rapidly. Especially the reserves of emerging market sovereigns.
On Thursday we suggested the evolving dynamic could be linked to a contraction of petrodollar/sweatdollars in the global monetary system, thanks to growing US energy independence and US labour/tech-based re-shoring.
We failed to mention, however, how the situation is exacerbated by China’s growing inability to throw renminbi at its export competitiveness problem due to not insubstantial dollar leverage exposure on the country’s books. Which is to say: China can only help its exporters — and by extension other emerging markets — by shedding a whole bunch of dollar reserves at the same time. Read more
That’s Citi, protesting. We’ll leave it to you to decide if it’s too much:
Sentiment indexes are in despair and investors want to get more bearish still — It is rather strange that an asset class which is already in despair according to our sentiment indicators, and where valuations range from 1 stdev-below-mean to mean in terms of P/BV, and yet fails to generate much investor interest. On the contrary, as sentiment has worsened and valuations have fallen, investors have become more dismissive of the asset class. This is no truer than when it comes to the China. A market, which is either in a bubble or collapsing, and sometimes doing both the same day according to the bears….
The Chinese market corrects and the bears come out of hibernation all at once. Having been temporarily silenced by the rising market, all one needs to do is open a reputable newspaper or look at Bloomberg and you’ll get your fill of China doom and gloom. And while the momentum is down, why not extend the pessimism to all EM, which after all is just one big China trade anyhow? China and the EM asset class is doomed and for all the pulp and paper in the world there aren’t sufficient hankies in the world to mop up this mess, it would seem.
As above, we got a 7 per cent print for Q2 GDP growth in China last week. Here’s the breakdown from CreditSights — do note the weakness generally vs the contribution from the financial sector. As CreditSights say “The finance sector’s contribution grew by over 20% in 1H15 this is no thanks to the banks and more likely due to profit growth at securities firms and possibly asset management companies. In contrast, the industrial sector, which contributes over a third to GDP, is growing at under 2% YoY.”
Of course, it’s real (ish) activity but it most probably isn’t going to be repeated at that level and without it GDP would have been down closer to 6 per cent, according to UBS.
Which is all interesting stuff, but it’s not why we’re here. Read more
Classic bullish/ bearish signal with obvious buy/ sell implications.
As Bernstein say:
The rebound over the last week means we have entered a period where everyone was right. China bulls can argue that the Shanghai Composite is still up 94% over the last twelve months. China bears can argue that the Chinese regulators have effectively taken the market out of consideration by virtue of the ham-fisted approach to reversing the sell-off. However, “I told you so” doesn’t constitute an investment recommendation.
From the Peterson Institute:
Does this mean anything? Yes, probably. It just doesn’t mean as much as it would if the government wasn’t dominating the market at the moment. Read more
The broad narrative of a coming capital account liberalisation in China has always bugged us. The main reason being that we couldn’t see how China, in its current state, was going to start letting money flow (easily) out as well as in.
But before we get into that we should note, somewhat counterintuitively, that China’s capital account is already fairly liberalised. Read more
Or, at least, it might according to the ECB’s Huina Mao, Scott Counts and Johan Bollen.
Naturally, this breaks down in China, where Weibo is your friend… Read more
It looks increasingly likely that the latest Chinese stock boom (now abating) was fuelled by a rush of margin financing rather than anything like fundamentals, turning the whole thing into a bit of a house of cards (you don’t say), but just in case you have doubts, here’s UBS’s Lu Wenjie presenting some supporting evidence.
First, a chart and some factoids: