The BIS’s latest Quarterly Review is chock full of useful observations about the counterintuitive effects of negative interest rates, electronic trading on fixed income markets and wealth inequality on monetary policy. Do read the whole thing.
If you don’t have time… cast your eyes directly to Robert McCauley and Chang Shu’s contribution on dollars and renminbi flows out of China.
McCauley (in particular) has been tracking the story of international dollar liabilities and their monetary effects for some time. He was also one of the first to draw attention to the Chinese dollar debt load. As a rule any research with his byline is a must read. Read more
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.
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
…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.
The latest from SocGen’s Albert Edwards features this eye-catching chart:
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
Something’s afoot in the world of RMB.
The renminbi fell on Tuesday by the most in a single day since 2012, dropping 0.35 per cent against the dollar in the onshore market by midday in Shanghai, and 0.7 per cent since Wednesday, as the FT reported.
The market has put this down to an imminent change in China’s foreign exchange regime. The narrative is that the PBOC is preparing to widen the trading band ahead of flotation and is spooking the market intentionally, so that it realises that the RMB goes down as well as up, and that carry-trades are no free lunch.
Not everyone is as convinced. Read more
Earlier on Tuesday we proposed that one of the reasons gold was rising was because the market, despite the taper, was still being overloaded with liquidity relative to the number of safe US assets in circulation.
But we’ve also speculated in the past that if and when China begins to unwind its US Treasury stock, as it may be forced to if it needs to defend the RMB from devaluation, then the Treasury stock it releases could end up injecting a fair number of dollar assets — at least on a temporary basis — into the global dollar system.
The sequence of events might consequently look something like this: Read more
There aren’t many people out there who agree with us that China has a yuan overvaluation problem, and that floating the currency will result in the opposite of the expected effect. But there are some.
Diana Choyleva at Lombard Street research is one such economist.
In a note on Tuesday, she sums up the problem beautifully.
As she notes, the key issue is that China’s export-driven growth model, which depended on long-term currency devaluation, created excessive savings which encouraged unproductive investments at the expense of consumer spending. Accordingly, attempts to restructure the economy and make it more consumer-focused depended on an explicit currency appreciation path.
And yet, overturning a decade’s worth of competitive devaluation was never going to be easy. For one, it was bound to stifle China’s export advantage and simultaneously increase Chinese purchasing power abroad much more significantly than at home. Read more
A common criticism of the secular stagnation and post-scarcity theory is that it is contradicted by the fact that unacceptable levels of poverty exist in many places around the world, and in particular the developing world.
If there’s so much growth potential out there, how is it possible that the economy is in secular stagnation? Or so, at least, the argument goes.
But perhaps the question we should be asking is what continues to frighten investment capital away? Read more
We were going to be slightly snarky in the face of Zhou Xiaochuan, head of the People’s Bank of China, promising to “basically” end normal intervention in the currency markets and other such liberalising things — the lack of a timetable and the ambiguity of phrasing making this seem rather similar to what we’ve heard in the past — but then we saw this from Neil Mellor at BoNYM and felt bad:
However, although a timetable was absent from Mr Zhou’s brief – something we discuss below – the fact is that this announcement constituted the beginnings of a new era for financial markets and no superlative would overstate its significance.
Oops. Read more
Thanks to Monument Securities’ Marc Ostwald for directing our attention to an interesting report from MNI on Tuesday regarding changing attitudes to the renminbi:
The PBOC made a “big mistake” in letting the yuan rise so quickly earlier this year because it has only swelled the level of foreign exchange onshore, creating potential problems when depreciation expectations rise and capital starts flowing out of the country, regulators contend. Read more
How much would you pay for a bundle of 100 1-renminbi bills?
Is the answer Rmb109? Read more
We’ve written a lot about capital outflows from China, what Beijing is doing to try to stem the flows, and how all this impacts the renminbi. Most of the time, the talk is about billions of dollars whizzing around the financial markets, one way or other. Yet, it seems that China’s capital outflow is accelerating even in its simplest form — yes, we mean bundles of cash hidden in suitcases.
It’s seriously old school, and seems almost quaint, but the sums are sizeable. Read more
China snuck something out last Friday that just might be pretty significant…
From the FT: Read more
There have been a few estimates of large scale capital flight out of China recently that don’t exactly tally with other signals. The strength of the yuan is among them, though it admittedly may be explained by myriad other factors.
Capital flight has largely been calculated by movements in China’s FX reserves, with reference to other variables such as the trade surplus, FDI and movements in exchange rates. Read more
Izzy wrote in May how China’s Rmb exodus is a huge (and still little-explored) story for the world economy, and it’s one that won’t be going away as China recorded a net capital account deficit in Q2. We’re wondering now how this might collide with risks to domestic liquidity — specifically, whether a combination of Rmb exodus and local banking problems might affect the People’s Bank of China’s ability to maintain financial stability?
A very brief recap on the Chinese foreign reserves-domestic liquidity nexus: Read more
Mitt Romney, aspiring US president-to-be, has notoriously declared that if he ever takes office he will immediately name China a “currency manipulator”.
This, of course, is an ironic turn of events, given that China stopped being an outright currency manipulator a while ago. Read more
Remember the days when Chinese banks used to routinely drain dollars from Chinese corporates? The days when the Chinese corporate sector was a net dollar seller?
Those days, it seems, may have very abruptly come to a halt. Read more
First, in a sign that Chinese woes are definitely rising and that authorities are now sufficiently concerned, we bring you news that China cut rates on Thursday (via Bloomberg):
China cut interest rates for the first time since 2008, stepping up efforts to combat a deepening economic slowdown as Europe’s worsening debt crisis threatens global growth. The one-year deposit rate will drop to 3.25 percent from 3.5 percent effective tomorrow, the People’s Bank of China said on its website today. The one-year lending rate will fall to 6.31 percent from 6.56 percent. Banks can offer a 20 percent discount to the benchmark lending rate, the PBOC said, widening from a previous 10 percent.
FT Alphaville has been focusing on signs that China may be suffering a “capital outflow” problem.
We also think global markets may be under appreciating the problem. Read more
There is a huge developing story in China’s currency, the renminbi.
After years of structural under-valuation, things are changing. Read more
There seems to be something of a love-in going on between China and the IMF, though admittedly you have to wade through a weighty report to glimpse it.
Last weekend, finally, after years international pressure, China’s central bank said it was widening the renminbi’s daily trading band with the US dollar. Read more
That’s pronounced a bit like “Joe”, but with a softer ‘g’ sound. According to Standard Chartered you need to start practising – because People’s Bank of China governor Zhou Xiaochuan is “the world’s central banker”.
StanChart note that everyone already knows China has the world’s largest stock of M2 money. Read more
Does China’s decision to expand the allowed trading range for the yuan signal something significant for the country’s economy? Like, everything is roses?
We’re just asking because a Reuters analysis piece argues that this is the case: Read more
China intends to extend renminbi loans to other Brics nations, in another step towards the internationalisation of its currency, the FT reports. The China Development Bank will sign a memorandum of understanding in New Delhi with its Brazilian, Russian, Indian and South African counterparts on March 29, say people familiar with their talks. Under the agreement CDB, which lends mainly in dollars overseas, will make renminbi loans available, while the other Brics nations’ development banks will also extend loans denominated in their respective currencies. The initiative aims to boost trade between the five nations and promote use of the renminbi, rather than US dollar, for international trade and cross-border lending. Under 13 per cent of China’s Asia trade is transacted in renminbi, according to Helen Qiao, chief Asia economist for Morgan Stanley. HSBC estimates that the currency’s share of regional trade could swell to up to 50 per cent by 2015.
China’s foreign-exchange reserves dropped for the first time in more than a decade, Bloomberg reports, as foreign investment moderated, the trade surplus narrowed and Europe’s crisis spurred investors to sell emerging-market assets. The holdings, the world’s biggest, fell to $3.18tn at the end of December from $3.2tn at the end of September, data from the People’s Bank of China showed. The quarterly drop was the first since the second quarter of 1998, according to data compiled by Bloomberg. Meanwhile the WSJ says China may eventually invest more of its $3.2tn foreign-exchange reserves in stocks, enterprises and other assets as it looks for ways to boost returns on its reserves, according to an interview with Jiang Jianqing, chairman of China’s largest state-owned bank.
Something is happening in China.
That’s the ominous title of an FX note posted by George Saravelos of Deutsche Bank on Friday morning. Read more
The EFSF roadshow is in Asia trying to drum up interest in the newly leveraged, newly insured, revamped fund. The Chinese are counting their chips and considering whether to double down on their European bet. (Mrs Wanatabe is also checking out the goods.)
But Europeans shouldn’t rely on China to come to their rescue, argues Julian Jessop, Capital Economics’ Chief Global Economist. In a sharp note published on Friday, Jessop offers a free reality check to anyone who thinks Europe can avoid solving its own problems. Read more