Some more sentences about China, this time from BNP Paribas’ Richard Iley:
It has been a near unshakeable axiom that China’s economy is on a pre-determined flight path to overtake the US and quite quickly become the world’s biggest economy. But China’s rapid nominal compression combined with the end of RMB appreciation vs. the USD and the solid c.4% nominal GDP growth in the US economy mean that, for the first time in a decade, China’s catch up with the US has stalled. Q1 GDP data is not yet available for the US economy but, assuming a cautious 2.5% annualised increase, helpful base effects would still leave nominal GDP at c.4.5% y/y. The US has therefore almost certainly grown faster than China’s in USD terms over the last year for the first time in well over a decade (Chart 5 & 6).
Another BoAML FX observation on Thursday, this by way of Claudio Piron, emerging Asia FI/FX strategist, and his team.
On the analysts’ radar this week, the continuing risk of CNY depreciation, and in particular this chart:
Clearly there are incentives for China to join the currency wars in earnest.
The RMB is up 6 per cent in Nominal Effective Exchange Rate terms since August 2014 with, say SocGen, the JPY, EUR, KRW and RUB the top contributors, accounting for 1.9pt, 1.3pt, 0.5pt and 0.4pt of the appreciation respectively. Honourable mention to the USD, naturally, against which the RMB is up 0.5 per cent.
Nine days in and it’s still falling…
Some analysts had thought Beijing was ready to let the renminbi stabilise, but a sharp sell-off on Friday – at one point it declined 0.9 per cent, its biggest daily fall since the new currency system was introduced in 2005 – showed that the central bank was still determined to push it further.
“We’re still seeing PBoC intervention”, said a trader with a bank in Beijing. “This is beyond our expectations.”
Argue about more sweeping policy changes as you will (the bet is still basically on a PBoC attempt to deter speculative inflows) but maybe keep an eye on the 6.20 level as you do. Read more
It’s not an easy concept for some gold lovers to grasp, but… a nation importing huge amounts of gold into its economy doesn’t necessarily reflect prosperity on its part. In fact, it can imply economic weakness around the corner.
Prosperous countries, after all, don’t need gold (or huge amounts of foreign reserves for that matter either) to back their fiat currency. They don’t need them because they are so mighty, productive, knowledgable, powerful and desirable to live in that they have seigniorage power all of their own accord. You know. Like Bitcoin. But not because they are artificially scarce, but because they are managed well.
Also, even if you go with the goldbug logic that fiat ‘money printing’ equals debasement, it must then also imply that mass gold importation equals the opposite: purposeful rebasement. Someone is trying to bolster what would otherwise be a naturally weak currency. Read more
The assumption for a long time has been that when a free floating yuan is finally born step 1 on its journey would be a joyous rush of capital inflows sweeping it upwards as foreigner investors finally got to jump into China with both feet.
But, as we’ve been arguing for a while, that might not be true anymore. Diana Choyleva of Lombard Street seems to agree: Read more
China’s State Council has announced intentions to carry out some potentially quite big reforms. From Bloomberg:
China signaled it will propose plans this year to allow freer flows of its currency in and out of the nation as part of measures to loosen control over the yuan and interest rates. Read more
China’s balance of payments deficit in the second quarter was its first such deficit since 1998, and it attracted a lot of attention. Together with other bits of data about currency flows, it heightened fears about whether there was some kind of capital flight out of the country, and what it would mean for domestic monetary policy just as the economy became slightly stretched — but still somewhat inflationary.
But it’s not so bad, Societe Generale’s Wei Yao says. Yao looked through the details of the State Administration of Foreign Exchange data from Q2 and reckons most of it can be explained by fairly normal changes associated with the authorities’ tentative steps towards renminbi internationalisation: namely, an increase in private foreign currency deposits (as opposed to the official reserves), and credits to foreigners on domestic banks’ balance sheets. Read more
The reversal of currency flows in and out of China is continuing. The PBoC published data on Tuesday showing that the country’s banks were net sellers of yuan in July, selling Rmb3.8bn or $587m. As the WSJ’s Tom Orlik explains, this means that the banks’ foreign exchange purchases are lower than the monthly inflows from trade and investment, and it suggests some “hot money” is leaving — possibly in part because exporters and importers no longer want to settle in yuan.
Of course this is only a change in the direction of flows — and a small one when viewed in context. The chart below from Chinascope Financial demonstrates how, while the trend has been negative since September 2010 and particularly since September 2011, the banks’ overall forex position hasn’t changed that much in the past year: Read more