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
Meanwhile, in the domestic banking scene… [See part 1 on capital outflows here.]
China’s financial system stability is increasingly intertwined with its shadow banking system — which is big, according to various tallies. Bank of America Merrill Lynch says it accounts for a quarter of all bank loans, with the biggest segments being wealth management products or WMPs (8 per cent) and trust companies (8.9 per cent). Fitch Ratings says that WMPs now account for about 16 per cent of all commercial bank deposits; KPMG says trust companies will overtake insurance to become the second-biggest component of the financial sector. 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
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
All that gradual exchange flexibility, and yet the renminbi is only weakening:
The world’s biggest banks have taken steps to protect themselves from the risk of a collapse of the offshore renminbi market in Hong Kong, allowing them to postpone payments and settle their transactions in US dollars in certain circumstances, reports the FT. The moves signal that although bankers view the internationalisation of the Chinese currency as a big opportunity, they see a risk that the small but fast-growing offshore renminbi market could seize up. While market participants say the chance of a collapse is extremely low, bankers say that a mechanism to settle trades in an emergency situation is essential. This is because China retains extensive capital controls that limit the flow of renminbi between the onshore and offshore markets. Under the measures taken, Swift, the global payments system operated by almost 10,000 banks, this week implemented a mechanism that would allow its members to complete trades with each other even if the offshore renminbi market became completely illiquid.
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.
Here’s an interesting way of looking at the market’s current obsession with public debt and reserve currency status.
Consider, for example, that a large amount of public debt is an absolute necessity to ensure a functional monetary system and a reserve currency position. But also, that the scale of the public debt (to ensure the system works) must be maintained at a healthy ratio to gross domestic product. Read more
Here’s an item that slipped by us at the end of last week — but not past the
worrisomely workaholic indefatigable Stacy Marie-Ishmael of FT Tilt, who spotted it while on vacation and forwarded it to us. (Thanks.)
From the emerging markets research group at BBVA: Read more
We knew that China’s efforts to internationalise the RMB were moving along nicely, but thus far CNH deposits (yuan held offshore in Hong Kong) are still a relatively small part of China’s total deposit base.
But a new paper from RBS notes that as a percentage of Hong Kong deposits, they’re becoming a big deal indeed, and quickly: Read more
The past, present, and future of international currency dominance
Some thoughts from emerging market specialist, Ashmore…
… On Chinese president Hu Jintao’s visit to America: Read more
China took a further step towards increasing its currency’s global role, allowing domestic companies to move renminbi offshore for investment purposes, the FT reports. The shift came as the People’s Bank of China allowed the currency’s daily trading reference point to strengthen through the Rmb6.6 per dollar level for the first time on Thursday, a day after Tim Geithner, US Treasury secretary, reiterated concerns about China’s currency policy. The renminbi, which many of China’s trading partners believe is undervalued, will feature in discussions next week between Hu Jintao, Chinese president, and Barack Obama, his US counterpart, in Washington. Companies have been allowed to use the renminbi to settle international trade transactions since July 2009, under an initiative to reduce Beijing’s reliance on the US dollar. According to the PBoC, mainland companies can now use the renminbi to launch businesses overseas and fund acquisitions.
A report Wednesday morning from Reuters, which spots an article in a Chinese-language newspaper:
China will let the yuan rise about 5 percent against the dollar in 2011 to combat inflation, an official newspaper said on Wednesday, while a former central bank adviser said the country needs to free up the currency. … Read more
The big story on the trade balance figures released this morning is that US exports climbed to a two-year high in October on the back of a $4.9bn monthly boost over September. Imports declined by $0.9bn.
Trade in services was mostly unchanged, but nearly every category of goods showed improvement. The trade balance figures tend to jump around a bit, so it’s dangerous to extrapolate anything from just one month’s reading, but the balance appears to have broken away from its downward trend: Read more
Russia’s second-biggest bank will become the first emerging market issuer outside China of “dim sum” bonds denominated in renminbi, in a sign of the growing Chinese presence in financial markets, the FT reports. VTB Bank plans to issue Rmb1bn in three-year bonds, expected to yield about 3.125 per cent, according to people familiar with the situation. Only two foreign companies, McDonald’s in August and Caterpillar last month, have issued “dim sum” bonds, which are issued in Hong Kong, where the offshore market is developing. The recent issues follow the opening up of regulations by the Chinese authorities earlier this year. China is the future. More and more companies and banks recognise the importance of China. It is the fastest-growing economy in the world and a lot of companies want to do business there, which means they need the currency,” said Nigel Rendell, senior emerging market strategist at RBC Capital Markets.
Caterpillar, the US-based manufacturer of earth-moving equipment, is marketing a two-year Rmb1bn bond to institutional investors in Hong Kong, becoming the first foreign industrial multinational to issue debt in the Chinese currency, the FT reports. The issue, which is only the second by a multinational to date, dwarfs a Rmb200m issue launched by McDonald’s in August. The deal will give momentum to the nascent offshore market in renminbi-denominated debt which financiers hope will become an important fundraising route for companies with operations in China. The interest rate on Caterpillar’s corporate bond will be determined according to interest from Wednesday’s marketing effort. McDonald’s three-year note was quickly oversubscribed and secured a 3 per cent coupon.
Q: What is 41 years old, worth $300bn and often neglected? A: The bridesmaid of foreign exchange: Special Drawing Rights (SDRs).
SDRs are the IMF’s international reserve assets, which act as potential claims on the freely usable currencies of its members. (For example, you may see them as part of an Irish loan package.) Read more
Econbrowser recently posted an interesting guest article by Willem Thorbecke, a research fellow at the Asian Development Bank Institute.
Thorbecke argues that the US shouldn’t ignore the exchange rates of other East Asian countries as it pressures China to let the RMB appreciate. Read more
The latest diplomatic spin coming out of the G20 conference in Seoul:
Obama is pushing for specific commitments from other G20 leaders at this summit to tackle global imbalances — shorthand for the massive U.S. trade deficit and equally large trade surpluses built up by countries such as China and Germany. … Read more
On Tuesday the renminbi posted its largest one-day rise since it was depegged from the dollar in 2005, raising hopes that Beijing was set to let its currency appreciate at a faster pace, the FT reports. The renminbi rose 0.5 per cent to Rmb6.6424 against the dollar after the People’s Bank of China raised its daily reference rate, about which its currency is allowed to fluctuate, by the largest amount in three weeks. This raised speculation that China would allow its currency to rise further to reduce tensions ahead of this week’s meeting of G20 leaders in Seoul. The move coincided with a statement from China’s State Administration of Foreign Exchange, which said it would force banks to hold more foreign exchange and strengthen auditing of overseas fundraising in an attempt to limit hot-money flows into the country.
China and the US have the basis for an agreement at the summit of the Group of 20 leading nations next month on setting targets to cut trade imbalances, according to an adviser to the Chinese central bank, the FT reports. Li Daokui, a member of the central bank’s monetary policy committee and professor at Tsinghua University, said on Tuesday there had been “good progress” at the weekend meeting of G20 finance ministers in South Korea which had moved debate from the “surface issue” of nominal exchange rates to “talking about the substance of rebalancing world trade”. “China should not be afraid of numerical targets for reducing its trade surplus,” said Mr Li in an interview. “China is well positioned politically and economically to make this adjustment.”