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
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
The thing about the relationship between monetary stimulus and inflation in China is that — much like like a Wookie, an 8ft tall Wookie, living on the planet Endor with a bunch of 2ft tall Ewoks — it does not make sense. At least not if you approach it with a conventional eye.
So says China maven Michael Pettis, who emailed us over the last few days to say we must, at minimum, consider the possibility that there is a reason rapid credit growth in China has failed to do what it’s “supposed” to do. And, by extension, why deflationary pressures in China indicate the probable need for monetary tightening, not loosening. Read more
Said China of its own mooted plan on Thursday:
“It’s not a stimulus program by expanding fiscal input, it’s about guiding social capital into investment projects,” Luo [an investment official with the National Development and Reform Commission] said. “It has nothing to do with the 4-trillion-yuan stimulus plan in 2008, and it is fundamentally different from that.”
But wasn’t it already pretty clear it wasn’t a legit stimulus? Read more
Take note of the following story from IFR. It could turn out to be very important:
Jan 4 (IFR) – The yield-to-worst in the high-yield market dipped to its lowest level ever this week, as risk markets rallied on the fiscal cliff agreement. Dropping below 6% for the first time in history, the yield to worst on the Barclays high-yield index fell to 5.96% on Wednesday and pushed even lower to 5.90% on Thursday. This compares to 6.13% on Monday and 8.14% at the start of 2012. Read more
China’s markets are zooming upwards, and quite honestly who knows why? It could be something to do with the big politburo meeting yesterday, at which various pronouncements about the economic outlook were made. We’re not sure the remarks should be interpreted as meaning that continued large scale, infrastructure-focused stimulus is a certainty. Read more
Forecasting is a tricky thing. The latest quarterly update from Australia’s Bureau of Resources and Energy Economics predicts iron ore prices will average A$101 a tonne in 2013:
As in, does it exist?
Wang Tao at UBS takes aim at the “Rmb1tn stimulus“; she thinks it is not really real: Read more
A trillion renminbi! That’s almost like a real 2008-style stimulus (which was Rmb4tn). And beleagured Chinese stocks reacted accordingly:
News that the Chinese city of Changsha, in the central Hunan province, plans to spend Rmb829m, or 150 per cent of its GDP, made waves last month. It’s a fairly small city and one that was reportedly booming just weeks earlier.
We recently made the point that slowing growth was leading the central government to back away from its tentative plans to rebalance the economy, and instead doubling down on imbalances with its push to keep GDP growing through investment, particularly in infrastructure. Read more
Excuse the cliche, but there really IS something for everyone in the many bits of Chinese economic data released in the past few days.
Here’s a very brief summary, courtesy of Nomura (it excludes the loan data which just came out at pixel time – we’ll get to that further down): Read more
So what is this great new Chinese stimulus that world markets are becoming solely increasingly reliant upon for a regular fix of optimism?
Two things that we know so far… sort of: Read more
When the godfather of mortgage securitisation speaks, you listen.
This week Lewis Ranieri devoted a not insignificant amount of time from his Milken conference panelist discussion to Harp 2.0 — the US government’s refinancing programme for underwater mortgages. Read more
The US overtook China to regain top position as the world’s leading investor in “clean” energy last year, according to Bloomberg New Energy Finance, the FT reports. It was the first year since 2008 that the US has been ahead of China as the world’s largest market for investment in renewable energy, biofuels and energy efficiency. However, it may drop back again this year after the end of two key subsidy programmes introduced as part of the 2009 economic stimulus package: grants for renewable energy projects and government loan guarantees to encourage private sector investment.
The fate of a compromise deal to extend stimulus measures for the US economy for two months was thrown into doubt on Sunday after John Boehner, the Republican Speaker of the House, said he was opposed to the plan, the FT reports. Speaking a day after the Senate overwhelmingly approved a deal reached by the Democratic and Republican leaders in the upper chamber to extend payroll tax cuts, Mr Boehner said the bill would be rejected by rank-and-file Republicans in the House when it was taken up this week. Mr Boehner said that negotiations should be reopened and should focus on finding a solution for the entire year, rather than just the two months covered by the Senate compromise. However, Senate Majority Leader Harry Reid said that while he favoured a year long extension too, he wouldn’t negotiate a longer deal until the two month extension is passed by the House, reports the WSJ. The development raises the spectre of a year-end tax increase, says the NYT. While the House is expected to take up the bill on Monday, Senators have already finished up the last bits of their business on Saturday with the vote on the payroll tax extension and a large spending bill, said their goodbyes and left for the holidays.
This China decoupling thing was never really going to take off, was it?
From Bloomberg: Read more
Chinese premier Wen Jaibao threw some shade on the eurozone on Wednesday, and the US too — insisting they get their own fiscal and monetary houses in order and recognise China as a market economy if they really want to see some investment.
His own house didn’t look so great, either, when the Asian Development Bank challenged the likelihood of a much hoped-for Chinese soft landing with its updated outlook. It raised the inflation forecast for China, while cutting growth forecasts (hmm… stagflation, anyone?). Read more
Barack Obama sought to resuscitate his flagging presidency and the US economy with a larger-than-expected $450bn jobs plan that emphasises tax cuts in a bid to win over Republican opposition, the F reports. In a sign of the White House’s own bleak assessment of the recovery, the proposal, which was presented in an address by the US president to Congress, is more than half the size of the stimulus package enacted by Mr Obama shortly after he took office in the depths of the financial crisis of 2009. “It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and hire, there will be customers for their products and services,” Mr Obama said. If enacted, the plan would reduce tax paid by workers to fund the national retirement scheme to 3.1 per cent in 2012 from the 4.2 per cent level temporarily introduced this year.
Alternative working title: When Orson Welles meets finance.
We discussed Fantasy Fed options on Wednesday. But here’s one from Paul Krugman, which we definitely overlooked — ironically, possibly the most fantastical of all. Read more
An important question given struggling financial stocks, a stalling US economy, US public sector cuts and concerns over the impotence of QE3. Take your pick, really.
Fortunately it was also a question tackled Friday morning in a special conference call hosted by Nomura’s US banking analyst Brian Foran, Japan banking analyst Ken Takamiya, and Richard Koo from the Nomura Research Institute. Read more
Markets will look to this afternoon’s FOMC meeting for guidance or even policy stimulus from the Federal Reserve — although analysts expect little more than revisions to US growth for now, says Reuters. The Fed will be reluctant to make long-term decisions in response to swooning markets but it could consider anything from further asset purchases, to cutting interest on excess reserves, to modifying the outlook for an “extended period” of low rates, the FT says. Most economists in a Bloomberg poll think that changes to the Fed’s extended period language is most likely. But even an Operation Twist-style focus on buying long-term debt is possible, reports FT Alphaville.
The minutes from the US Federal Reserve’s June meeting show there is some interest in monetary stimulus if economic growth remains weak, marking the Fed’s first serious discussion of easing since the US economy hit a “soft patch” in the spring. “Some participants noted that, if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate, and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation,” the minutes said. Further monetary action would be likely to mean more quantitative easing, aimed at driving down long-term interest rates. However the minutes also show a deep divide among the FOMC members. While some thought that weak growth might create a need for further easing, others thought that slower growth and higher inflation suggest “that there might be less slack in jobs and product markets than had been thought”.
The Bank for International Settlements has warned that global growth must slow to address global imbalances, saying there is little to no slack left for rapid non-inflationary expansion, the FT reports. BIS in its annual report said that monetary policy should be quickly brought back to normal and countries should act urgently to close budget deficits. The tough recommendations from BIS – the international organisation which came closest to predicting the 2008-09 financial and economic crisis – came despite signs of weakening economic momentum this year. The BIS report, however, warned policymakers not to expect a normal recovery because much of the pre-crisis growth had been unsustainable and capacity will have been destroyed for ever, particularly in finance and construction.The BIS view is closest to that of the ECB but runs counter to that of the Fed, its largest member central bank, which made it clear last week that its interest rates would remain extremely low for an “extended period”.
For the commute home, where there is often such a thing as too much information, like the government warning on your favourite bottle of scotch,
- US IPO filings reach 2007 levels. Read more
Sean Corrigan, chief investment strategist at Diapason Commodities, was the first to detect a correlation between China’s loose monetary policies and copper prices. His basic finding; the greater the amount of loans extended in China, the more copper imports into China.
Although that was in January 2010. Read more
Well, it’s a start.
The FT reported Monday evening that the House of Represenatives will on Tuesday vote on a two-week continuing resolution (CR) that funds the federal government through March 18 and reduces FY 2011 discretionary authority by $4bn. Read more
King Abdullah of Saudi Arabia announced financial support measures, worth an estimated SR135bn ($36bn), in a bid to avert the kind of popular unrest that has toppled leaders across the region and is now closing in on Libya’s Muammer Gaddafi, the FT reports. The measures include a 15 per cent salary rise for public employees to offset inflation, reprieves for imprisoned debtors, and financial aid for students and the unemployed. FT Alphaville, echoing emerging markets offering, FT Tilt, notes it’s also the first time the Saudi government has made unemployment payments.
The fiscal stimulus and tax cuts package agreed late last year and the Federal Reserve’s autumn decision to restart quantitative easing have significantly improved the outlook for US growth in the eyes of the IMF, reports the FT. The Fund has increased its 2011 growth forecast by 0.7 percentage points to 3 per cent based on last year’s legislative deal to extend tax cuts and unemployment insurance beyond 2010. At the same time, the IMF warned about the long-term consequences to the deficit relative to the package’s ‘small growth dividend’. It projected that gross US government debt would hit 110 per cent of national income by 2016 — and that the deficit this year will be more than twice that of the eurozone.
Here’s a pop quiz for macro fans: Federal Reserve asset purchases were equivalent to an X hundred basis point reduction in the federal funds rate and contributed Y million jobs. What are X and Y?
In a recent paper on zero lower bound events and the impact of quantitative easing, economists at the San Francisco Fed try to find X and Y. Read more
The tax cut package is proving stimulative already – at least in terms of encouraging debate in the wonkosphere.
We continue to share the unoriginal view that extending the tax cuts for those earning above $250k will not provide the best bang to buck ratio. (And, yes, we accept that there are other reasons why you might want to offer tax cuts.) Read more