Prudence and the PBoC

If you wanna know why China cut policy rates again over the weekend this chart from UBS’s Wang Tao goes a fair distance towards explaining it:

The cut was earlier than expected, but the reasoning is pretty simple. As Tao says (with our emphasis): Read more

So you still yuan out?

Charts from Nomura showing, on the left, China’s largest cumulative two-month decline in FX purchase positions on record occurring despite a record trade surplus over the same period and, on the right, the probable hoarding of foreign currency as reflected in a sharp monthly rise in foreign-currency deposits in January.

Or to paraphrase a bit further: more signs of capital flight and depreciation pressure in China. Read more

The shuttering of China?

This is gonna be speculative, so bear with us.

It’s the idea that China will — as more and more capital threatens to flow out of the country — start to shut its doors and look inwards once again. Read more

This currency would be great if it wasn’t for the market, RMB edition

“China reported the largest deficit in its capital and financial account in more than a decade for the last quarter of 2014, the latest evidence showing that capital is flowing out of the country,” you say?

It “recorded a deficit of $91.2 billion in the period under its capital and financial account, which covers investments, the State Administration of Foreign Exchange said Tuesday, based on preliminary estimates,” you add?

A Great FX Outflow, indeed. Read more

China’s new normal, cut out and keep edition

Here’s 28 of China’s 31 provincial and municipal governments adjusting to reality:

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China Vs the so-called “art” industry

Remember Roubini going off about the art market in Davos? About how “Whether we like it or not, art is used for tax avoidance and evasion” and “While art looks as if it is all about beauty, as a business it is full of shady stuff”?

Well here are two bits of related Chinese art market shenanigans for you.

The first, from the Epoch Times, is about corrupt officials who peddle their works of calligraphy to disguise bribes (via Climateer and The Art Market Monitor): Read more

If we hit that bullseye, the rest of the dominoes should fall like a house of cards, China’s implicit state guarantee edition

The thing about a “pervasive implicit state guarantee” is that it’s pretty pervasive. It gets everywhere. Well, just about everywhere. Everywhere that an implicit state guarantee can get.

Futhermore, it’s hard to get rid of once it spreads. (We’ll spare you an analogy) Read more

China’s currency war problem won’t just go away

Pretty obviously — with ECB QE, a presumed resultant euro funded carry trade, and all sorts of central banks rushing to cut rates — there’s some sort of renewed currency war movement going on.

And while we’re all ears for arguments about positive-sum outcomes (in a deflationary world), it’s worth remembering those who might struggle to get involved. Read more

ICYMI, China’s credit buildup was pretty damn fast

Like 97th percentile fast.

From Goldman, do click to enlarge: Read more

Shenzhen and the art of balance sheet maintenance

Chinese real estate companies raised $5.3bn in dollar bond markets during the first three weeks of 2013 and $4.9bn over the same period in 2014.

This year, not a single deal has been completed…

“You don’t want to go hat in hand to investors when they feel they’re catching a falling knife,” said the head of debt capital markets at one investment bank.

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The Great China FX Outflow

As Goldman flagged this morning, December has brought with it $19bn of FX outflows from China. That’s the biggest move since 2007 (with our emphasis):

The position of FX purchases for the entire banking system (the PBOC plus commercial banks) decreased by about $19bn in December (vs. essentially flat in November)…

The FX outflow in December underlined the weakness in demand for the CNY, despite a strong trade balance of close to $50bn. The FX outflow size is the largest since December 2007 (and this earlier data point was skewed by the MOF’s FX injection in China’s sovereign wealth fund). The PBOC has been setting the daily USDCNY fix on the strong side of the spot rate since late November to counteract depreciation expectations. Today’s data suggest that besides displaying such a bias in fix setting, the central bank might have gone further in supporting the currency by buying CNY in the market. But we await PBOC balance sheet data, due out in the coming weeks, to confirm if it is indeed the case. The FX outflow also partly explains the slow M2 growth in December.

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China, stimulus and the Chewbacca defense

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

Lessons in sustainable finance from local Chinese governments

From the FT:

Local governments in some of China’s smallest cities are snapping up an increasing amount of their own land at auctions, in a destructive cycle designed to prop up property prices but which is ravaging their own finances.

Local government financing vehicles in at least one wealthy province, Jiangsu, which borders Shanghai, accounted for more land purchases than property developers did in 2013 — the last year for which data were available — according to research collated by Deutsche Bank…

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Deflating China

Here’s what 33 months of negative Producer Price Index inflation in China look like:

Of course, we’re now at 34 months, following December’s print. This clocked a 3.3 per cent year on year fall in the index — the biggest annual fall in more than two years.

Dramatic. But the question is, should we care? Read more

“China’s fiscal slide” less fun than it sounds

Sentences to warm the New Year heart, from Deutsche:

This year, China will likely face the worst fiscal challenge since 1981. We believe this is the most important risk to the economy and one that is not well recognized in the market.

Assuming the second bit is true… Read more

“必有牛市” – “There must be a bull market”

You’ve read about the scope for a dynastic bull market in the Economist… now read the report. If you can read Mandarin, like P/E ratios and have a good feel for Chinese imperial history that is.

Do click through the below for the pdf from Cinda. Joseph Cotterill, our resident Mandarin translator, assures us that it’s a chart of the last two millennia of order and chaos in China… which is nice: Read more

China’s “new 4 trillion stimulus” and its collateralised weight

Biggest fall in five years that, even if it’s still up 35 per cent this year. Might be time to talk about the potential consequences of all this, no? Read more

Your Shanghai equity “frenzy”

And in the Shanghai Composite, from Fast, “as of 2:34pm in Hong Kong, turnover today is already $91.4bn, a record high according to Bloomberg data going back to 2005.”

Blame retail, blame leverage but don’t, as already mentioned, put too much weight on the Shanghai-Hong Kong Stock Connect scheme — uptake has been light and the timing is off. It’s up to you how much weight you put on that rate cut in late November. YEAH the equity rally got off the ground well before the rate cut with the Shanghai Composite up by 23 per cent between the start of June and 21st November, more than any other major equity market. BUT shares have also gone up 17.5 per cent since the rate cut so it’s obviously part of the story.

But to get back to the more important retail, leverage stuff…. Read more

China’s levered stock market

Consider this from Gavekal’s Chen Long on the run up in China’s A-shares:

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Wriggle room, the CNY, and the PBoC

More on that Friday PBoC rate cut — and just as China goes ahead and cuts its 14-day repo operation rate by another 20bp to 3.20 per cent too. That move on Tuesday, according to Nomura, suggests that the PBoC will continue to ease monetary policy… which would be true to form.

As Barc note, “the policy rate cut suggests that China is once again following the typical sequence in a monetary easing cycle – the pace of CNY appreciation is often slowed in advanced, followed later by the same directional moves in the policy rate and banks’ required reserve ratio.” Read more

Xi who must keep you employed

This man is in charge of China. Like, really in charge:

And he wants to make sure everyone he’s in charge of remains nice and calm. So he’d like them kept busy. That, for the most part, means they should be working — call it a social compact or call it a security measure, it doesn’t really matter. Read more

Update: moles still largely unwhacked in China

If there’s one sure bet in China it’s that money, uh, finds a way and that shadow banking (or whatever less objectionable name you wish to apply) will do its damndest to help. Otherwise, what’s the point?

In this episode, crowd funding. Read more

Regressing to the mean in China or why if something cannot go on forever, it will stop

With a h/t to Marginal Revolution, here’s Larry Summers and Lant Pritchett on why — for the same reason the USSR didn’t overtake the US, and Shinzo Abe has a tough job on his hands — “excessive extrapolation of performance in the recent past and treating a country’s growth rate as a permanent characteristic rather than a transient condition” is a bad idea.

Most particularly where China is concerned. Read more

Chinese QE turns American?

Yeah, we know, it’s semantic. China are already the kings of QE. But bear with us for a bit. The nature of their QE may be changing.

From Stephen Green and Becky Liu at Standered Chartered: Read more

It’s not easy having loads of FX reserves

Via Reuters on Monday (H/T Marc Ostwald):

BEIJING, May 12 (Reuters) – A capital account deficit would be a good thing for China, the head of the central bank’s research unit said on Monday, because it could be used to offset the current account surplus and China would not need to accumulate foreign reserves continuously. Jin Zhongxia, director of the Finance Research Institute of the People’s Bank of China, made the comments during a business forum in Beijing. The previous day, Premier Li Keqiang had said China’s war chest of foreign currency reserves had become a headache as its continued rise could stoke inflation in the long term.

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China’s leaning towers

We are now fairly sure there is a serious mismatch between the supply of and demand for charts about China property — more are being produced than will ever be seen. That said, here are a few worth paying attention to:

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This is nuts. When’s the 危机?

Via the WSJ:

Alibaba Group Holding Ltd.’s online-payment affiliate is set to roll out its first wealth management product Friday, as Chinese Internet companies move deeper into financial services.

The affiliate, Alipay, this week began allowing users of its Yu’E Bao investment service the right to put their money into the wealth management product when it launches. In China, wealth management products are deposit-like investments offering higher returns for a fixed period than banks offer on a typical savings account.

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Devaluation stations: Et tu China?

Lombard Street’s Charles Dumas charts the overvaluation of the Chinese currency:

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Chinese chicken

More macabre farmyard and less ‘where the WMP things are‘ this time…

It’s a matter of canards and Bertrand Russell’s chicken you see. In other words — if you think China can avoid a financial crisis in the future because it has managed to do in the past, you might get your neck wrung. Read more

The PBOC’s big test

The PBOC conducted a 255 bn yuan ($42 bn) liquidity operation on Tuesday, causing money market rates — which had been running very high — to drop significantly.

As Bloomberg noted:

The seven-day repurchase rate, a gauge of interbank funding availability, dropped 88 basis points to 5.44 percent in Shanghai, according to a daily fixing compiled by the National Interbank Funding Center. It surged 153 basis points yesterday, the most in seven months. The Shanghai Composite Index climbed 0.9 percent today, after closing below 2,000 yesterday for the first time since July.

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