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.
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.
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
On Sunday Pimco issued an intriguing tweet from Bill Gross, the undisputed King of the bond mountain.
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
Lombard Street’s Charles Dumas charts the overvaluation of the Chinese currency:
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
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
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
A couple of points from Deutsche Bank’s GEM Equity strategy team on Friday to file under the “it’s China, not the Fed, that’s driving everything at the moment” meme:
…‘we believe that the improvement in the Chinese economic and corporate data, which has become evident since the end of August, is not sustainable’ and that ‘the Chinese growth story is starting to unravel’. As regular readers will know, our negative structural view derives from an examination of the relationship between the corporate sector and the state, especially at a local level, which we have documented in two longer research reports (China’s corporate sector; a messy transition’, 15 May 2012, and ‘China; no quick fix for the Beijing model’, 30 August 2012). Read more
China announced last week that its State Administration of Foreign Exchange would remove the $1bn limit for foreign sovereign wealth funds, central banks and monetary authorities buying Chinese assets through the Qualified Institutional Investor Programme (QFII).
David referenced that this might turn out to be pretty significant as reserve managers are currently desperate to diversify their holdings out of euro and dollar.
But there’s another important factor to consider too. China is not a benevolent agent which just does things for the sake of pleasing other people. If it chooses to act you can bet your bottom yuan that it’s because it suits its own interests to do so. 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
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
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. Read more
All that gradual exchange flexibility, and yet the renminbi is only weakening:
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
One reserve currency to rule them all.
But does it need to be this way? Or is it indeed possible to have two, or even several such currencies? Or to get straight to the heart of it: can the euro or Chinese yuan ever have the status of the US dollar? 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
Pretty much every China watcher, including us, has written in recent months about how reserve ratio requirement (RRR) cuts by the People’s Bank of China are not necessarily about credit easing. In fact these days, an RRR cut is not so much a move to make more credit available as it is to avoid reductions in liquidity.
Mark Dow, portfolio manager at Pharo Management, has a nice explanation of how this is, and where the RRR fits into the PBoC’s broader monetary policy. It starts with the policymakers’ credit expansion targets, which are believed to be about Rmb8tn to 8.5tn this year: 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
Bloomberg reports on staling housing markets in Asia that have been hit by government efforts to prevent the real estate bubbles that Western economies have seen burst over the last few years. Property prices in Hong Kong have decreased by 6 per cent since June and Barclays analysts estimate a drop of 25 per cent could be seen by 2013. Would be Hong Kong homebuyers have to find large deposits, as well as stumping up extra transaction taxes and facing rising interest rates. The WSJ reports that banks in Hong Kong have also been seeing a decline in yuan deposits as increasing amounts of the currency is used to pay mainland suppliers. The outflow of deposits, as well as tighter lending conditions in China have motivated banks in Hong Kong to raise additional yuan funds in order to move further into the market. Flight to the to US dollar has also led to decreases in deposits.
Shanghai plans to become a global center for yuan trading by 2015, open its markets wider to foreign investors and almost triple non-currency financial transactions, reports Bloomberg. The city will allow “significantly more” foreign participation in its financial markets, according to the plan jointly published by the National Development and Reform Commission and the Shanghai government on Monday. Shanghai aims to have about 1,000tn yuan ($158tn) in financial trading, excluding the currency transactions, by 2015, compared with 386.2tn yuan in 2010, the plan said.
President Obama was in Hawaii this weekend to promote the Trans-Pacific Partnership, a trade accord that would be the the largest the US has entered into since the North American Free Trade agreement in 1994. The agreement includes nine countries in the Asia Pacific and may be expanded to include Japan and Canada, according to Bloomberg. The pact would seek to free up trade via traditional channels by addressing tariffs and allowing better market access, but it also aims to address any unfair advantages that state-owned enterprises may have when bidding for business. The agreement is meant to be signed within a year, though some participants in the negotiations think that it will prove too difficult to meet that timeline. At the same meeting in Hawaii, President Obama also remarked on the yuan’s appreciation being too slow, Bloomberg reports.
What are chances of a soft landing for the Chinese economy? Pretty slim if you ask über bear Albert Edwards.
The Société Générale strategist reckons “blind faith” in the competence of the Chinese authorities to guide the economy to a soft landing is misguided. He says: Read more
A bill that aims to punish Beijing for holding down its currency passed the Senate on Tuesday despite a warning from China that the legislation could plunge the global economy into a 1930s-like depression, the FT reports. The legislation passed the Democrat-led Senate with a comfortable 63-35 majority, with several Republican senators also supporting the bill. The vote could set up a tussle with the House of Representatives, whose Republican leaders have called the bill “dangerous” and so far have refused to schedule a vote on it. China stepped up its criticism of the bill, with foreign ministry spokesman Ma Zhaoxu said in a statement warning the move “seriously violates rules of the World Trade Organisation and obstructs China-US trade ties”, Xinhua reports.
The chairman of the US Federal Reserve has accused China of damaging prospects for a global economic recovery through its deliberate intervention in the currency market to hold down the value of the renminbi, the FT reports. Speaking just hours after the Chinese government sharply criticised a US congressional bill that would punish Beijing for alleged currency manipulation, Ben Bernanke told a congressional committee that an undervalued renminbi was preventing the rebalancing of global demand towards emerging market economies. The US Senate voted overwhelmingly on Monday to open debate on a bill, clearly aimed at China, that would impose tariffs on imports from countries with undervalued currencies. However on Tuesday, John Boehner, Republican Speaker of the House of Representatives, counselled caution over the bill, saying it went beyond the remit of Congress.