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Beijing Eases Policy, Yuan Slides Towards 10-Year Low

October 8, 2018

Beijing Eases Policy, Yuan Slides Towards 10-Year Low

On Sunday, the Bank of China cut the level of cash that banks must hold as reserves. The Yuan continued its slide.

Shares in Asia stumbled in early trade on Monday as investors waited with bated breath as China’s markets prepare to reopen following a week-long holiday and after its central bank cut banks’ reserve requirements in a bid to support growth.

Investors will be focused on markets in China, following a decision on Sunday by the People’s Bank of China (PBOC) to cut the level of cash that banks must hold as reserves in a bid to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States.

Reserve requirement ratios (RRRs) – currently 15.5 percent for large commercial lenders and 13.5 percent for smaller banks – would be cut by 100 basis points effective Oct. 15, the PBOC said, matching a similar-sized move in April.

Trade War

China said it would not devalue the yuan in response to a trade war. Actions speak louder that words.

The CNH is once again dangerously close to the PBOC’s redline of 7.00, with 3-month USD/CNH points, which have reached their highest this year, suggesting that a breach of that level is increasingly probably and implying a CNH yield of around 2% above equivalent USD 3-month rates. At the same time, the 1-year forward is also flirting with 1,000 pips, another signal that traders see a weaker yuan. The rate of appreciation in the forward curve this month is the quickest since June, when the U.S.-China trade war crossed the Rubicon.

…click on the above link to read the rest of the article…

China Cuts Reserve Ratio, Releases 1.2 Trillion Yuan Amid Rising Trade War, Record Defaults

October 7, 2018

China Cuts Reserve Ratio, Releases 1.2 Trillion Yuan Amid Rising Trade War, Record Defaults

China’s central bank announced it would cut the Required Reserve Ratio (RRR) for most banks by 1.0% effective October 15 for the fourth time in 2018, a little over three months after the PBOC announced a similar cut on June 24, as Beijing seeks to stimulate the slowing economy amid the growing trade war with the US, a slumping stock market, a sliding yuan and a record number of bond defaults.

The People’s Bank of China announced on Sunday local time that it lowered the required reserve ratio for some lenders by 1 percentage point according to a statement on its  website. The cut, which will apply to a wide range of banks including large commercial banks, joint stock commercial banks, city commercial banks, non-county rural banks and foreign banks, will release a total of 1.2 trillion yuan ($175 billion), of which 450 billion yuan will be used to repay existing medium-term funding facilities which are maturing, and the remaining RMB 750bn will help offset the seasonal rise in liquidity demand during the second half of the month due to tax payments, according to the PBOC.

But the real reason behind the RRR cut is that it is intended to boost sentiment before the onshore equity market re-opens on Monday after the week-long holidays, as well as to support liquidity conditions at a time when global interest rates have suddenly spiked to multi-year highs..

Commenting on the cut, Goldman economists said that while they had been expecting one RRR cut per quarter in H2, “the 1pp magnitude surprised us on the upside.”

…click on the above link to read the rest of the article…

Ex-PBOC Head Warns China’s Exporters Could Soon Ditch The US

September 21, 2018

Ex-PBOC Head Warns China’s Exporters Could Soon Ditch The US

Former Chinese central bank governor Zhou Xiaochuan suggested on Wednesday that the direct impact on China of the trade war with the US “appears limited,” though it could quickly prompt China’s top exporters to pivot away from US markets. Xiaochuan, who left the bank in March after 15 years at the helm, told Reuters that China’s economy would be stable in 2018, with an expected growth rate of 6.5%, but needed to shift away from an economic model based on “urbanization,” or constructing ghost cities.

However, the main risk to the global economy is protectionism according to the ex-PBOC head. The costs of protectionism could hit the US the hardest, as Chinese firms are expected to withdraw from US markets and expand into other global economies:“I think it will force China to look at many other markets. So it’s not necessarily a good thing for the United States,” he said.

“I think the speed of (geographical) diversification can be relatively fast and beyond many people’s expectations.”

Reuters said Xiaochuan downplayed the idea that protectionism will severely affect economic growth in China, which he said had been estimated at 0.2-0.8% of GDP, but added that trade wars are creating uncertainties and could hurt business confidence.

Xiaochuan is right, in the latest US Economic Outlook via Barclays, US Economist Michael Gapen revealed that global growth momentum is already slowing.

Gapen also showed that global trade volume as a share of world GDP has likely reached a turning point into a protectionist era.

As a result of the peak in “hyper-globalization”, China is being forced to change its growth strategy after many decades. The economic driver of supplying Western markets with cheap goods and constructing ghost cities in China are over. “Whether this is reaching the peak or has peaked and maybe going down, we need to find some new economic growth driver,” said Xiaochuan.

…click on the above link to read the rest of the article…

China Caves: The Full Details Behind Beijing’s Launch Of Fiscal Easing

July 24, 2018

China Caves: The Full Details Behind Beijing’s Launch Of Fiscal Easing

Last week we documented several instances of China’s most recent monetary easing, from the expanded usage of the Medium-Term Lending Facility to purchase China’s equivalent ot junk bonds, to the barely noticed 103bps cut in China’s 3-Month Treasury rate, even as the PBOC had cut the RRR three times already, most recently at the end of June.

However, judging by the ongoing slide in the Chinese stock market, it was not enough; meanwhile in a curious development, last week we also reported that in a very rare public “war of words” between the PBOC and the Ministry of Finance, the PBOC accused the MOF of not doing enough to stimulate the country and that the country’s fiscal policy wasn’t “proactive.” That, as we said at the time, was a clear signal that fiscal policy easing may be imminent.

And, as we learned overnight, it was because on Monday the State Council held a meeting in which it discussed economic policies, and decided to make the fiscal policy more “proactive” (a word we had heard just a few days earlier), and to keep liquidity conditions “reasonably adequate”. To temper expectations, the government also reiterated that they intend to avoid aggressive loosening like the “4 trillion” stimulus China rolled out in 2008/09.

Commenting on the announcement, Deutsche Bank writes that “the statement is a confirmation of policy stance changing from tightening toward loosening.”

Indeed, as noted here over the past month, the change of monetary stance has already happened in Q2 with the RRR cut and injection of liquidity through MLF. The new message from the meeting today is that fiscal policy will become incrementally more expansionary.

Specifically the government will:

  1. allow all firms to deduct 75% of their R&D expenses from tax, which they estimate can save firms RMB 65bn for the full year;

…click on the above link to read the rest of the article…

Has The PBOC Taken Control of The Gold “Market”?

July 11, 2018

Has The PBOC Taken Control of The Gold “Market”?

Has The PBOC Taken Control of The Gold "Market"? - Craig Hemke (10/07/2018)

The evidence is mounting, and we invite you to consider the implications.

First, a few items of background information. Perhaps these are unrelated, perhaps they are not.

Fast forward to the summer of 2018. Two weeks ago, our fellow columnist here at Sprott Money, David Brady, wrote an insightful piece regarding a new correlation for the global gold price—the USDCNY—which is the exchange rate of US$ to Chinese yuan. Though the PBOC maintains a “peg” for this rate, the rate is allowed to fluctuate if the PBOC deems it necessary. Before we go on, I urge you to read David’s column: https://www.sprottmoney.com/Blog/gold-the-chinese-…

Now consider this. Since the PBOC began to actively devalue the yuan versus the dollar four weeks ago, the price of COMEX gold has tracked the yuan nearly tick-for tick. This is clearly shown on the chart below. We’ve taken the USDCNY and inverted it to CNYUSD. This is shown in candlesticks. The price of the Aug18 COMEX gold is represented as a blue line.

…click on the above link to read the rest of the article…

China Threatened By “Vicious Circle Of Panic Selling” From Marketwide Margin Call

July 7, 2018

China Threatened By “Vicious Circle Of Panic Selling” From Marketwide Margin Call

Two weeks ago, when commenting on the PBOC’s latest required reserve ratio cut, we pointed out that one of the more prominent risks facing the Chinese stock market, and potentially explaining why the Shanghai Composite simply can’t catch a bid during the recent rout, is the risk of a wave of margin calls resulting in forced selling of stocks pledged as collateral for loans.

The pledging of shares as loan collateral – a practice that has gotten increasingly more popular over the years – has been especially prevalent among smaller companies as we observed in February and initially, last June. Unlike in the U.S., where institutional shareholders are a big market presence, private Chinese firms are often controlled by a major shareholders, who often own more than half of company. These big stakes are the most convenient tool for such big shareholders to raise their own funds.

Here, the risk for other shareholders is that when major investors take out such share-backed loans is that stocks can plunge sharply when the borrowers run into trouble, and are forced to liquidate stocks to repay the loan. Hong Kong-listed China Huishan Dairy fell 85% in one day in March 2017: It is unclear what triggered the selloff in the first place, but the fact that Huishan’s chairman had pledged almost all of his majority shareholding in the company to creditors was likely a key factor.

Small caps aside, the marketwide numbers are staggering: about $1 trillion worth of stocks listed in China’s two main markets, Shanghai or Shenzhen, are being pledged as collateral for loans, according to data from the China Securities Depository and ChinaClear. More ominously, this trends has exploded in the past three years, and according to Bank of America, some 23% of all market positions were leveraged in some way by the end of last year in China, double from the start of 2015.

Source: WSJ

…click on the above link to read the rest of the article…

Has the PBoC deliberately weakened CNY as part of the trade war?

June 30, 2018

Has the PBoC deliberately weakened CNY as part of the trade war?

It has been another trade war week, as the market has been looking for clues on the Chinese retaliation measures against the Trump tariffs that are planned to go live on 6 July.

Global trade momentum started to weaken even before the trade conflict escalated. The three months from February until April marked the weakest running 3-month period for world trade since early 2015. A bad sign given that the period included a temporary cease-fire between Trump and Xi Jinping. Usually it adds downwards pressure on 10yr bond yields, when world trade is slowing (at least initially). A further slowdown of global trade in June/July/August could keep long bond yields under pressure over the summer. In other words, the trade war fog needs to dissipate for the 10yr US Treasury yield to unfold its upside potential to the range between 3.25%-3.50% (Major Forecast Update: USD to remain in the driving seat)

Chart 1: Less global trade, lower long bond yields

Last week we wrote that we found trade-based Chinese retaliation measures more likely than attempts to retaliate via the financial markets. The fact that Trump is threatening with new tariffs on goods worth a total of USD 450bn makes the retaliation process trickier for China. It is simply not possible to retaliate symmetrically, as there are not enough US exports into China to tax. This leaves an elevated risk of unorthodox retaliation measures being used. Prohibiting symbolic US products from entering Chinese territory could be one way of doing it. Expect more clarity on whether Xi Jinping will deliver an ALL-IN answer as early as this weekend.

…click on the above link to read the rest of the article…

China Cuts Reserve Ratio, Unlocks 700BN Yuan Amid Rising Trade War, Mass Defaults And Margin Calls

June 24, 2018

China Cuts Reserve Ratio, Unlocks 700BN Yuan Amid Rising Trade War, Mass Defaults And Margin Calls

As widely expected, China’s central bank announced it would cut the Required Reserve Ratio (RRR) for some banks by 0.5% effective July 5, just over two months after the PBOC did a similar cut on April 17, the first such easing since the start of 2016.

The move is expected to unlock 700 billion yuan ($108 billion) in liquidity amid growing trade war tensions, a sharp slowdown in the Chinese economy, a tumbling stock market, rising forced margin call, and a spike in corporate defaults.

According to the central bank, the aim of the cut is” to support small and micro enterprises, and to further promote the debt-to-equity swap program.” The cut will apply to major state-run commercial banks, joint-stock commercial lenders, postal banks, city commercial lenders, rural banks and foreign banks, in other words: virtually everyone.

“The size of the liquidity being unleashed has beat expectations and it’s larger than the previous two cuts this year”, said Citic fixed income research head Ming Ming. “It’s almost a universal cut as it covers almost all lenders.”

The RRR cut was also widely expected following the publication of a central bank working paper on Tuesday calling for such a cut.

A cut in China’s RRR by the PBOC is imminent following central bank’s working paper released Tuesday arguing for such a cut.

According to Bloomberg, the cut is designed to achieve two things:

  • The 500 billion yuan unlocked for the nation’s five biggest state-run banks and 12 joint-stock commercial lenders will be channeled to debt-to-equity swaps, which can reduce companies’ debt burdens and help cleaning up banks’ balance sheets. It comes following no less than 20 corporate bond defaults in 2018, and ahead of a wave of corporate repayments that has prompted analysts to express fears about a default avalanche.

…click on the above link to read the rest of the article…

Weekly Commentary: The Great Fallacy

June 17, 2018

Weekly Commentary: The Great Fallacy

A big week in the world of monetary management: The Federal Reserve raised rates 25 bps, the ECB announced plans to wind down its historic QE program, and the Bank of Japan clung to its “powerful monetary easing” inflationist scheme. A tense People’s Bank of China left rate policy unchanged, too weary to follow the Fed’s path.
The renminbi declined a notable 0.5% versus the dollar this week. More dramatic, the euro was hammered 1.9% on Draghi’s game plan. Also on Thursday’s dollar strength – and even more dramatic – the Argentine peso sank another 6.2% (down 34% y-t-d). The session saw the Brazilian real drop 2.2%, the Hungarian forint 2.6%, the Czech koruna 2.2%, the Polish zloty 2.0%, the Bulgarian lev 1.9%, the Romanian leu 1.9% and the Turkish lira 1.7%.

The FOMC, raising rates and adjusting “dot plots” higher, was viewed more on the hawkish side. The ECB, while announcing plans to conclude asset purchases by the end of the year, was compelled to add dovish guidance on rate policy (“…expects the key ECB interest rate to remain at present levels at least through the summer of 2019…”). Blindsided, the market dumped the euro. The Fed and ECB now operate on disparate playbooks, each focused on respective domestic issues. Anyone these days focused on faltering emerging market Bubbles, global contagion and the rising risk of market illiquidity?

June 13 – Financial Times (Sam Fleming): “Jay Powell put his personal stamp on the Federal Reserve on Wednesday, as the new chairman vowed to speak in plain English and hold more regular press conferences as he fosters ‘a public conversation’ about what the US central bank is up to. The Fed’s statement after the Federal Open Market Committee meeting, which detailed its decision to raise rates 0.25% and set a course for two more increases this year, also bore his imprint, as Mr Powell stripped away some of the economic verbiage that cluttered its communications in recent years. Mr Powell’s break from the approach of his predecessor… was more a stylistic one than a radical change of monetary policy strategy.”
…click on the above link to read the rest of the article…

Hot War and Cold Markets

April 13, 2018

Hot War and Cold Markets

This is turning into a comedy. A black comedy, for sure, but still. As both the Skripal novichok ‘poisoning’ case in Britain and the ‘chemical attack’ in Douma, Syria fall flat on their faces on a total and absolute lack of evidence, it’s becoming clear that western ‘authorities’ are not at all planning to let go of the privilege that in times gone by allowed them to claim whatever they wanted and demand to be believed.

And despite the insane amounts of spying that underlies their business models and will lead to their demise(s), here is where social media do play a decisive role. See, if you’re an ‘authority’, there’s nothing you would rather do than to close down those social media that let people spread news that contradicts and/or doubts what you just said, and undermines that privilege. But that also would mean you can’t spy on them anymore through social media. A toss-up?!

Whatever the outcome will be, it’s obvious that Donald Trump is having war talks with his military and closest advisers. And they can basically tell him anything, he’s not a military man. Which is fine, Lincoln wasn’t either. But it does mean he’s vulnerable to narratives and briefings that are simply not true. Lincoln went to great lengths to surround himself with people who could trust.

What about Trump? Does he know that, as Paul Craig Roberts said on Twitter yesterday ..

The Russians know that they can, at will within a few minutes, sink the entire US fleet, destroy every US airplane & ship in the ME & within range of the ME, completely destroy all of Israel’s military capability & wipe out the military of the two-bit punk state of Saudi Arabia.

…click on the above link to read the rest of the article…

Russian Central Bank Buys Gold – 600,000 Ounces Or 18.7 Tons In January As Venezuela Launches ‘Petro Gold’

February 22, 2018

Russian Central Bank Buys Gold – 600,000 Ounces Or 18.7 Tons In January As Venezuela Launches ‘Petro Gold’

– Russian central bank buys gold – large 600,000 ounces or 18.7 tons of gold in January
– Russia increased its holdings to 1,857 tons, topping the People’s Bank of China’s ‘reported’ 1,843 tons
– Russia surpasses China as 6th largest holder of gold reserves – after U.S., Germany, IMF, Italy and France
– Turkish central bank added 205 tons “over 13 consecutive months” – Commerzbank
– Meanwhile, Russian ally Venezuela is launching a new gold-backed cryptocurrency next week

Russia has overtaken China as the fifth-biggest sovereign holder of gold, allowing it to diversify its foreign currency holdings amid a deepening rift with the US, Bloomberg News’ Eddie van der Walt reported overnight.

The Bank of Russia increased its holdings in January by almost 20 metric tons to 1,857 tons, topping the People’s Bank of China’s reported 1,843 tons. While Russia has increased its holdings every month since March 2015, China last reported buying gold in October 2016. The U.S. is still the largest owner of gold, with 8,134 tons, much of it stored in Fort Knox.

Russia’s central bank continues to add gold to reserves while the People’s Bank of China remains on hold, pointed out Commerzbank.

Analysts cited news that the Russian central bank bought 600,000 ounces, or 18.7 tons, of gold in January as it continued to diversify its reserves. Analysts cite IMF data showing that Turkey also bought large quantities of gold in January at 560,000 ounces or 17.4 tons.

“Thus the Turkish central bank has topped up its gold reserves by a total of 205 tonnes over 13 consecutive months,” Commerzbank added.

Kazakhstan continues to buy gold in small quantities, as it has been doing steadily for years.

This goes some way to plugging the gap left by the Chinese central bank. The PBOC, meanwhile, has not reported the purchase of gold for 15 months in a row.

…click on the above link to read the rest of the article…

What’s Behind Global Inflation: China Creates A Record 2.9 Trillion Yuan In New Loans In One Month

February 13, 2018

What’s Behind Global Inflation: China Creates A Record 2.9 Trillion Yuan In New Loans In One Month

According to one monetary theory, in a world in which China is the dominant creator of debt – which it has been since the financial crisis – it is also China that is the marginal creator of the global inflationary impulse. In which case, the latest Chinese new loan data helps explain the recent inflationary burst which judging my the recent market volatility has freaked out US traders, because according to the PBOC, in January China created a record CNY2900 billion in new loans ($458.3 billion), a striking rebound from the CNY2030 billion a year ago, and almost 1 trillion yuan above the CNY2000 expected.

According to Reuters, the credit boom has been fueled “by strong economic growth, a robust property market and a crackdown on riskier shadow lending, which has forced banks to shift some loans back onto their balance sheets.” But mostly it has been forced by an implicit demand on Beijing to keep the global reflationary impulse strong at a time when the Fed is shrinking its balance sheet – a highly deflationary, if only for circulating monetary aggregates, exercise.

A more detailed breakdown of the loan data showed sharp pickups in demand for credit from both households and companies, a harbinger of strong consumption and investment, if both funded on credit. Corporate loans surged to 1.78 trillion yuan from 243.2 billion yuan in December, while household loans rose to 901.6 billion yuan in January from 329.4 billion yuan in December.

Outstanding yuan loans grew 13.2% in January from a year earlier, also faster than an expected 12.5% rise and compared with an increase of 12.7% in December.

…click on the above link to read the rest of the article…

One Bank Asks If The PBOC Is Secretly Goosing Markets

January 5, 2018

One Bank Asks If The PBOC Is Secretly Goosing Markets

Something odd is going on in China. On one hand, the PBOC has been soaking up excess liquidity from the market like a drunken sailor, and after not conducting reverse repos for 10 consecutive days, it has reduced the excess liquidity level by 510bn yuan in the latest week as existing open market operations matured, and roughly half that in the week prior.

asd

On the surface, this would suggest a sharp tightening in monetary conditions, and yet precisely the opposite is taking place: over the past week, instead of rising short-term rates – the traditional indicator of tighter conditions in China – yields on Chinese short-dated instruments have tumbled. Putting the move in context, 1Y yields have plunged nearly 20bps in the first week of 2018, the biggest weekly slide since June 2015.

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In parallel, on Thursday the 7-Day repurchase rate slid to the lowest since April.

While some have provided theoretical explanations, nobody really knows what is going on. In fact, some such as Citi have put on the tinfoil hat and speculate that the PBOC is covertly adding tons of liquidity on the short-end of the curve, to wit:

It looks like the PBoC has been adding quite a lot of liquidity in the shorter end of the curve in recent days -with a variety of interbank rates softer, and the 1y CGB yield notably lower by 21bps YTD whereas 5s and 10s yields have stayed broadly flat. 

Assuming that Citi is correct, it would explain many things, not least of all the stunning surge higher in Chinese, global and even US stocks. This is how Citi puts it:

Against that background, it is no surprise that equity markets have been so well supported and the SHPROP has exploded upward.

 

…click on the above link to read the rest of the article…

Perpetual Notes – China’s New Way To Hide Debt (Call It Equity)

November 9, 2017

Perpetual Notes – China’s New Way To Hide Debt (Call It Equity) 

The legacy of the soon-to-retire PBoC governor, Zhou Xiochuan, will be that in sharp contrast to his western brethren, he warned that China’s credit bubble would burst before the fact. Two weeks ago, Zhou warned during the Party Congress that China’s financial system could be heading for a “Minsky moment” due to high levels of corporate debt and rapidly rising household debt (see here).

“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.”

Perhaps sensing that nobody in the Middle Kingdom was paying attention, we noted two days ago his lengthy essay published on the PBoC website. It contained another warning that latent risks are accumulating in the Chinese system, including some that are “hidden, complex, contagious and hazardous.” He also highlighted “debt finance disguised as equity” as a concern. Talking of which, there’s a new growth market in the gargantuan Chinese corporate debt market – we are referring to perpetual notes. Are you ready for the clever part about perpetual notes – they are debt but it’s permissible under Chinese accounting regulations to classify them as “equity” – et voila, corporate gearing has fallen. According to Bloomberg.

Under pressure to trim borrowings, China’s companies have found a way to reduce their lofty debt burdens — even if some of the risk remains. Sales of perpetual notes – long-dated securities that can be listed as equity rather than debt on balance sheets given that in theory they could never mature — have soared to a record this year as Beijing zeros in on leverage and the threat it poses to the financial system.

…click on the above link to read the rest of the article…

PBOC’s Zhou Warns Of “Sudden, Complex, Hidden, Contagious, Hazardous” Risks In Global Markets

November 5, 2017

PBOC’s Zhou Warns Of “Sudden, Complex, Hidden, Contagious, Hazardous” Risks In Global Markets

Just two weeks after warning of the potential for an imminent ‘Minsky Moment’, Chinese central bank governor Zhou Xiaochuan has penned a lengthy article on The PBOC’s website that warns ominously of latent risks accumulating, including some that are “hidden, complex, sudden, contagious and hazardous,” even as the overall health of the financial system appears good.

The imminence of China’s Minksy Moment is something we have discussed numerous times this year.

The three credit bubbles shown in the chart above are connected. Canada and Australia export raw materials to China and have been part of China’s excessive housing and infrastructure expansion over the last two decades. In turn, these countries have been significant recipients of capital inflows from Chinese real estate speculators that have contributed to Canadian and Australian housing bubbles. In all three countries, domestic credit-to-GDP expansion financed by banks has created asset bubbles in self-reinforcing but unsustainable fashion.

And then at the latest Communist Party Congress meeting in Beijing, the governor of the PBoC (People’s Bank of China) said the following;

“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment’. That’s what we should particularly defend against.”

Yet, stock markets shrugged off his warning… while the Chinese yield curve has now been inverted for 10 straight days – the longest period of inversion ever…

Which appears to be why he wrote his most recent and most ominous warning yet… (as Bloomberg reports)

The nation should toughen regulation and let markets serve the real economy better, according to Zhou.

The government should also open up financial markets by relaxing capital controls and reducing restrictions on non-Chinese financial institutions that want to operate on the mainland, he wrote.

…click on the above link to read the rest of the article…

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