USDCNY volumes getting a bit embarrassing now.
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It’s Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington
It’s Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington
On Tuesday evening, we asked what would happen if emerging markets joined China in dumping US Treasurys. For months we’ve documented the PBoC’s liquidation of its vast stack of US paper. Back in July for instance, we noted that China had dumped a record $143 billion in US Treasurys in three months via Belgium, leaving Goldman speechless for once.
We followed all of this up this week by noting that thanks to the new FX regime (which, in theory anyway, should have required less intervention), China has likely sold somewhere on the order of $100 billion in US Treasurys in the past two weeks alone in open FX ops to steady the yuan. Put simply, as part of China’s devaluation and subsequent attempts to contain said devaluation, China has been purging an epic amount of Treasurys.
But even as the cat was out of the bag for Zero Hedge readers and even as, to mix colorful escape metaphors, the genie has been out of the bottle since mid-August for China which, thanks to a steadfast refusal to just float the yuan and be done with it, will have to continue selling USTs by the hundreds of billions, the world at large was slow to wake up to what China’s FX interventions actually implied until Wednesday when two things happened: i) Bloomberg, citing fixed income desks in New York, noted “substantial selling pressure” in long-term USTs emanating from somebody in the “Far East”, and ii) Bill Gross asked, in a tweet, if China was selling Treasurys.
Sure enough, on Thursday we got confirmation of what we’ve been detailing exhaustively for months. Here’sBloomberg:
China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter.
…click on the above link to read the rest of the article…
China Is Pushing On A String Ensemble
China Is Pushing On A String Ensemble
Look, it’s very clear where I stand on China; I’ve written a lot about it. And not just recently. Nicole Foss, who fully shares my views on the topic, reminded me the other day of a piece I wrote in July 2012, named Meet China’s New Leader : Pon Zi. China has been a giant lying debt bubble for years. Much if not most of its growth ‘miracle’ was nothing but a huge credit expansion, with an outsize role for the shadow banking system.
A lot of this has remained underreported in western media, probably because its reporters were afraid, for one reason or another, to shatter the global illusion that the western financial fiasco could be saved from utter mayhem by a country producing largely trinkets. Even today I read a Bloomberg article that claims China’s Q1 GDP growth was 7%. You’re not helping, boys, other than to keep a dream alive that has long been exposed as false.
China’s stock markets have a long way to fall further yet. This little graph from the FT shows why. The Shanghai Composite closed down another 1.27% today at 2,927.29 points. If it ‘only’ returns to its -early- 2014 levels, it has another 30% or so to go to the downside. If inflation correction is applied, it may fall to 1,000 points, for a 60% or so ‘correction’. If we move back 10 or 20 years, well, you get the picture.
…click on the above link to read the rest of the article…
First the Miners, now the Banks, then Property? Going to be a Hard Landing for… Australia
First the Miners, now the Banks, then Property? Going to be a Hard Landing for… Australia
A housing market set for the mother of all corrections.
“I think it’s important that people don’t hyperventilate about these type of things.” With these words, Australian Prime Minister Tony Abbott tried to soothe the world’s rattled nerves today about the ongoing crash in China. Australia is heavily exposed to China, the biggest consumer of its commodity exports.
“It is not unusual to see stock market corrections,” he said about the relentlessly brutal three-month crash that has taken the Shanghai Composite down 43% so far.
“It is not unusual to see bubbles burst in particular markets and for there to be some flow-on effect in other stock markets, but the fundamentals are sound,” he said, speaking of the Chinese fundamentals, and by extension, of the Australian fundamentals that depend so much on Chinese fundamentals.
And he said this though factory activity in China shrank at the fastest rate since the Financial Crisis, other indicators are heading south, cars sales are suddenly plunging, and the People’s Bank of China started devaluating the yuan to mitigate the problem, thus further hurting Australian exports to China.
So here’s Lindsay David, founder of LF Economics in Australia, weighing in on the “sound” fundamentals in Australia.
…click on the above link to read the rest of the article…
China Cuts Benchmark Interest Rate By 25bps, Cuts RRR By 50bps
China Cuts Benchmark Interest Rate By 25bps, Cuts RRR By 50bps
What China was supposed to do over the weekend, and waited until its stock market tumbled another 16%, it has just done, because as MarketNews, Reuters and Bloomberg all just blasted, moments ago the PBOC cut both the benchmark and RRR rates:
- CHINA PBOC CUTS INTEREST RATES
- CHINA PBOC CUTS REQUIRED DEPOSIT RESERVE RATIO
- CHINA PBOC CUTS 1Y DEPOSIT RATE BY 25 BPS
- CHINA PBOC CUTS 1Y LENDING RATE BY 25 BPS
- CHINA PBOC CUTS BANKS DEPOSIT RESERVE RATIO BY 50 BPS
- CHINA PBOC: OVERALL PRICE LEVEL STILL LOW DESPITE PORK PRICE
- CHINA PBOC: GLOBAL FINANCIAL MKT SEES BIG VOLATILITY
- CHINA PBOC: ECO STILL FACING DOWNWARD PRESSURE
- CHINA PBOC LIFTS CEILING ON DEPOSIT INTEREST RATES
This move takes the RRR from 18.50% to 18.00%, the deposit rate from 2.00% to 1.75%, the lending rate from 4.85% to 4.60%, and the PBOC also announced a further 300 bps RRR cut for financial leasing and auto leasing companies.
Here is the initial take from MarketNews:
The People’s Bank of China cut both interest rates and the bank deposit reserve requirement on Tuesday, saying that a more flexible monetary policy is needed in the face of pressure on the economy and global financial market volatility.The PBOC announced 25 basis point cuts to the one-year deposit and lending rate and also cut the required bank deposit reserve ratio by 50 basis points, with the latter to take effect on September 6. The reserve cut will release around CNY650 billion in frozen deposits back into the system.
The PBOC also lifted entirely the ceiling on deposit rates of over one-year, marking another step towards fully-liberalized interest rates.
This is what the PBOC said in connection to the rate cut (google translated):
1. what the introduction of the combination of measures to cut interest rates drop quasi major consideration is?
…click on the above link to read the rest of the article…
What the Heck is Going on in the Global Markets?
What the Heck is Going on in the Global Markets?
This wasn’t supposed to happen. The week was already on a crummy downhill path globally, and emerging-market currencies were blowing up, when on Friday in China the Caixin’s Purchasing Manager’s Index hit the worst level since March 2009; manufacturing is sinking deeper into the mire.
So the Shanghai stock index plunged 4.3% for the day, and 11.5% for the week, to 3,508, closing at the same level as the bottom of its July rout.
The entire machinery that the Chinese government and the People’s Bank of China had set in motion to bail out the markets during the July rout, which had worked for a couple of weeks, has now proven to be useless. And the markets, thought to be controllable by fiat or manipulation, suddenly regained a will of their own.
Other Asian stock markets plunged too: Hong Kong’s Hang Seng dropped 1.5% on Friday and 6.6% for the week; it’s 5.1% in the hole for the year. The Nikkei fell 3% on Friday and 5.3% for the week.
Europe was next. The German Dax, the British FTSE 100, French CAC 40, the Spanish IBEX 35, the Italian FTSE MIB, they all plunged about 3% for the day and lost between 5% and 6.5% for the week, except for the German Dax which lost nearly 8% for the week. It has now plummeted 18% since its dizzying peak in early April. Easy come, easy go.
Have central banks lost their omnipotence?
That despicable, unpredictable force that central banks were thought to have vanquished – markets with a will of their own – ricocheted in its unruly manner around the world.
In Europe and Japan, the central banks are currently engaging in relentless QE programs to inflate stocks, and China is doing a whole lot more, and yet, this debacle! A few more episodes of this – and folks are going to question the omnipotence of central banks, and they’re going to doubt the central banks’ vaunted ability to inflate the markets. If those doubts spread, not even QE can prop up the markets. Omnipotence only works if people believe in it.
…click on the above link to read the rest of the article…
China Stocks Crash, More Than Half Of Market Halted Limit Down; PBOC Loss Of Control Spooks Global Assets
China Stocks Crash, More Than Half Of Market Halted Limit Down; PBOC Loss Of Control Spooks Global Assets
China sure has its micro-managing hands full these days.
Just hours after the PBOC announced a modestly “revalued” fixing in the CNY, which curiously led to weaker trading in the onshore Yuan for most of the day before a forceful last minute intervention by the central bank pushed it back down to 6.39…
… it was the local stock market spinning plate – which had been relatively stable during the entire FX devaluation process – that China lost control over, and after 7 days of margin debt increases the Shanghai Composite plunged by 6.2% in late trade,tumbling 245 points to 3748, just 240 points above its recent trough on July 8, a closing level some 27% off its June peak. The smaller Shenzhen Composite Index fell 6.6% to 2174.42. This was the biggest single-day rout since July 27.
According to Reuters, “volatility in both indexes spiked in the afternoon in what is becoming a mysteriously recurring pattern in China’s stock markets since Beijing stepped in to avert a full-blown price crash in early summer.”
There were various reasons cited for the selling: one was that with Chinese housing data coming in stronger than expected, that Beijing may limit its future interventions to promote further easing of financial conditions and thus, supporting the market as we warned last night after the housing data came out:
…click on the above link to read the rest of the article…
Riskiest End of the Junk Bond Market Just Blew Up
Riskiest End of the Junk Bond Market Just Blew Up
You wouldn’t know by looking at the US Treasury market, which remained relatively sanguine this week, with only a little panic buying on Tuesday. So 10-year Treasuries ended the week near where they’d started it. But at the other end of the spectrum, the riskiest portion of the junk bond market just blew up spectacularly.
There were a lot of culprits to catch the blame. At the top of the list was the devaluation of the Chinese yuan. It caught the corporate bond markets by surprise, though it shouldn’t have, injected all kinds of stress into them, and drove up bond spreads, with investors demanding a higher yields for riskier bonds. It hit the riskiest segment of the junk bond market with a sledge hammer.
Given the precarious state of the current credit bubble and the pandemic nervousness about it, bond investors were rattled by the moves of the People’s Bank of China. In prior crises, such as the 1997 Asian financial crisis and the 2008-2009 Global Financial Crisis, the PBOC had maintained a fixed exchange rate with the dollar. It didn’t devalue, as other countries were doing, to get out of the crisis. The yuan was seen as stabilizing the markets. Now the yuan is seen as destabilizing the markets.
It didn’t help that the Fed’s cacophony has been pointing at a September rate hike. It would be the first ever in the careers of millennials working on Wall Street. It would bring to an end the 30-year bull market in bonds. Even most middle-aged money managers have not yet experienced the alternative, other than a few short-lived dips and panics. On a visceral level, they simply can’t believe rates can ever rise over the long term. To them, rates can only go down.
…click on the above link to read the rest of the article…
Both ECB And BOJ Warn More QE May Be Response To Chinese Currency War
Both ECB And BOJ Warn More QE May Be Response To Chinese Currency War
Minutes from the ECB’s most recent policy meeting reveal that Mario Draghi and company have a number of concerns about the pace of economic growth in the euroarea and about the outlook for inflation which, much to the governing council’s surprise, “remains unusually low.”
Board members also took note of increasingly volatile EGB markets and made special mention of the second bund VaR shock which took place at the first of June, something the central bank attributes to “overvaluation [and] one?way market positioning related to the public sector purchase programme.” In other words: “our bad.”
The bank gave itself the now customary pat on the back for the “success” of PSPP noting that the “moderate frontloading of purchases” (a reference to the effective expansion of QE that was leaked to a room full of hedge funds at an event in May) was going smoothly, other than the above-mentioned nasty bout of extreme volatility.
As for the economy and inflation, well, that’s not going so hot. “Overall, the recovery in the euro area was expected to remain moderate and gradual, which was considered disappointing from both a longer-term and an international perspective [while] consumer price inflation had remained unusually low.”
Between that rather grim assessment and the comments cited above regarding volatility, one is certainly left to wonder what it is exactly about PSPP that’s going so “smoothly.”
But as interesting as all of that is (or isn’t), the most compelling comments were related to China. Here’s the excerpt:
In particular, financial developments in China could have a larger than expected adverse impact, given this country’s prominent role in global trade.
Consider that, and consider the following statement sent to Bloomberg by an adviser to Japanese PM Shinzo Abe:
…click on the above link to read the rest of the article…
The US-China “Currency War”: Winners and Losers
The US-China “Currency War”: Winners and Losers
American politicians aren’t congratulating the Communist Party in Beijing for its success in following the capitalist proverb “enrich yourself,” but screaming foul play: China falsifies the exchange rate of the yuan so that it can make more money off the USA than vice versa. The accusation, made by everybody from Donald Trump to Bernie Sanders, is that China’s policy is killing good-paying American jobs – and a lot else besides. What’s bad for America can’t be caused by anything done by America, but by Chinese trickery!
America’s right to success
The remedy for the problem is just as obvious as the blame: China must get on board with America’s approved rules for international trade and commerce. If China allows its currency to free-float, then the value of the yuan will adjust, China’s exports to the USA will become more expensive, China and the rest of the world will buy more products from the USA, and jobs will return to the USA.
The assumption is that the global money traders, in their infinite wisdom, would find the “correct” exchange rate between the yuan and the dollar once they have free access to the supply and demand for China’s currency. What would the correct exchange rate be? One that guarantees the success of US firms.
Before this week’s turnaround in response to its slump, China had been moving towards free market convertibility of the yuan. Since 2005, it had allowed its currency to gain almost 30 percent in relation to the dollar, while trying to moderate its increase. Yet the results for the trade balance with the US were exactly the same. What was inferred from this? China hadn’t gone far enough. So how will we know when it’s gone far enough? When America is the winner.
…click on the above link to read the rest of the article…
China Black Swans Not So Rare Anymore as PBOC Shocks Markets
China Black Swans Not So Rare Anymore as PBOC Shocks Markets
Investors should prepare for more surprises out of China after the yuan’s devaluation became the country’s latest unexpected policy move to roil global markets.
That’s the advice from Fraser Howie, co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” He says Chinese policy decisions are becoming “erratic” as authorities struggle to combat the nation’s deepest economic slowdown in more than two decades.
This week’s tumble in the yuan — the biggest devaluation since 1994 — comes just a month after unprecedented state intervention in the stock market deepened a $4 trillion sell-off. Two years ago, authorities triggered the country’s worst modern-day cash squeeze by restricting the supply of funds to the banking system. The failure of China’s decision makers to telegraph and explain those policy changes has increased volatility worldwide as traders struggle to forecast what happens next in Asia’s biggest economy, Howie said.
“This complete lack of signaling has investors, both foreign and domestic, completely spooked about what’s going on,” Howie, a former managing director at CLSA Asia-Pacific Markets, said in a phone interview from Singapore. “China has a huge influence globally and markets don’t like shocks.”
While investors parse every word in Federal Reserve statements for clues on future U.S. monetary policy, the People’s Bank of China provides few such details, while decisions are often the result of political wrangling, according to Howie.
“We don’t know what their policy is,” he said. “We don’t see minutes of meetings. We don’t get regular announcements, so we get a tremendous lack of transparency.”
Yuan Plunge
The PBOC took markets by surprise when it cut the daily fixing for the yuan by 1.9 percent on Tuesday, ending a four-month peg against the dollar. The currency tumbled 2.9 percent in two days, the most since the country ended a dual-currency system in 1994, while it now trades at the biggest discount to the offshore yuan since 2010.
…click on the above link to read the rest of the article…
Will China Play The ‘Gold Card’?
Will China Play The ‘Gold Card’?
Alasdair Macleod has posted an article at www.goldmoney.com which I think is important.
(See “Credit deflation and gold”.www.goldmoney.com/research/analysis.)
The thrust of the article is that China, at some point, will have to revalue gold in China; which means, in other words, that China will decide to devalue the Yuan against gold.
Since “mainstream economics” holds that gold is no longer important in world business, such a measure might be regarded as just an idiosyncrasy of Chinese thinking, and not politically significant, as would be a devaluation against the dollar, which is a no-no amongst the Central Bank community of the world.
However, as I understand the measure, it would be indeed world-shaking.
Here’s how I see it:
Currently, the price of an ounce of gold in Shanghai is roughly 6.20 Yuan x $1084 Dollars = 6,721 Yuan.
Now suppose that China decides to revalue gold in China to 9408 Yuan per ounce: a devaluation of the Yuan of 40%, from 6721 to 9408 Yuan.
What would have to happen?
Importers around the world would immediately purchase physical gold at $1,084 Dollars an ounce, and ship it to Shanghai, where they would sell it for 9408 Yuan, where the price was formerly 6,721 Yuan.
The Chinese economy operates in Yuan and prices there would not be affected – at least not immediately – by the devaluation of the Yuan against gold.
Importers of Chinese goods would then be able to purchase 40% more goods for the same amount of Dollars they were paying before the devaluation of the Yuan against gold. What importer of Chinese goods could resist the temptation to purchase goods now so much cheaper? China would then consolidate its position as a great manufacturing power. Its languishing economy would recuperate spectacularly.
…click on the above link to read the rest of the article…
China “Loses Battle Over Yuan”, And Now The Global Currency War Begins
China “Loses Battle Over Yuan”, And Now The Global Currency War Begins
Almost exactly seven months ago, on January 15, the Swiss National Bank shocked the world when it admitted defeat in a long-standing war to keep the Swiss Franc artificially weak, and after a desperate 3 year-long gamble, which included loading up the SNB’s balance sheet with enough EUR-denominated garbage to almost equal the Swiss GDP, it finally gave up and on one cold, shocking January morning the EURCHF imploded, crushing countless carry-trade surfers.
Fast forward to the morning of August 11 when in a virtually identical stunner, the PBOC itself admitted defeat in the currency battle, only unlike the SNB, the Chinese central bank had struggled to keep the Yuan propped up, at the cost of nearly $1 billion in daily foreign reserve outflows, which as this website noted first months ago, also included the dumping of a record amount of US government treasurys.
And with global trade crashing, Chinese exports tumbling, and China having nothing to show for its USD peg besides a propped and manipulated stock “market” which has become the laughing stock around the globe, at the cost of even more reserve outflows, it no longer made any sense for China to avoid the currency wars and so, first thing this morning China admitted that, as Market News summarized, the “PBOC lost Battle Over Yuan.”
That’s only part of the story though, because as MNI also adds, the real, global currency war is only just starting.
And now that China is openly exporting deflation, and is eager to risk massive capital outflows, the global currency war just entered its final phase, one where the global race to the bottom is every central bank’s stated goal. Well, except for one: the Federal Reserve. We give Yellen a few months (especially if she indeed does hike rates) before the US too is back to ZIRP, maybe NIRP and certainly monetizing even more things that are not nailed down.
…click on the above link to read the rest of the article…
People’s Bank of China Freaks Out, Devalues Yuan by Record Amount, Vows to “Severely Punish” Capital Flight
People’s Bank of China Freaks Out, Devalues Yuan by Record Amount, Vows to “Severely Punish” Capital Flight
Everything has started to go wrong in the Chinese economy despite its mind-bending growth rate of 7%. Exports plunged and imports too. Sales in the world’s largest auto market suddenly are shrinking just when overcapacity is ballooning. The property market is quaking. Electricity consumption, producer prices, and other indicators are deteriorating. Capital is fleeing. The hard landing is getting rougher by the day. But Tuesday morning, the People’s Bank of China pulled the ripcord.
In a big way.
It lowered the yuan’s daily reference rate by a record 1.9%. The yuan plunged instantly, and after a brief bounce, continued to plunge. Now, as I’m writing this, it is trading in Shanghai at 6.322 to the dollar, down 1.8% from before the announcement. A record one-day drop.
The PBOC had kept the yuan stable against the dollar. As the dollar has risen against other major currencies, the yuan followed in lockstep. Over the past week, the Yuan’s closing levels in Shanghai were limited to vacillating between 6.2096 and 6.2097 against the dollar. Over the past month, daily moves were limited to a maximum 0.01%. The PBOC controls its currency with an iron fist.
Hence the shock to the currency war system.
The Nikkei, beneficiary of the most aggressive currency warrior out there, had been up, nearly kissing the magic 21,000 at the open for the first time in a generation, but plunged 200 points in one fell swoop when the news hit. Then the Bank of Japan jumped in with its endless supply of freshly printed yen, furiously buying Japanese ETF to stem the loss. The lunch break put a stop to all this. Then the Nikkei plunged again. Maybe the folks at the BOJ were late getting back to their trading stations. But now they’re back at work, mopping up ETFs.
…click on the above link to read the rest of the article…
China’s Plunge Protection “National Team” Bought 900 Billion In Stocks, Goldman Calculates
China’s Plunge Protection “National Team” Bought 900 Billion In Stocks, Goldman Calculates
In, “The Complete Guide To China’s CNY 4 Trillion Margin Doomsday Machine,” we presented a comprehensive look at the various backdoor channels the country has used to skirt official restrictions on leveraged stock trading. Here, courtesy of BofAML, is a breakdown of these channels and the bank’s best estimates of their size.
The dramatic sell-off that made international headlines last month and, along with the Greek drama, dominated financial market news, was precipitated by an unwind in these unofficial margin lending channels.
In a frantic attempt to restore the equity bubble that has for the better part of a year served as a distraction for China’s flagging economic growth and bursting property bubble, Beijing unleashed a plunge protection effort of epic proportions that included everything from threatening to arrest sellers to using China Securities Finance Corp. as a state-controlled margin lender.
In short, the PBoC, with the help of the country’s banks, helped CSF mushroom into a multi-trillion yuan Frankenstein and now that the mentality of the retail crowd (which in China had accounted for around 80% of daily turnover) has transformed from “buy the dip and get rich” to “sell the rip and break even,”any indication that CSF is set to exit the market is greeted with panic by market participants.
Here with a breakdown of just how much money has been funneled into Chinese equities by the so-called “national team” and on how, just like the Fed with QE, the PBoC will find that a swift exit is effectively impossible, is Goldman.
* * *
From Goldman
China musings: How much has the government bought in the market?
The Chinese government’s recent measures to support the domestic equity market through the so-called ‘national team’ institution are being frequently discussed by investors and in the media. In this commentary, we estimate the amount of money the ‘national team’ has spent to support the market, the remaining capital left available for use, the sectors that have likely benefitted from government support, the potential overhang on the equity market from government support measures, and our views on the equity market over coming months.
…click on the above link to read the rest of the article…
Deflation Is Winning – Beware!
Deflation Is Winning – Beware!
Expect the ride to get even rougher
Deflation is back on the front burner and it’s going to destroy all of the careful central planning and related market manipulation of the past 6 years.
Clear signs from the periphery indicate that a destructive deflationary pulse has been unleashed. Tanking commodity prices are confirming that idea.
Whole groups of enterprises involved in mining and energy are about to be destroyed. And the commodity-heavy nations of Canada, Australia and Brazil are in for a very rough ride.
Whether the central banks can keep all of their carefully-propped equity and bond markets elevated throughout the next part of the cycle remains to be seen. We know they will try very hard. They certainly are increasingly willing to use any all tools at their disposal to keep the status quo going for as long as possible.
Whether it’s the People’s Bank of China stepping in to the market to buy 10% stakes in major Chinese corporations in a matter of weeks, the Bank Of Japan becoming the majority owner of key ETFs in the Japanese markets, or the Swiss National Bank purchasing $100 billion of various global equities, we see the same desperation. Equity prices are being propped, jammed and extended higher and higher without regard to risk or repurcussions.
It makes us wonder: Why haven’t humans ever thought to print their way to prosperity before?
Well, that’s the problem. They have.
And it has always ended up disastrously. History shows that the closest thing that economics has to an inviolable law is: There’s no such thing as a free lunch.
Sadly, all of our decision-makers are trying their hardest to ignore that truth.
First, The Fall….
So how will all of this progress from here?
We’ve always liked the Ka-Poom! theory by Erik Janzen which we explained previously like this:
…click on the above link to read the rest of the article…
