Thread by @Trinhnomics

The PBOC sets the CNY fix 0.27% weaker vs the USD at 7.0012 (markets allowed to trade in a 2% band) & that makes perfect sense as economic growth outweighs all other consideration in the short-term!

https://twitter.com/Trinhnomics/status/1227806033642319872

The math for CNY weakness vs USD makes sense. People that say that the PBOC will hold it below 7 just say it b/c they think they understand policy makers but don't forget that:

THINGS ARE EVOLVING & POLICY MANDATES EVOLVE

Recap of Chinese data:

January CPI 5.4% (food inflation on earlier lunar new year & apparently food CPI still going up on higher demand vs supply)

GDP - don't know & don't get monthly data for a while but railway + steel production + real estate sales are down in double digits.

There's a memo in the economic community to come up w/ ways to gauge activity (pollution, air & port traffic, railway, real estate sales etc) but let me assure u that they are not good b/c: Despite higher CPI, the PBOC cut rates & set the CNY fix weaker.

Watch Jan monetary data!

Btw, higher CPI = higher costs of goods for households, which is higher earnings for sellers.

If the CNY is weaker, then that means that import bills relatively more expensive & exports cheaper.

So? A weaker CNY favors imports (things for production/firms) over households👈🏻👈🏻👈🏻

If u think markets REJOICE over this, then u're not paying attention. Chinese fix weaker is = BAD FOR ASIA as that makes less Chinese imports & more competitive Chinese exports & so Asian markets go red.

Btw, mainland stock won't like either. Listed firms are mostly DOMESTIC👈🏻👈🏻

As in Chinese publicly listed revenue source is primarily from onshore vs other like Japanese, South Korea, Taiwanese & Singapore. Chinese firms are MORE DOMESTICALLY ORIENTED (look at others all above 40% for external revenue).

Hence not liking the weaker CNY directional move!

#Headline: Chinese companies say they can't afford workers right now.

So if companies don't pay workers (reduce input costs to offset declining earnings), then the workers reduce costs (less spending on non-essentials as essentials are actually more expensive - see higher CPI)..

And so the sector that is supposed to put the floor to growth (consumption, which is more resilient & less volatile than business investment), is well...

You fill in the conclusion.

Note that this is what people call the MULTIPLIER EFFECT.

As in, don't think that this thing is contained at just the company level, it will hit ALL BALANCE SHEETS. Households, corporations, & banks will add downward to this multiplier.

So, what will the central bank/gov do?

@luluyilun just spoke on TV & said that labor law in China dictates companies pay 1 full cycle so February payment maybe secured but not March.

Not a good end to Q1 2020. What about Q2 2020? Will things just magically rebound to normal? 🤔🧐