I had been planning to do a daily China thread this week. But things got a little busy, so I am behind schedule. In any case, here are some observations on why the Renminbi (CNY) is so stable, despite the risk aversion around Evergrande...
Let us start with a recap:
white line is usdcnh (the cnh is holding at around the strongest level since 2018 [low is strong])
yellow line is CNY vs basket (the CNY is strong on a broad basis, around a 5y high [high is strong on this metric]
Hence, while many Chinese assets (from real estate credit to tech equities) have been on the back foot, the currency has been stable, or even strengthening.
It is worth comparing to the early COVID shock, which was China centric in Jan-Feb 2020 (before the Milan outbreak). At that point, CNY outperformed on a basket basis, and vs the EUR (although it did slide vs a globally strong USD, not shown)
Hence, the experience from 2020 and 2021 is that the CNY (or CNH) is resilient to (even) domestic shocks.
But was it always like this?
NO! Anybody who traded in 2015 will remember the days when the CNY was under extreme pressure as a function of domestic economic weakness, unwinding of carry trades and counter-productive FX policy.
Back in August 2015 the CNY dropped very quickly (about 5% vs the USD) and the PBOC had to step in and intervene in probably the biggest support operation in the history of the world (>$100bn in August alone)
(and the cumulative interventions added up to around $1000bn)
What has changed since?
Back in 2015, China was working towards currency convertibility (free cross-border movement of capital). But in January 2017 something fundamentally changed. China was able to stabilize the currency, without spending any money (FX) on it?
Behind the scenes, they closed all the holes in the balance of payments (from current account to capital account), and the currency stabilized (it also helped that a lot of carry trades had been unwound by then).
The key point is that China is a unique country. The economy is huge. But it is still able to micro manage the currency, via various types of intervention: direct or much more subtle. Whether they need it (right now) is a different topic.
Right now, the balance of payments is supported by strong exports, and lack of FX drain from outbound tourism (we can do a separate thread on all that later).
But let us first talk about what the PBOC wants (because it has a history if getting it, at least on the FX front). The PBOC and the broader policy apparatus wants a resilient currency: a reserve currency.
They have been working very hard, especially over the last five years to achieve reserve currency status, and they have had some success. Look at this chart of CNY share of global reserves. It is going up (and this was before Russia bought more a few months ago).
At this juncture, they have a big challenge at hand in the local real estate market. The last thing they want is that sectoral instability to be mirrored in macro instability, and the currency is the most overt reflection of such instability.
Macro weakness can trigger capital flight dynamics, and that is bad, and especially bad if you want a reserve currency reputation.
They want their currency to behave like a reserve currency & since they have little external debt (especially in foreign currency) and still $3 trillion in reserves (as well as all the informal levers) they have a lot of ways to get what they want (and > six years of credibility)
The bottom line is: The Chinese currency is trading very resiliently in the face of even a domestically generated shock (outperforming other Asian currencies). And this is not very surprising, given the structure of the external balance sheet and the desires of policy makers.
I will leave it at that. How much damage we will see around Chinese real estate remains unknown. But it is pretty clear that policy makers will work very hard to avoid damage to the CNY's reputation. END
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Today, I will show some background data on the structural problem in Chinese real estate, and offer some basic perspectives on how the situation differs from the US in 2008 (not better or worse, but simple different)
The memory from the US in 2007-2008 is still fresh. The US housing market was too hot. There was too much leverage / building. And we ended up with a big crisis => the losses had to be allocated (globally), and policy makers were not willing to (or politically able) fill the gaps
There is a huge amount of focus on China contagion/Evergrande at the moment. Hence, it is a time to be precise. I will not do a comprehensive thread (yet). But just provide some specific color on the High Yield credit moves, which themselves are generating a lot of attention.
It is true that China (USD) credit indices moved a lot last week, after stabilizing briefly in early September.
And there are lots of fintwit comments on that: Here is a good (and sober) example:
It is worth thinking about what is going on under the surface, so I am going to plug in the first 10 names (highest weight in the index) and let them tell the story:
The first one is Bank of Communications (2.4%) weight in HY index. Yield is very stable. Not much contagion here.
Here is a thread about getting involved with NFTs...
It is not about whether NFTs are inherently valuable (it seems like an unresolved philosophical question). But simply about observing the process for the first time, and the FEES, which can be rather wild!
here we go...
It is hard to have an opinion about a new market / asset until you have actually been directly involved in some form...
...I bought my first Bitcoin many years ago, to experience the process. And I did the same with ETH too, quite a few years back. It was pretty simple, although the identification process involved a bit of a lag on some platforms at the time.
The perception of vaccine effectiveness has been influenced by Israel's experiences since early 2021.
There has been three faces already in 2021...
A) Hope, B) Doubts, C) Fresh Hope
A) In the first half of year, Israel's success in getting cases down to VERY low levels (combined with full reopening) created global optimism that 'normalization' was around the corner in many parts of the world.
B) But then we had a fresh spike in cases as delta emerged, and lots of coverage of break-through cases (=doubt about vaccine effectiveness)
Here is our 'prediction model' from today. It mean to pull information together from many many different instruments and map them into a simple signal for the S&P500 based on historical correlations
It is an information aggregator, not a prediction tool
Here is our FX summary. It is meant to give a clear, objective daily overview, in vol adjusted space, so you can get a feel for global action in 5 seconds (rather than spending 5 minutes on it)