This morning economic eyes are again looking East. Let us start with this from the Financial Times.
China’s regulators sought to reassure markets on Monday as equities and the renminbi extended losses in a rocky start to the year, following weak economic data and geopolitical uncertainty ahead of Donald Trump’s inauguration.
The Financial Times seems rather in a tizzy about Trump 2.0 as I am not sure many others are uncertain about what it will bring. Indeed not everyone is convinced it is the change of policy claimed.
Actually, Trump policy has been rather continuous, so continuous that Biden continued it. And so Trump 2.0 is a continuation with no break since 2017. Yes, true story. Look up Biden trade and investment policy on China. There is no uncertainty whatsoever. A ton of China hawks in ascendant since 2017. ( @Trinhonomics)
In terms of the economics I am expecting the threat of more tariffs unless The Donald gets what he wants. But returning to the equity market issue this takes us back to September last year when the regulators and central bank intervened. Whereas now we see this.
Mainland China’s benchmark CSI 300 index edged down 0.2 per cent on Monday and has declined 4.1 per cent in the first three trading days of the year, marking the worst start to 2025 among major Asian indices. Small-cap stocks on the CSI 2000 have fallen 6.6 per cent since the start of the year. Hong Kong’s Hang Seng index shed 0.4 per cent on Monday and is down 1.2 per cent so far this year.
At this point I am reminded that part of the plan back in September was to allow people to borrow money to buy Chinese equities. How is that going?
SHANGHAI COMPOSITE INDEX FALLS BELOW 3200, HITS LOWEST POINT SINCE OCTOBER 18 LAST YEAR. ( @CNWire)
If we look at the Shanghai Composite it peaked at 3674 after the stimulus announcement and closed that day at 3490. Whereas today it closed at 3206 so anyone taking the official hint and borrowing to invest has singed fingers. Or this from the Governor of the People’s Bank of China which we looked at on the 24th of September last year is not going so well.
This policy will greatly enhance the institutions’ ability to obtain funds and increase stock holdings.
Along the way my central theme that the real issue here is the property boom and then bust was also in play as we look at Hong Kong based developers.
SUNAC CHINA PLUNGES OVER 14%, RONSHINE CHINA AND SINO-OCEAN FALL OVER 9%, SHIMAO GROUP DROPS 6%, ZHONGLIANG HOLDINGS SLIDES 5%, AND AGILE GROUP DECLINES 4% (mktnews.com)
Oh and via the various banking crises we have learnt what the word “resilience” really means.
The Shanghai and Shenzhen exchanges sought to reassure investors that China’s economy was supported by “solid fundamentals and resilience” during a weekend meeting with foreign institutions “to solicit opinions and suggestions” on recent moves in Chinese equities, they said on Sunday. ( Financial Times)
Chinese Yuan
It has been a busy phase for the Chinese central bank.
The central bank on Monday kept the daily fixing rate — the midpoint around which the renminbi is allowed to trade 2 per cent in either direction against the dollar — at Rmb7.19, in spite of selling pressure on the currency. ( Financial Times)
In itself that is no big deal as the PBOC runs a managed exchange rate. But we ended up with this.
CHINA’S ONSHORE YUAN FINISHES DOMESTIC SESSION AT 7.3296 PER DOLLAR, WEAKEST SUCH CLOSE SINCE SEPT 8, 2023 ( @FirstSquawk)
It is at what we might call the outer limits of the band suggesting that markets are listening to Queen and David Bowie.
Pressure pushin’ down on mePressin’ down on you, no man ask forUnder pressure that brings a building downSplits a family in two, puts people on streets
Let me illustrate the driving forces here via what is home territory for me.
US Treasuries slumped, lifting the yield on 30-year bonds to the highest since late 2023, as a rattled market prepares for $119 billion of fresh government debt issuance this week.
The 30-year rate climbed as much as four basis points to 4.85%, the most since November 2023, before a $58 billion sale of three-year notes on Monday. ( Bloomberg)
Tactically players are getting a higher yield for themselves, but strategically we have been seeing rises in US bond yields as official interest-rates have been cut. Returning to the Trump 2.0 theme of the Financial Times remember that some of this is due to the way that Treasury Secretary Yellen issued shorter-dated bonds meaning more supply is on the horizon. Now let us compare that to China.
The yield on 10-year Chinese government bonds fell 0.015 percentage points to 1.61 per cent on Monday, after hitting its all-time low below 1.6 per cent last Thursday. Bond yields move inversely to prices. ( Financial Times)
The basic analysis here is the gap in bond yields which is putting downwards pressure on the Chinese Yuan. At the moment it is of the order of 3% per annum as the US ten-year is 4.62%. If we look at the Chinese end of this there has been quite a shift in policy because previously the PBOC was acting to try and keep Chinese bond yields above 2% and setting out to discourage bond buyers. I will return to that in a moment.
Also if your currency is weak open mouth operations usually only highlight the issue.
Its newspaper, the Financial News, said the central bank would “resolutely guard against the risk of exchange rate overshooting and maintain the basic stability” of the renminbi. It added that the central bank’s past “experience of multiple rounds of appreciation and depreciation” showed it had “sufficient” tools to keep the exchange rate “basically stable”. ( Financial Times)
Interest-Rate Cuts
The times they are a changing as previously China often acted on the quantity of money rather than its price or interest-rate.
In comments to the Financial Times, the Chinese central bank said it was likely it would cut interest rates from the current level of 1.5 per cent “at an appropriate time” in 2025.
It added that it would prioritise “the role of interest rate adjustments” and move away from “quantitative objectives” for loan growth in what would amount to a transformation of Chinese monetary policy.
Whilst it feels like a grand announcement back on December 9th we looked at the Politburo declaring monetary policy would be “moderately loose” this year. Back then it was news that the benchmark bond yield had gone below 2% and as it is now 1.6% we can see that money has already poured into the bond market ahead of the anticipated interest-rate cuts.
Along the way that has applied more pressure to the Chinese Yuan.
Comment
So far I have looked at financial markets and there is a tinge of irony in the Caixin Services PMI being stronger. But it also came with this.
“Market optimism weakened. The indicator for expectations of future activity stayed in expansionary territory, but fell by more than 3 points compared with the previous month, leaving it just above September’s four-and-a-half-year low.”
Plus if we return to my central theme that this is a balance sheet recession and depression created by the property market bust then the developments at the start of 2025 give me a touch of the vapors.
I’m turning JapaneseI think I’m turning JapaneseI really think soTurning JapaneseI think I’m turning JapaneseI really think so.
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