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China removes the USD peg


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triage - I have seen that 40% figure for the first time this year (got to bear in mind that pegging with USD, the Chinese currency is perhaps 15-20% up from a natural float)


In 2015, the IMF estimates that the developing economies grew at 4.0%ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ÂÂthe slowest since the Great Recession year of 2009 and less than half the rate they enjoyed in 2007, just before that downturn. In 2016, I think their performance will deteriorate further. At the epicenter of this slowdown is China, whose high growth rate only a few years ago (running over 10% per year) enabled it to generate, singlehandedly, perhaps a quarter of the annual growth in global production. Everyone agrees that China's growth rate is now falling, but no one can agree on how much. While the official numbers put Chinese GDP growth last year at just under 7%, most outside analysts are frustrated by the regime's irregular accounting methods and figure it's doctoring the numbers to hit official targets...


There are many reasons why China is now in trouble. Its industrial and real estate sectors racked up vast amounts of debt over the past decade, leading to excess production and capacity that is hard to unwind. Its overvalued currency is squeezing its export businesses, but any deliberate attempt to devalue would be like disarming a bomb, incurring the risk of sudden capital flight. Meanwhile, just as rural areas are running dry on new young adults to send to the cities, China is undergoing rapid demographic aging. Just this year and next, its working-age population has stopped growing and has now started a gradual decline. Basically, China has outgrown one growth paradigm and hasn't yet figured out how to move to another.........


....And then there's China. In 1997, China was an inert bystander, with few financial ties to the rest of the world. Today, China is a slowly collapsing supernova, with such massive external trade and financial activity that even a slight change in its rate of decline will have large repercussions both regionally and globally. Without a doubt, China is the single biggest reason why what goes down for emerging markets in 2016 could be worse than in 1997.


BP: I should have known: Once again, it's all up to China! So what will happen in China in 2016?


NH: Here's the problem China faces. Because of the CNY's de-facto peg to the USD, the dollar's rapid riseÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ÂÂby about 25% (trade-weighted average) over the last two yearsÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ has dragged China's currency up with it. What's more, two years ago many analysts already believed that the CNY was overvalued. And now that China's economy is slowing down and the PBOC is reluctantly allowing to CNY to ratchet down, the pushing and shoving to get to the exit is beginning to overwhelm the authorities' power to control capital outflows.


We're not just talking about carry traders wanting out. We're talking about the Chinese people wanting out. The elite have already dug their own exit tunnelsÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ ...More will follow. Since last summer, the PBOC has spent roughly $100 billion in FX reserves each month trying to keep the CNY up. But the hemorrhage is slowly widening even as the CNY slowly falls.


Clearly the dam will burst open long before the PBOC gets to the bottom of its $3.3 trillion war chest, which really isn't that large relative to potential investor flow. Consider that each adult Chinese citizen can legally send $50,000 per year abroad. If just one Chinese household in twenty were to exchange the legal maximum from CNY to USD today, PBOC's entire kitty would be empty by sundown. China's government itself is to blame to setting up this situation. In recent years they've helped keep the CNY up by running the perfect roach motel: Investment can get in, but can't get out (except with special permission). As a result, most Chinese families and firms have never been able to diversify their portfolios by investing abroad, creating an enormous pent-up demand for foreign assets.


Xi Jinping and the PBOC don't have many good options, and they don't have much time to choose from among them.


BP: What are their options?


NH: Their first (and worst) option would be to stay the current course, losing reserves and credibility at a growing rate while failing to stop the currency decline. Before the year is out, they will have to enact a major devaluation anyway and do it from a position of weakness. Their second option would be a resolute defense of the CNY near its current level with much stricter capital controls and jacked-up interest rates. But capital will still seep outÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ÂÂand to prevent higher interest rates from killing the economy, they would have to switch entirely to fiscal stimulus. I just think it's too late for this. Their third option would be to bite the bullet up front and enact a large devaluation (40% or more) that the PBOC is certain it could defend and then accompany that by further relaxing of capital controls. It is the best option, but since it requires boldness and political courage it is probably not the one Beijing will choose....

Neil Howe of http://www.saeculumresearch.com/


The Big Picture - January 2016 Report

All signs point to 2016 being a momentous year on every front, from the shuddering global economy to the stormy upcoming election season. How will the world look by year's end? BP interviewed Saeculum Research Founder and President Neil Howe to get his take on what's ahead.

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There has been a debate about whether the Chinese authorities will opt for looser or tighter control to try to address the capital flight that China is experiencing.


Those who lean towards the authorities loosening up think that they will allow the RMB to drift or float lower, or perhaps that the authorities will use a single major devaluation of the RMB to convince people to continue holding the RMB.


Those, like George Magnus, who think that the first and only focus of the Chinese leadership is for the Communist Party to retain control, argue that the leadership will tighten control in an attempt to squeeze off capital flight.


A couple of developments suggest that the authorities are attempting the latter course, at least as far as information and speculation goes.


Quartz is reporting that at least one Chinese agency is attempting to stem the flow of information from the less easily controlled foreign sources (it reminds of the time when China had an outbreak of bird flu which originated in Guangdong Province and was killing people in China and HK and the authorities banned the import of Australian processed chicken products).




ZH is carrying an article that the South China Morning Post (a HK paper) and the FT are reporting that China has stopped releasing some metrics that allow analysts to calculate the level of capital flight from China.




Restricting information flow is one of the standard tactics that Chinese authorities use to control the populace. This is the system where even a decade after Mao's death in some parts of China people were not aware of that fact. In the mid 90's I personally experienced this effect. Eighteen months after the authorities in Beijing had made a ruling which affected my work government officials in Beijing were applying the ruling, government officials in Shanghai were aware of the ruling but thought it had not come into effect yet but government officials in Guangzhou insisted that no such ruling even existed.

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Here is some recent analysis from Michael Pettis in which he provides some commentary on the Kyle Bass newsletter that sent a shudder through the markets.




Basically Prof Pettis takes issue with some of the detail in the Bass newsletter, both regarding the current state of affairs and the likely consequences, but ends with this:


...[The newsletter] addresses important issues, including its large and rising debt burden, but for the reasons discussed above I think China will be able to withstand net capital outflows longer than he and the market might currently believe. If I am right, however, it doesnÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t mean that we can simply ignore the extent of the net outflows. And clearly the PBoC isnÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t ignoring it. For reasons I canÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢t publicly disclose I am quite certain that Beijing and its policy advisors have been watching the large net monthly outflows with as much concern as anyone in the market.


There was talk that the Chinese authorities would attempt to address the capital flight just after last year's National Day, in early October, then some suggested that the Lunar New Year break earlier this month would be an opportune time, and now I've seen some speculation that the authorities are tightening foreign news flow in early March so that they can muffle any domestic reaction to major changes brought in around that time.


As always, the decisive action that I am expecting never seems to come (how many times have I jumped at shadows???). But I'm reminded of Tiananmen Square from 1989 which dragged on for weeks, and all the time the view in western media was that actions by the authorities were being measured and that international public opinion would protect the protestors. It did not turn out that way (and the authorities did a wonderful job then of keeping the Chinese population largely in the dark).

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  • 3 weeks later...

Here's a Bloomberg piece about how some of the RMB shorters are being burnt by the currency's resilience and stability but how some foreign punters are staying the course.




China apparently now has an information blackout in place designed to prevent much of the international discussion of its economic situation from getting through to the Chinese hoi polio. It appears that they have been able to regain control of the RMB without any drastic action but if they decide to play nasty it will not be carried out in front of the Chinese people.





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Continues to smell like an incoming devaluation to me.


Check out this aggregation of merger and acquisition stories involving unviable Chinese entities and foreign companies from ZH.




As the bod from Goldman Sachs is quoted as saying: "A possible motivation could be a desire to acquire assets in dollars and euros ahead of a devaluation of the yuan".


Also check out the Dim Sums blog where it is noted that China has built up massive stockpiles of rice, corn and cotton. Also note elsewhere that China has also been active of late in rebuilding their stockpiles of iron ore and copper and that they have taken advantage of lower oil prices to fill their strategic oil reserves to 80% of capacity.


There seems an unusual level of motivation for the Chinese to spend their RMB buying assets which are not traded in RMB if you accept the official line that the RMB is not going anywhere...



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  • 2 weeks later...

Here's a thought ... just maybe those bloody central bankers have once again managed to prevent the international economy from being purged of its malinvestments.




Obviously I dispute the notion that any intervention by central bankers "saved" the world: the only way the world can be saved is to allow this current credit cycle to end. All the central bankers have done is to plug a leak in the wall, it only means that the credit level, like water, will find the next weakest point in the wall to leak through.


But yes for the time being at least outward signs of the crisis appear to have abated.


(hat-tip gunna at macrobusiness)

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  • 2 weeks later...

Ambrose of the London Tele reports the views of one Chinese economist insider. Talk of China facing a similar situation to that the UK faced in 1992 when George Soros famously broke the pound, and the need for a 15% devaluation of the yuan. Though no mention of the probability of such an event nor the timing so not to be taken too seriously imo.



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  • 1 month later...

Here is an informative piece about the conundrum facing China's authorities regarding its currency. It was in the Wall St Journal a few days ago and reprinted in the Oz. You might need to google the headline:

"A Rare Look Inside ChinaÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¾Ãƒâہ¡ÃƒÆ’‚¢s Central Bank Shows Slackening Resolve to Revamp Yuan" to get to the body of the article.




It looks like President Xi is jamming Premier Li into an unwinnable position. Xi expects Li to deliver on the growth rate targets but will not allow him to loosen the RMB, which is probably somewhat overpriced.


The bottom line seems to be that President Xi flirted with market forces but quickly shied away back into the familiar arms of maintaining control. If so then I guess for the time being any devaluation of the RMB will be incremental at most.

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  • 3 years later...

CNH through the 7.0 mark


wait for a Trump tweet? Start of the currency wars?

.......... one view

In order to take control of U.S monetary policy and force the recalcitrant Mr. Powell into cutting rates aggressively he will deliver lots of trade tensions.


Peter Navarro is going to be the happiest person in the White House.


This is not going to end well.


Any company that had not started reviewing its supply chains will most surely do so now.


Companies hate uncertainty, as do markets.


China will give up on trying to do a deal with Trump.


And if you were China what would you think of this statement from Trump on Thursday: âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’…âہ“Weâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢re going to tax the hell out of China until we make a deal.âââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’‚ÂÂ


By the way, theyâââہ¡Ãƒâ€šÃ‚¬ÃƒÆ’¢Ã¢Ã¢â€š¬Ã…¾Ãƒâ€šÃ‚¢re still best friends...yeah, right!


We are about to see China retaliate and the currency will be the first signal.


Look for the Chinese currency to weaken through 7.0 versus the U.S dollar.


And then wait for the Trump tweet.


In the meantime Secretary of State, Mike Pompeo, is doing everything he can, at every public speaking opportunity, to annoy the Chinese.


Then there is Hong Kong, which is being drawn into the U.S-China conflict, with Chinese authorities accusing America of fanning the flames of civil unrest.

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