USD/CNH daily
I tend to think the only thing that matters in global markets right now is the latest candle in USD/CNH.
We got a report today that China told banks to escalate yuan intervention and the market is taking that as a sign that a further significant devaluation (like in 2015) is off the table.
At the same time, China problems continue to worsen. Today we learned that China trust company Zhongzhi is planning a debt restructuring and it looks like debt problems are cascading. Moreover, it looks like the central government doesn’t want to bring out the bazooka.
We got a surprise cut from the PBOC this week and today it said “prudent monetary policy will be precise and forceful.” At this point, the market is tired of ‘prudent’ moves from China and wants more of the powerful variety. Combine that with talk about a ban on China stock sales and the whole thing looks ham-handed.
To be far, China still has many levers to pull on with inflation running at 0% y/y but the market is quickly losing faith and so am I. Coming into this year, the baseline was for a strong China recovery from covid-zero but it’s been a disappointing result at every turn.
Bloomberg yesterday also suggested that the slump in China property prices is far worse than official data suggests.
That compares to official data saying prices are down just 6% from the August 2021 peak.
Officials are starting to talk about an improvement at the end of Q3 or into Q4 but I’m not sure I have the patience or faith in them delivering. Calls for stimulus to boost consumption are growing louder, including from the PBOC. But the government appears to be philosophically against direct subsidies and is trying to subsidies auto and large-ticket items instead.
Finally, everything in China is opaque. I don’t have much faith in the data and anecdotal reports are always a source of confusion. There’s some acknowledgement that something needs to be done but the tradeoffs are perplexing officials. Xi Jinping might also be preoccupied with geopolitics and fighting the trade war.
For now, I’m growing increasingly bearish on China and that’s tempered my optimism for global growth and commodities.
Where the puzzle really comes unraveled is in bonds where if China were to sell Treasury holdings or even stop re-investing proceeds, it could have a disastrous effect at the long end. That’s something that might already be unfolding and adds to the headache of figuring out what is happening in global capital markets. Technically, there isn’t much standing in the way of 4.50% 10s, so maybe we take it from there or wait for the Fed to call the top in rates.