We are not even out of the first week of 2016 and there is already a litany of financial and economic news out of China. We discussed several times in 2015 the issue of whether the Chinese central planners could make a better job of this sort of thing than the evil capitalist imperialists of the West and this week’s news suggests maybe not! Let us remind ourselves of one of the signs of trouble which I discussed on August 11th by looking at what the People’s Bank of China (PBOC) had done.
The bank then weakened the midpoint to 6.2298 per dollar on Tuesday morning, compared with Monday’s 6.1162 fix – the biggest-ever one-day adjustment to the midpoint.
So we saw that the Yuan ( which seems to have replaced the Renimbi again…) was seeing two things at once. Firstly it was continuing a journey from a fixed exchange-rate in the direction of a flexible or free once. Secondly it was being devalued/depreciated as the flexibility was downwards. At the time I pointed out that this was a new front in the currency wars of the time as we were already seeing the Bank of Japan and the European Central Bank push the Yen and Euro later. We know now that ( as I discussed yesterday) the Euro was about to take a dive.
If we look back to August we see that the Yuan declined to around 6.4 versus the US Dollar quite quickly and then we saw a period of relatively stability as for example a month ago it was at 6.4. Actually it had rallied and dipped back. But since then we have seen a slow decline which has been replaced by faster falls this week. Central banks always have difficulties with a managed float of this sort and China has seen the same and now it finds the Yuan at 6.59 versus the US Dollar. Actually another sign of trouble is that the offshore Yuan is at 6.68 right now showing quite a gap and it was at 6.74 earlier until a fall back which looks rather like PBOC intervention to me. Thus we see that the managed float has proved problematic in 2016 so far with today the most difficult as an attempt to push the Yuan higher ended with it being fixed lower. We are back to levels seen in February 2011.
This morning has seen news of trouble on this front too. I will let Reuters take up the story.
China’s foreign exchange reserves, the world’s largest, fell $107.9 billion in December to $3.33 trillion, the biggest monthly drop on record, central bank data showed on Thursday.
This backs up the picture for 2015 as a whole.
China’s foreign exchange reserves fell $512.66 billion in 2015, the biggest annual drop on record.
So it looks as though China has certainly been splashing the cash in 2015 to support its currency. As we have discussed monetary flows into China have become outflows and I note that RBS think that in the year to November 2015 outflows were of the order of one trillion US Dollars.
If we look at this in the style of the film “Airplane” then it looks as though the International Monetary Fund may have chosen a bad time to put the Yuan in its SDR (Special Drawing Rights) basket.
The strong dollar
A factor underreported in this is that China is at least partly suffering from its decision to at least partly fix its currency against the US Dollar. The trade-weighted Dollar Index is at 98.7 as opposed to the 80 or so of the summer of 2014 and this move has put the squeeze on quite a lot of currencies. If we look at 2016 so far ( h/t @BTabrum) then of 22 emerging market currencies the Yuan is in 11th place below the Singapore Dollar but above the Russian Rouble and its fall is small compared to the 6% of the Argentine Peso.
On December 11th the PBOC with interesting timing guided us towards a new trade-weighted index for the Yuan or Renminbi and here is the latest report.
According to the latest figures, on December 31, 2015, the CFETS RMB exchange rate index closed at 100.94, gaining 0.98 percent from the end of 2014;
In case you do not get the message then it is rammed home.
The mixed movements of the three RMB exchange rate indices are a reflection of overall stability of the RMB exchange rate against a basket of currencies in 2015…….The current conditions are supportive of relatively stable RMB exchange rate against a basket of currencies.
Actually in a way they have been proven correct today alone.
In 2016, the RMB exchange rate regime will continue to be based on market supply and demand and with reference to a basket of currencies. We expect that the exchange rate will move in both directions with flexibility.
So we move on having noted that at least some of the trouble right now has been caused by a sort of managed fixing versus the US Dollar. This has been exacerbated by the strength of the US Dollar which has put pressure on currency management. If we look at the other extreme of a free float even the previously firm UK Pound £ has been feeling the strain as it has been pushed below US $1.46. So the PBOC may be singing along to Brandon Flowers of The Killers.
And we’re caught up in the crossfire of Heaven and Hell
And we’re searching for shelter
Equity market pain
You can argue that there was only a very brief equity market in China this morning. There was only 29 minutes of trading as the market fell by just over 7% with the CSI 300 index falling 255 points. So much for a free market? Oh and where was the plunge protection team when it was most needed?
If we look for perspective we see that back on the 11th of August the Shanghai Composite equity index had a high of 3970 and today it closed at 3116. In the meantime we have had a barrage of moves to support the markets but technical and economic such as the interest-rate cuts. But like the evil capitalist imperialists discovered such moves struggle to reflate a deflating bubble. The falls have been particularly sharp this week so far as the Shanghai Composite closed 2015 at 3539 meaning there has been a 12% loss so far in 2016.
There has been an international impact too as we see that the UK FTSE 100 has fallen below 6000 today and as I type this is down 160 points at 5913. So central bankers around the world will be watching this – and in the case of the US Federal Reserve with sweaty palms and maybe a racing heartbeat – as they have targeted asset prices which includes equities. Spare a thought for Swiss taxpayers should this go on as of course the Swiss National Bank has become something of an equity investor in recent times.
A deeper analysis of the Chinese situation shows us that its own financial instabilities have been exacerbated by the strong US Dollar. This has been made worse by its decision to set its exchange-rate against it. Thus rather than drifting lower like virtually everyone else instead the pressure builds up, which it has tried to resist, but even with its sizeable currency reserves it has to give way every now and then. This then adds to the pressure as everybody concentrates on the decline in the reserves rather than the large amount left. Also I suspect that those in the “know” have been trying to get out of the Yuan before it falls further which only makes things worse.
The generated instability is also being seen in the stock market where it would appear that at least temporarily the plunge protection team has taken a holiday or perhaps a bath. As this crunches around the financial system we see consequences in many markets and not just other equity ones. For example Dr. Copper has nearly touched US $2 and Brent Crude Oil fell earlier to below US $33.
If we now move to the real economy we know that it had slowed down in China as highlighted by this week’s services and manufacturing surveys which indicated stagnation at best. The PBOC and Chinese authorities will be hoping for a disconnect between financial markets and the real economy but sadly for them this is usually an example of an asymmetric relationship. Falls hurt and rallies help little, or at least that has mostly been the picture in the West. Of course markets themselves are likely to be volatile as for the last day of trading this week it would hardly be a surprise if the plunge protection team was already doing some calisthenics and limbering up. For them there is only one song today courtesy of David Bowie and Queen.
It’s the terror of knowing
What this world is about
Watching some good friends
Screaming, “Let me out!”
Tomorrow gets me higher
Pressure on people – people on streets