China Focus : A First Time For Everything
I am struck that this is the first time that markets are confronted with the actual prospect of China slowing and their surprise rate cut last weekend is also seen as result of their ballooning debt problem.
We had scares in the past and scandals and such but never have we encountered a sustained slowdown or rather realistic expectations of a sustained “new normal” slowdown before.
That was the main theme that was echoed during the annual National People’s Congress, parliamentary meeting held earlier this week where the 2015 GDP target has been definitively slashed to 7% (from 7.5%) and warnings of downward pressure as their economy adjusts to a “new normal”. http://www.cnbc.com/id/102470536
The picture is dismal if we view how their USD GDP growth has more than halved since its peak in 2011.
And that will affect commodity consumption, of course.
On the bright side, we can expect China to continue to drive outward direct investments into the frontier markets to make up for the anemic onshore growth and Hong Kong and Macau would be the worst hit, if you ask me.
Hong Kong’s retail sales slumped in January despite the lunar new year festivities, recording the biggest drop since the 2003 SARS epidemic and Macau casino revenues have fallen by a record 48%. All signs in place when Patek Phillipe and Panerai started cutting prices last month purportedly because of Euro weakness. http://www.scmp.com/business/companies/article/1725243/officine-panerai-drops-prices-hong-kong-to-combat-euro-weakness
It does not help that Alibaba is under scrutiny for fake orders resulting in their share price plunge to the lowest since their IPO and now Siemens is also investigating some fictitious Chinese contracts.
There is always a first time for everything and mindsets are gradually adjusting to the new China which has not looked so bad in 25 years even as they continue to cement their global status as a political and economic powerhouse.
USDCNH broke a new 2 year high earlier this week after the rate cut but managed to settle lower although we should continue to expect the currency to weaken against the USD(and only the USD) in the days ahead.
If we take SGDCNH as an example, we are at 5 year lows.
Thus for the spate of CNH issuances out of the foreign banks that we have seen in the past week, starting with CBA’s 1 bio sub debt, I think there are some nice buying opportunities there.
Leaving with the indicative prices.
TH believes CNY will be forced to devalue soon?
Divided opinion on that.
On one hand, it would be instant profits but on the other hand, it would undermine their global standing. If they want to be taken seriously as a global reserve currency, then now is the time to stand firm and build faith.
Four months ago, handsome RM introduced me a CNH product. There was minimal risk (Fixed-yields + FX-hedged + counterparty was the bank’s china branch).
Last night, handsome RM brought me to a nice establishment. He shared that the CNH product was structured to lend money to subsidiaries of China’s SOEs.
But the bank’s dreams had been crushed; the “safe” debtors began to default the bank’s branch in China.
Well, Kaisa’s case has demonstrated to us the importance of knowing your enforceable jurisdiction and suddenly offshore debt has become “subordinated” even if they are senior.
It’s not time yet to stand firm.
It will weaken first.
Looks that way.
Drank a lot last night with him and been feeling very lonely in the past 20hrs . hahahaa, the world’s FX market also got very drunk since Nov 2014 and the hangover might be irreversible in the next few years.
Suddenly, those who bet on CNY’s continued appreciation against USD got worried. The possibility of re-pegging HKD (stronger) against USD has faded too.
Today, CNY is still quite pegged to USD. If USD continues to strengthen further against the rest of the world, Chinese manufacturers will be ruined. Some Chinese businesses do fear a sudden yuan depreciation against USD and prefers to hold onto offshore HKD or USD now.
On the contrary, if USD strengthens, the Chinese reserves of 3.8 trillion will be making big time profits.
Hangover depends on what you have been drinking lah !