China Focus : Preparing For Something Big

It’s been a big week in China and Chinese equities are the best performers this week after the slew of reforms announced for their economy and financial markets.

The main cheer came from the Ministry of Finance and a proposed CNY 1 trillion dollar debt swap between local governments and the MoF which resulted in an instant rally of 2% for the SHCOMP. The MoF came out later to clarify that this swap is to allow local governments to issue bonds to refinance debt that was previously issued through local government financing vehicles that are due to mature this year which would amount to CNY 1.86 trillion.

So much for the debt swap claims but it only serves to show that the market does not really care as more investors start to view China’s stock market as a casino, according to the WSJ.

To add to the casino case, we now note that the Chinese yuan dominates 80% of Bitcoin trades, an indication of more speculation ?

Central bank governor Zhou also announced that China may soon fully liberalise interest rate mechanism by removing the deposit rate ceiling which would be a historic feat allowing banks to pay higher deposit rates if required.

As a result, Chinese credits have done well for the week with good demand seen across and CNH bonds benefited from talk of further easing if the economic slowdown persists.

And the CNY has held its own against the USD this week, showing no signs of weakening (after hitting a 2 year low last week) after chalking a record trade surplus in February.

Bonds should continue to do well, the currency looks like it will be in a range for a while and the stocks had their second best weekly closing in 5 years, so what can I say ? Casino ?

I note with some interest that China has so far been shunning further investments into Europe, missing out their bond and equity bull run, with most headlines focused on their interest in emerging markets these days. And I wonder if it has anything to do with possible political rifts, or early signs of potential ones, to insulate themselves from over exposure and to forge new allegiances with upcoming economies instead ? Just a thought.

Countries are taking sides with the UK flipping over to show support for China’s Asian Infrastructure Investment Bank which is not making the US very happy and Australia will soon have to decide if they want to do the same.

In any case, China remains amazing in their claim on their ability to reincarnate the Dalai Lama and I take my hat off to them, again.

I do not know what they are preparing for, but I think it is big.

Indicative prices.