Despite the Yuan’s value recently plummeting to an eight-year low, the Chinese economy has been rather stable in the second half of 2016, manufacturing PMI held above 50 (above 50 signals expansion); exports reached $196.8 Bln in November(from $176.2 Bln in January); and in industrial production growth averaged 6.14% Year over Year.
Together, these changes all represent a strong indicator of growth - and of bounce-back - and all thanks to the Yuan. Or more accurately, to the Yuan meltdown. Even as the Chinese Yuan shed more than 7.1% this year, it allowed China’s exports to rebound and stabilize industrial and manufacturing production. But all that stability comes at a stiff price, down the line.
While a weaker Yuan helps exporting sectors, it causes problems in China’s domestic economy. In it, an exceptionally weak currency has the same impact as monetary easing, creating an inverse relationship where, when the Yuan’s value is eroded, China’s housing bubble swells.
The more China’s housing bubble swells, the more its debt problem becomes acute. And, ultimately, the more painful its bust will be. Continue reading "China 2017: More Boom Before the Bust"
Chinese policymakers are in the midst of a very delicate maneuver. With a hyped housing market and an unloved stock market, China’s policymakers want the “hot money” from real estate investment to be funneled away from housing and into the stock market. The problem? It won’t be easy and may require sacrificing economic growth, just at the point when growth has begun to stabilize.
The Bubble Returns
For some time now, Beijing has been well aware of the bubbly housing market. In fact, China has experienced two housing slumps in past decade, back in 2011-2012 and in 2014-2015, in both cases, the slump was largely due to the government’s efforts to curb prices in the preceding years. Those efforts were primarily through the implementation of new housing regulations and by clamping down on shadow lending. More importantly, the Chinese government put to good use its main monetary tool, the Yuan. By allowing the Yuan to strengthen, credit became more expensive and, as a result, the hype ended. But the price tag was dear because tightening efforts also resulted in a sharp slowdown in the Chinese economy and a meltdown in the Chinese stock market.
In 2015, the crisis was so severe, in fact, that Chinese policymakers had no choice but to drastically reverse policy by cutting lending rates, intervening in the stock market and, yes, as you might have surmised, devaluing the Yuan. But ironically, just when the easing measures have started to make a real impact, the housing market has once again become overheated and has turned bubbly. Continue reading "Will China Drop The Ball?"
Chart 1. Crude Oil-Copper Correlation: Gap Widened
Chart courtesy of tradingview.com
Another attempt by oil to close above the psychologically important $50 level (black dashed horizontal line) has failed. This was the third and a good try, and it was after a good correction in July, which makes bulls nervous as they lose their patience. Copper couldn’t keep the correlation gains achieved in July as it didn’t follow the rising crude last month and on the contrary, it moved the opposite way below the $2.2 level. The gap between them widened.
It’s not all bad news. There are at least two positive factors: Continue reading "Copper Waits If Oil Keeps Upside; China Is In Focus"
A little more than a week ago, China released its data for second quarter GDP growth alongside other important data sets that, entwined, give us a glimpse into the health of the world’s second largest economy and a framework for FX strategy in the Asian space.
China’s second quarter GDP growth hit 6.7% for the second quarter year-on-year, the same growth rate as the first quarter and moderately higher than the 6.6% called for in Reuters’ consensus poll. The major contributor to GDP growth was consumption, a rather positive sign that consumers are becoming a more prominent engine in the Chinese economy. This was further enforced when China’s retail sales posted growth of 10.6% in June compared to 10.0% in May.
But on the flip side, there were some negative signs as well, and plenty of them. GDP growth was, indeed, driven by consumption but the growth in the services sector, or the tertiary industry as it is referred to, was 7.6% Year on Year. That is simply not enough to accommodate China’s weakness in manufacturing and not exactly in line with China’s growth plans. Continue reading "China Recap: The Good And The Bad"
China has resorted to its old habit of stimulating the economy by allowing the Yuan weaken. But while the "remedy" has yet to work its wonders. The side effects, are already emerging—inflation is on the rise.
The People's Bank of China, China's central bank, ought to decide - support China's manufacturing or curb inflation.
What will the Chinese central bank do? And equally important, how will the dollar respond?
China's Central Bank: The Logic
In order for us to try and gauge the next move by China's central bank, we must delve first into the logic. In other words, what is the central bank considering? Now, that's not an easy undertaking, by any stretch of the imagination. Nevertheless, the task has turned a tiny bit simpler. Last month, in an interview with the Caixin Weekly, the Governor of the People's Bank of China, Zhou Xiaochuan, outlined the central bank's policy.
Here are the points to focus on: Continue reading "China's Policy About To Hit The Dollar?"