David Fuller and Eoin Treacy's Comment of the Day
Category - China

    Wider China-Hong Kong Discrepancy Revives Fake Trade Doubts

    This article from Bloomberg news may be of interest to subscribers. Here is a section:

    The discrepancy suggests China’s trade recovery in December was inflated by fake invoicing to skirt capital controls and profit from the difference between the yuan’s exchange rates in on-shore and off-shore currency markets.

    In a twist to fake invoicing in 2013, when the government said export and import figures were overstated due to the phony trade to bring money into the mainland, the refreshed practice has more to do with capital outflows from China. Outflows jumped in December, with the estimated 2015 total reaching $1 trillion, Bloomberg Intelligence estimates show.
    Offshore Affiliates

    "The divergence of trade data indicates a potential use of the trade channel for financial arbitrages," said Raymond Yeung, a Hong Kong-based senior economist at Australia & New Zealand Banking Group Ltd. Given how the spread between the onshore and offshore yuan widened in December, exporters and importers "may move funds across the border through trading with offshore affiliates. By blowing up trade figures, traders may potentially receive a larger forex quota to move their funds abroad."

     

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    Quarantine Alert as China Infects Singapore's Banks

    This article by Andy Mukherjee for Bloomberg may be of interest to subscribers. Here is a section: 

    Two, pessimism is setting in just when the city's benchmark interbank borrowing rate is climbing. To the extent Singapore banks' net interest margins in recent years have been hostage to the abundance of cheap money, investors had a reason to be optimistic. Clearly, China-related jitters are trumping any hopes of them being able to turn their low-cost deposits into higher-priced loans, especially without a revival in the property market:

    Three, the pecking order has changed since China's shock Aug. 11 devaluation. Before that, UOB, the smallest of the trio by market value, had the lowest price-to-book ratio. Now it has the highest. Interestingly, this shift has occurred even as analysts have marked down their estimates of UOB's 2015 per- share earnings by almost 3 percent over the past four weeks. It seems investors are giving UOB the benefit of the doubt because of its lower exposure to Asia's biggest economy:

    Ultimately, though, it's impossible to accurately assess Singapore banks' actual vulnerability to a China meltdown. All three are regional lenders with significant corporate loan books at a time when companies in Asia are facing deep distress because of the way China's flagging demand for commodities has caught them off guard. Ripples in the high-yield bond market are giving a strong signal that 2016 may well turn out to be a year of accelerated loan-loss provisions for them. Investors may be right to seek cover.

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    Hong Kong Dollar Forwards Sink to Weakest Since 1999 on Peg Bets

    This article by Saijel Kishan and Dominic Lau for Bloomberg may be of interest to subscribers. Here is a section: 

    The city’s government bonds tumbled, pushing the 10-year yield to the highest level in 15 months and Hong Kong’s Hang Seng Index of shares dropped the most since Aug. 24 and as rising local borrowing costs threaten to further brake an economy reeling from a collapse in Chinese shares and the slowest growth in the mainland in 25 years. The yuan’s slide to a five-year low in the first week of January triggered weakness in emerging Asian currencies this month, led by a 3.4 percent drop in South Korea’s won.

     “It’s like an attack all fronts on Hong Kong,” said Nordine Naam, global macro strategist at Natixis in Paris. “Investors are getting more and more risk adverse, especially with regards to China and so they’re getting out of the region. For the time being, Hong Kong has lost its safe haven status.”
    Hong Kong Monetary Authority Chief Executive Norman Chan said Monday he expects the local currency to decline to the lower limit and reiterated his commitment to keeping the linked exchange-rate system. It had traded at the strong end of the range as recently as Jan. 4. He said Wednesday that the International Monetary Fund is also a supporter of the mechanism.

    Hong Kong brought in the peg in 1983 after a 30 percent plunge in the local dollar’s value led to panic buying of rice and other staples. Former HKMA chief Joseph Yam in 2012 called for a review of the peg, having in 1998 conducted $15 billion of stock purchases to fend off speculative attacks on Hong Kong’s equity and currency markets.

    “The Hong Kong dollar is a victim of all the risk aversion across global markets given what’s happening with China,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “Dollar pegs across the globe are under pressure but I trust that the Hong Kong peg will stay in place because there are no better alternatives given the volatility we’ve seen with the yuan.”

     

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    Top Forecaster Sees Aussie Demons Capping Gains as Bottom Near

    This article by Candice Zachariahs for Bloomberg may be of interest to subscribers. Here is a section: 

    Bialas estimates that a “big chunk” of Aussie underperformance came from the unraveling of carry trades that involved, in particular, borrowing euros at near zero percent to buy a currency linked to a higher benchmark rate. The Reserve Bank of Australia cash rate currently stands at 2 percent and policy makers have signaled a reluctance to take it any lower.

    Australia last month capped its strongest year for job growth since 2006, with the country’s services sector propelling gains as the mining industry cooled.

    “I expect the Aussie-U.S. dollar to bottom sometime in the second quarter,” Bialas said, “as improved competitiveness of sectors unrelated to mining, a strong labor market and a recovery in inflation will give rise to speculation about the return of the RBA to raise interest rates later this year.”

     

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    China's Mixed Signals Have Eichengreen Questioning 'Competence'

    This article by Anna Andrianova for Bloomberg may be of interest to subscribers. Here is a section: 

    It’s clear that they have responded very poorly and very erratically so far, especially in the past year,” said Eichengreen, author of “Hall of Mirrors,” a book analyzing the crises of the Great Depression and the Great Recession. “They can’t quite decide if they want the exchange rate be more flexible or not, they can’t communicate clearly to the markets.”

    The measures to shore up the Chinese currency and plug an outflow of capital risk setting back the long-held goal for an internationalized yuan. The People’s Bank of China said Monday that lenders in offshore yuan-trading centers will now have to lock away a share of deposits in its accounts, ending the exemption for foreign institutions in a push to curb speculation against the currency. That followed large-scale intervention in Hong Kong last week that sent yuan borrowing rates in the city soaring to a record as liquidity was temporarily crunched.

     

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    European Shares Rebound From Four-Day Rout as Carmakers Rally

    This article by Alan Soughley and Sofia Horta e Costa for Bloomberg may be of interest to subscribers. Here is a section:

    “This rebound could be a sign that global markets are calming down a little,” said Pedro Ricardo Santos, a broker at X-Trade Brokers DM SA in Lisbon. “We expect to see a recovery for equities this week, though we’re not yet talking about a strong rally from here. Concerns about commodities prices will persist, and pressure on those sectors continues to be very high.”

    Investor fear that turmoil in China’s stocks and currency will spread to the global economy has spurred declines in world markets this year, wiping about $5.4 trillion off the value of international equities. Mining companies have suffered the most in Europe, with a gauge of regional commodity producers sliding 15 percent so far in 2016. 

     

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    How Low Could Yuan Fall to Restore China Export Growth?

    This article by Fielding Chen and Tom Orlik for Bloomberg may be of interest to subscribers. Here is a section:

    Analysis by Bloomberg Intelligence Economics suggests a drop in the yuan to 7.70 to the U.S. dollar could return export growth to 10% year on year by end-2016 and add 0.7 percentage point to GDP growth. A slide to that level could also result in capital outflows of around $670 billion, though that appears manageable given the People’s Bank of China’s large foreign exchange reserves.

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    President Xi Jinping lays down the law to the Chinese army in first 'precept' speech since Mao Zedong

    This article by Li Jing for the South China Morning Post on Monday may be of interest to subscribers. Here is a section: 

    The only other leader to have given a precept speech to the military in the 67-year history of the People’s Republic of China was Mao Zedong, who did so in 1952 and 1953.

    Xi, who is also chairman of the Central Military Commission (CMC), used the speech to call for his military reform plans to be fully implemented.

    Xi’s ambitious modernisation plan would completely remodel the army, which was established in Mao’s era, and would therefore put him on a par with – or even higher than – Mao in terms of his military authority, said Chen Daoyin, an associate professor at Shanghai University of Political Science and Law.

    “No other former CMC chairman – Deng Xiaoping (???), Jiang Zemin (???) or Hu Jintao (???) – has given a military precept before, which means Xi’s power and authority is even higher than them,” said Chen.

    Zhang Lifan, a party historian, said the phrase “Xun Ci” suggested a sense of sternness and admonishment towards the lower ranks.

    “It also signals Xi’s discontent and anxiety over the status of the army – the rampant corruption and the Soviet-style command structures,” he said.

    Xi was showing assertiveness in the overhaul to remove any resistance from within the army, said Zhang.

     

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    China's Seven-Minute Selling Frenzy Shows Circuit-Breaker Risks

    This article by Kyoungwha Kim and Cindy Wang for Bloomberg may be of interest to subscribers. Here is a section: 

    “Investors rushed to the door during the level-one stage of the circuit breaker as they fretted the market would go down further,” said William Wong, the head of sales trading at Shenwan Hongyuan in Hong Kong.

    Spiraling losses on the first day of China’s circuit breakers show how measures meant to help restore calm to one of the world’s most volatile equity markets risk doing just the opposite. The selloff could spur policy makers to “fine tune” the new rules, according to Andrew Sullivan, managing director for sales trading at Haitong International Securities Group Ltd. in Hong Kong. Unlike similar circuit breakers in markets including the U.S., the threshold for trading halts in China is low enough that they would have kicked in 20 times last summer alone.

    Circuit breakers are the latest effort by Chinese authorities to tame swings in a stock market where the growing use of leverage by individual investors drove an unprecedented boom -- followed by a $5 trillion bust -- in the span of just a few months last year. The CSI 300 index of the nation’s biggest companies rose or fell by 5 percent 20 times from the start of June through early September, with daily moves exceeding 7 percent on half of those occasions.

    Chinese shares began Monday with losses after data showed manufacturing contracted for a fifth straight month and investors anticipated the end of a ban on share sales by major stakeholders at the end of this week.

     

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    China and Clinton Agree: Traders Should Pay for Canceled Orders

    This article by Eduard Gismatullin and Sam Mamudi may be of interest to subscribers. Here is a section: 

    Other measures suggested by the CSRC include forcing traders who use automated orders to provide a detailed description of their strategies to regulators and wait for a review before they’re allowed to execute trades. That proposal has raised concern among some international investors who don’t want to disclose their proprietary trading algorithms, according to Calvin Tai, the head of global clearing at Hong Kong’s stock exchange.

    Clinton, the front-runner to win the Democratic nomination for president, called for a fee on canceled orders in October and explicitly linked the idea to curbing high-frequency traders. Her plan is designed to target “harmful” high-frequency trading that makes markets “less stable and less fair,” Clinton’s campaign said at the time. 

    For every 27 orders placed on U.S. stock exchanges, about one is filled, according to data from the U.S. Securities and Exchange Commission. In other words, approximately 96 percent of all orders sent to U.S. equity markets are canceled.

    China wouldn’t be unique in trying to limit canceled trades. Traders using Frankfurt-based Deutsche Boerse AG’s stock market are restricted from submitting an excessive amount of orders that don’t get executed. Borsa Italiana has a high-usage surcharge to prevent orders from getting too far out of whack with the number of actual trades.

     

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