If you’re a regular reader, you might be sick of hearing about China, the yuan, Hong Kong money market rates, and everything else that goes along with trying to untangle exactly what’s going on in the world’s second largest economy.
Well it’s probably best if you do what I did: resign yourself to the fact that keeping abreast of developments in Chinese markets is now a necessity.
You need to take a holistic approach to markets and that means understanding things like the RMB basket and why it forces China to devalue in periods of structural USD strength; the smoke signals sent by soaring O/N HIBOR, Hong Kong depo rates, and forward points; the significance of the mainland 7-day repo rate; etc.
Staying up to speed can be painful, but you’ll sleep better if you’re informed (well, except for the fact that keeping up with everything listed above means staying up for the overnight session).
Following the election, it seemed like no one cared about China anymore. To the extent that perception was real (i.e. to the extent worries about the country had actually receded), the calm was shattered following the December Fed meeting as China’s bond market collapsed.
In any event, most of us skeptics look forward to new material from SocGen’s Albert Edwards. Below, find an excerpt from Edwards’ latest piece which finds him questioning the market’s complacency with regard to China:
For most of last year, things in China had gone quiet as far as macro investors were concerned. Economic activity had recovered, deflation had abated, the crash in the equity market was halted as was a plunge in FX reserves. It looked as if the seemingly omnipotent Chinese authorities had regained assertive control of their economy and financial markets. All seemed well. Yet amid the post-Trump rally, capital flight from China was getting out of control and the renminbi was plunging again — although global investors didn’t seem to care in the same way they did 12 months before. But China’s problems have not gone away, as a surge in the overnight deposit rate to 80% has just caused the biggest two-day rise in the offshore renminbi on record.
For those of us who follow these things, it was somewhat perplexing that the increasing rout in the renminbi in Q4 last year barely raised a murmur of market concern.
Global markets really couldn’’t seem to give a toss about events in China. Yet they should.
As for average US retail investors, we can sum up their feelings about the vagaries of Chinese markets as follows…