Ok, so China looks like it’s in some pretty serious trouble.
One day after the SHCOMP officially fell into a bear market, H-shares suffered the same fate, falling 2.2% to bring losses since their January 26 highs to 21%.
That is a pretty damn remarkable turnaround. If you think back to January, H-shares were a veritable world-beater. At one point, they staged a truly incredible 19-session win streak:
Hong Kong-listed shares of Industrial & Commercial Bank of China have fallen for 13 days a in a row:
Onshore markets got no relief on Wednesday either, with the SHCOMP falling another 1.1%:
Clearly, the yuan has people spooked. We’ve been over this a hundred times in the past several days, but just to reiterate, the currency has exactly nothing working for it right now. There’s speculation Beijing could deploy it as a weapon in the trade war with Trump (or worse, that what we’re seeing is evidence that it’s already been deployed) and there’s decelerating growth which has necessitated loose monetary policy that in turn makes the policy divergence with the Fed wider.
Both of those things are conducive to capital flight if they persist. The offshore yuan is at its weakest against the dollar since December:
And if you look at a chart of the onshore yuan that captures the August 2015 deval., you can get a sense of how quickly it’s falling:
So yeah, this is some reasonably harrowing shit – to the extent it makes sense to use “reasonably” with “harrowing.”
“Investors are getting into a bit of a panic now,” Ken Peng, at Citi Private Bank in Hong Kong told Bloomberg for a piece out Wednesday, adding that “policy makers might be allowing the market to push the yuan weaker, without doing it themselves, as the trade tensions with the U.S. worsen and will be wary of burning foreign-exchange reserves to little effect.”
But see there’s the interesting part of this. If China lets the market weaken the yuan, well then they can step in and sell Treasurys on the excuse that the market is being “irrational”, thus killing two birds with one stone (letting the yuan weaken to soften the blow from the trade war on exports and punishing the U.S. by selling Treasurys).
On that note, I’ll leave you with a little color from SocGen’s Kit Juckes:
President Trump wants the rest of the world to stop buying oil from Iran and Sassan Ghahramani (SGH Macro Advisors, ex-Medley) reportedly told clients that Chinese leaders believe that US import tariffs are inevitable, expect the yuan to weaken further and will seek to reduce Treasury holdings ‘appropriately’. A strategic decision to sell Treasuries and weaken the currency makes little sense. China holds Treasuries because it bought dollars to slow the yuan’s rise as capital flooded into the country. If the market reacts to Mr Ghahramani’s work by selling the yuan (so PBOC can intervene to support a falling currency and reduce their Treasury holdings), I’m sure the Chinese would grab the opportunity, but a strategic move doesn’t make sense. As for weakening the currency, we learnt in 2017 that this risks destabilising China’s balance of payments. Anything that threatens stability at a time when the focus of policy is to engineer a soft landing for the economy and controlled de-leveraging, would be very dangerous.