You Call It ‘Yuan Stability Promises’ And ‘Stimulus Hopes’, I Call It ‘The National Team’

Chinese Premier Li Keqiang’s Wednesday promise not to devalue the yuan further to fight the trade war with Donald Trump gave risk assets in Asia a boost overnight. “Recent fluctuations in the renminbi exchange rate have been seen as an intentional measure, but that isn’t true,” Li told the World Economic Forum in Tianjin, in a keynote speech.

He went on to say that “one-way” devaluation “will do more harm than good to China’s economy” and as such, Beijing “will by no means stimulate exports by devaluing the yuan.”

With all due to respect to Li, the PBoC clearly countenanced yuan depreciation from late June through early August. The central bank allowed the policy divergence between the U.S. and China to drift wider as upbeat U.S. econ data pigeonholed Jerome Powell into hawkishness. As the policy divergence grew and evidence of a deceleration in the Chinese economy accumulated, the currency rapidly weakened. The depreciation from late June through early August completely offset the effects of the first round of 301 investigation-related tariffs (duties on $50 billion in goods implemented in two steps on July 6 and August 23) and what was, at the time, still a theoretical second round of IP theft-related tariffs on $200 billion in Chinese exports to the U.S. (those tariffs are now a reality).

In August, when dollar-yuan looked liked it might push through a 7-handle, the PBoC moved in to slam on the brakes. Specifically, they reinstated forwards rules (August 3), chided onshore banks for selling RMB (August 7), moved to squeeze offshore liquidity (August 16), and reinstated the counter-cyclical adjustment factor (August 24). Here’s the annotated chart dating back to the the 2015 devaluation:


(Bloomberg, my annotations)

The point is, yes, China did weaponize the yuan, but it was a kind of “passive” weaponization, if you will. They let the policy divergence between the PBoC and the Fed do all the work and remember, when you have a managed currency, doing nothing is the same thing as doing something. They clearly could have put the brakes on the depreciation earlier because, well, because look at what they did in the four steps mentioned above. They could have implemented those measures at any time, but it seems to me like they waited until a 7-handle was on the horizon.

Notably, the depreciation from late June through early August did not translate to reserve losses, which, on the surface at least, suggests that capital flight was not an issue. You can torture that data if you like, but this is the big picture:



In any event, Li’s comments are comforting to the extent they suggest China isn’t planning on using the yuan to fight Trump now that the trade war has officially entered a new phase. That was positive for risk sentiment in Asia and the SHCOMP rose more than 1% for the second day in a row. This is only the second time since July 24 that the SHCOMP has posted back-to-back 1% gains. You’ll recall that in late July, China promised to take a “more proactive” approach to fiscal stimulus, briefly providing a reprieve for Chinese equities.


Some of the optimism you’re seeing in Chinese stocks over the past two sessions is doubtlessly tied to hopes of further stimulus and Wednesday’s gains were likely in part attributable to Li’s promise of yuan stability. However, it is extremely likely that the vaunted “National Team” is in the market right now.

On August 20, Shanghai Securities News reported that major Chinese insurance companies  spent “at least billions of yuan” buying up shares in the onshore market. Additionally, an “unidentified large Chinese  insurer” was said to have bought billions in A-shares whenever the SCHOMP fell below 2,700 over the three sessions prior to August 20. In other words: China is keen on defending the 2016 lows.

As it happens, Deutsche Bank was out with a note on Tuesday that predicted the 21 entities that comprise the National Team would likely be back in the market soon. To wit:

The absence of large-scale market support despite weakness in the A-share market in 1H could be attributable to a less systematic contagion risk vs. that in 2015. But we believe it is becoming increasingly likely that the National Team will intervene this time since: 1) the Shanghai Composite Index is now very close to the key psychological level of 2,638; 2) valuations are turning more attractive than when the index bottomed in Feb16; 3) the latest announcement of USD200bn in tariffs by the US administration; 4) low interbank borrowing costs that the National Team can leverage to strengthen its balance sheet.

What signs are we seeing? First, the blue-chip SSE50 index, favored by the National Team, has outperformed CSI300 since 20 August, when Bloomberg reported the National Team was supporting the market. Second, there have been strong daily net inflows into several index ETF funds, which the National Team has used as investment channels in the past. Third, Central Huijin has announced it plans to issue more interbank bonds to expand its cash reserves.

Here’s an annotated history of the state vehicle’s activities:


(Deutsche Bank)

As of June, the National Team held more than 1,100 stocks worth more than CNY1.2 trillion. As Deutsche Bank goes on to write in the note cited above, that’s good for 5.5% of the A-share market’s free float.

The bank flags recent blue-chip performance as evidence of state buying. To wit:

We note several signs suggesting that the National Team is likely to have provided some support, either directly or indirectly, over the past few weeks. More importantly, we think the support is likely to continue in the weeks ahead. Relative strong blue-chip index performance since 20 Aug. When the National Team intervenes in the market, it tends to prefer adding blue-chip index stocks to have an immediate impact on the index. As shown in Figure 12, SSE50, the index comprising most liquid large-cap companies listed in Shanghai Stock Exchange, has been the best performing index since 20 August, the day the National Team was reported to have taken action. In recent weeks, SSE50 delivered a 7ppt outperformance vs. smallcap ChiNext in which the National Team has limited holdings.

So I don’t know, folks. You’re free to attribute the two-day rally in Chinese shares to “stimulus hopes” and “yuan stability promises” if you like, but I’d be more inclined to call it state buying to defend the 2016 lows.


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