A top tier global economy intervened to stabilize its currency on Tuesday and Wednesday. And I don’t mean Japan. Or, actually, them too, but in this case, I mean China.
Following reports that state banks were selling dollars Tuesday to manage the yuan’s fall after the weakest fix since 2008 suggested authorities in Beijing are prepared to countenance some catch up vis-à-vis spot and CNH following the conclusion of the Party congress, the offshore yuan rose the most ever on Wednesday.
The 1.8% surge was remarkable (figure below), and spoke to authorities’ adeptness. “The softening of US Treasury yields as well as somewhat positive sentiment created favorable conditions for shadow intervention to nudge USDCNH back toward USDCNY,” Fiona Lim, a Singapore-based FX strategist said.
The unprecedented rally came on the heels of a string of record lows hit in the lead up to China’s twice-per-decade leadership reshuffle, which in 2022 doubled as a coronation ceremony for Xi.
If you’re inclined to describe the ongoing soap opera in the yuan as convoluted, you’re not wrong. Tuesday’s fix (mentioned above) was described by some as a “mini-devaluation,” but “post-Congress adjustment” was probably more apt. After all, the fixes are still very biased.
The PBoC will likely attempt to gradually normalize the situation with incrementally “weaker” fixes. Note both the italics and the scare quotes. Both are important. Tuesday’s fix (which, again, was the weakest in 14 years) was still nowhere near spot, which was pushing against the weak end of the band, to say nothing of CNH. Wednesday’s fix, 7.1638, was the 40th markedly biased reference rate in a row (figure below).
There are benefits to a weaker yuan, and China presumably wants them, but at the same time, they don’t want capital outflows. And investors are terrified following Xi’s power grab, so guarding against outflows is probably an urgent concern.
The bottom line on Wednesday appeared to be that authorities saw a tactical opportunity to turn the screws on specs. Rather than “going with it” (so to speak) by weakening the fix incrementally for a third day, the PBoC instead tilted back stronger. When taken with overnight dollar weakness and additional rumored USD selling by state-owned banks, the impact was significant, and a few dominoes were tipped. According to traders who spoke to Bloomberg, “the strength of the move caught out proprietary desks with stop-loss levels triggered.”
Again, I’d note that this was tactical, not some sort of muscular effort to draw a line in the sand. In fact, it’s more likely that China intends to let CNY continue to weaken in a managed fashion, hoping to reap the benefits while occasionally serving notice that evidence of speculation (e.g., a “too wide” CNH-CNY basis or a CNY that trades too close to the weak end of the band for too long) will be addressed accordingly. Certainly, Beijing has no qualms about resorting to draconian measures to halt one-way price action in the currency. The fact that they haven’t says a lot.
In any event, this is something to keep an eye on — as maddeningly convoluted as it is.
A Chinese fintech I own is normally a very highly profitable business. It’s a small cap that typically has bodacious earnings and grows like crazy. They also do some modest, offshore business (I believe it’s in Canada).
They were growing so much a year ago that their coffers overflowed, so they started to provide a dividend. Of course, as the world’s economies are constrained by economic and growth challenges, I’m waiting for the next quarterly report to see how much the company’s usual pattern of growth may be stunted.
Bottom line, the outlook for China’s banks doesn’t look favorable these days. China’s property and banking stocks are definitely in trouble. Today my fintech has a very deeply depressed stock price (because markets have been unkind, and who knows what will happen next in China). The only bright spot is the rate for the stock dividend is now 9.68%, which is stunning if you like dividends.
Government support for the yuan can help the currency and the economy a little. But if the ongoing growth proposition for this fintech completely dries up, I’ll accept the loss and sell. That is the way risk can go when investing in China. Fingers crossed, for now, that they will weather this storm.
I hope that China’s leaders will take a deep breath and avoid creating additional headwinds for their economy and stocks for a little while. Reckon I just have to see how the bad business environment in China may impact sales and operations for my investment. Ha! Probably not good, but I’ll let the numbers tell the story.