It’s fair to say China’s economic woes are the most important story in the macro universe.
Tuesday’s surprise rate cut from the PBoC was notable not just for the size (the largest MLF cut since 2020) but also for the proximity to the last cut. This was the second time in two months that Beijing lowered the one-year MLF rate in conjunction with the release of monthly activity data.
The yuan is in trouble. Tuesday’s losses pushed the would-be dollar competitor to the weakest against the greenback of 2023 and very close to levels seen in the wake of the Party congress.
The PBoC will keep leaning into the fix, but I’m not sure how effective it’s going to be.
If you ask Nomura’s Head of Global FX Strategy, Craig Chan, short the offshore yuan looks more compelling all the time. He cited, among other things, a worsening growth outlook and heightened credit risks, all as the authorities in Beijing appear reluctant to go all-in on fiscal stimulus.
In addition, equity outflows through the links are piling up — some $7.6 billion over the past 10 sessions, the most pronounced sell impulse since Xi consolidated virtually all political power in himself in October. That, Nomura noted, “adds to RMB depreciation pressures.”
The bank also said strong fixes aren’t having much of an impact, and so far, short positions don’t seem to be especially meaningful, or at least not going by relatively sparse interest in call strikes weaker than the 7.30 line. Earlier this week, Bloomberg’s Mark Cranfield cited elevated turnover in dollar-yuan, as well as demand for option strikes at 7.30 and higher.
Of course, the PBoC despises a one-way bet on the currency, and generally doesn’t countenance “herd behavior” for very long. They have a dizzying array of tools designed specifically to foil shorts and they’re not averse to creating new ones on the fly. Outright intervention shouldn’t be ruled out either. They can always sell Treasurys.
It’s also possible, albeit perhaps unlikely, that Beijing will give in and roll out the kind of massive stimulus markets are effectively demanding from the Party.
“The single-largest reason in my eyes that the Chinese reopening trade was a fail was the simple fact that, as opposed to the rest of the world, Chinese authorities never responded with fiscal transfer payments into the pockets of individuals and businesses who were bled dry during zero COVID,” Nomura’s Charlie McElligott said, calling yuan depreciation risk a “red flag.” “Hence, the one thing that could truly shock and awe markets at this desperate juncture would be outright ‘helicopter drops’ direct to households and businesses in order to stimulate D.O.A. Chinese consumption,” he went on.
As it happens (and Charlie mentioned this), Bloomberg on Tuesday ran a piece which quoted PBoC advisor Cai Fang who, in an article posted to the social media account of a Chinese economic think thank, gently suggested that, “It is necessary to use all reasonable, legally compliant and economic channels to put money in residents’ pockets.”
