As this week has progressed with the Western Capitalist Imperialists struggling with rising bond yields China can afford a wry smile. We noted the all-time lows being seen as its benchmark 10 year yield went below 2% as autumn turned to winter last year. Well now it is 1.75% as those invested in Chinese government bonds have a party as opposed to the bond vigilantes in the West. It’s 30 year is at 2.04% which is a fair bit lower than a year ago. So at this point we have something to go with their military parade and let us hold that theme as we may also be seeing something of a familiar theme from the past.
Developing countries are moving out of dollar debts and turning to currencies with rock bottom interest rates such as the Chinese renminbi and Swiss franc. ( Financial Times)
That sounds like another version of the Carry Trade to me and of course China will like the idea of both boosting its currency and particularly gaining control over these countries via their debt. I rather suspect they will come to regret it. By that I mean Chinese control over them and that is before the risk of something like this.
So the recent rise in the Swiss Franc will be a problem for many debtors in Eastern Europe as the value of their debt will be rising if they earn their income in anything related to the Euro. If we look at the Hungarian Forint the exchange rate against the Swiss Franc is not at the highs for this year but at just under 217 it is up just under 16% over the past year and up nearly 35% over the past 3 years. So it is likely that for most borrowers the value of their debt will have risen over the past 3 years swamping any likely monthly repayments.
That is how I described the blow up of the previous Carry Trade back on August 31st 2010. A real blast from the past! Now one might think the Swissy is more easily bounced around than the Yuan but we also saw this happen to the Japanese Yen. Anyway after the warning let me return to something that will make China happy.
A switch to renminbi borrowing — which comes as the Chinese currency hits its highest level against the dollar this year — is also a consequence of Beijing’s $1.3tn belt-and-road development programme, which has lent hundreds of billions of dollars for infrastructure projects to governments across the globe. ( Financial Times)
Personally I would not be the people of Kenya or Sri Lanka for all the tea in China.
Kenya’s treasury said in August it was in talks with China ExIm Bank, the country’s biggest creditor, to switch to renminbi repayments on dollar loans for a $5bn railway project weighing down its budget.
Sri Lanka’s president also told parliament last month his government was seeking lending in renminbi to complete a key highway project that stalled when the country defaulted in 2022. ( Financial Times)
Returning to pure economics plus out experience of the Carry Trade things may be even worse for Panama.
Panama tapped the equivalent of nearly $2.4bn in Swiss franc loans from banks in July alone, as the Central American nation’s government battled to contain its fiscal deficit and avoid a downgrade in its credit rating to junk status.
Felipe Chapman, Panama’s finance minister, said the access to cheaper financing saved more than $200mn compared with issuing debt in dollars and that the new loans had been hedged. ( Financial Times)
In any crisis the scramble for the exit will mean that the interest-rate gain now will be dwarfed by the capital losses and the bit below wont help in that regard.
He added that the country had “diversified” its sovereign debt management into both euros and Swiss francs “instead of relying solely on US dollar capital markets”. ( FT)
People like ECB President Lagarde will love this but in any blow up you will not see them for dust in a repetition of the way she exited the IMF after the record loans she made to Argentina went sour.
But for now China will love being part of this and will ignore the risks.
The Property Market
Things get less comfortable for China as we remind ourselves that the lower interest-rates are because of the property market blow up.Thus this from Yicai earlier attracted my attention.
Regarding market trends, urban market divergence will intensify in the second half of this year, according to executives at the builders. Core areas in first-tier and strong second-tier cities will likely stabilize first, while third- and fourth-tier and weaker second-tier cities will need more time to clear inventory and rekindle demand, they added.
As you can see they can halt it in some places but others just slip through their fingers a theme that is confirmed by another part of the article.The emphasis is mine.
China Overseas Land & Investment expects investment growth in the second half of this year. While the overall real estate market has contracted, demand for home improvement continues to grow, presenting ample development opportunities in an increasingly concentrated market, it pointed out.
This was supposed to be an article boosting things but again I have highlighted what I consider to be an important context.
The developers spent more than CNY605.6 billion (USD83.4 billion) buying land plots in the eight months ended Aug. 31, according to figures released by the China Index Academy, a real estate research center. Eight of the top 10 buyers were government-owned businesses.
China Equities
The problem with central planning and central control has been shown today and let me hand you over to CN Wire.
China’s financial regulators are weighing a series of cooling measures for the stock market as they become increasingly concerned about the speed of a $1.2 trillion rally that began in August, according to sources familiar with the matter.
This rally? From September 24th last year.
This has seen rough times and the Chinese authorities were perhaps looking with envy as the various indices for the US stock market kept hitting new all-time highs. So they have unveiled their version of the Plunge Protection Team.
One part of hat is below.
The first is to create a securities, fund, and insurance company swap facility to support qualified securities, funds, and insurance companies to obtain liquidity from the central bank through asset pledge.
The reference to August in the latest move is pure deflection, Back on September 24th last year this would have been considered a triumph.
The Shanghai Composite Index has reached its highest level in a decade, while the CSI 300 Index has climbed more than 20% from its lowest point this year. ( CN Wire)
Now the authorities are singing along with The Specials.
You’ve done too much,Much too young.
That led to this today.
T CLOSE, SHANGHAI COMPOSITE DOWN 1.25%, SHENZHEN COMPONENT DOWN 2.83%, CHINEXT DOWN 4.25%, STAR 50 DOWN OVER 6%, CAMBRICON DOWN OVER 14%. ( CN Wire)
Electric Vehicles
Again this starts as a triumph for the central planners.
China is conquering the world in electric vehicles. Its automakers produce far more than any other country and outpace them on innovation. China’s appetite for gasoline-powered cars is fading by the week. In each of the last five months, battery-powered and plug-in hybrid cars made up more than half of all cars sold. ( New York Times)
But then suddenly the Holy God of economics called Investment hits troubled waters.
But look closer at the industry and the picture is not pretty. Already, fierce competition among automakers has gotten ruthless, with about 50 automakers fighting for customers by slashing prices again and again. Manufacturers facing ruinous losses are struggling to pay the companies that supply their parts. And yet they keep borrowing from state-run banks to build more factories, leading to extensive overcapacity. ( New York Times)
Comment
As you can see there is a lot going on in the background But the theme is that whilst the central planners seem impressive and things initially start that way they end up with egg on their face frequently. The property market boom and bust is one example which they may repeat in the equity market. Any large scale Carry Trade could easily be another.
