It’s been nearly two months since Chinese cryptocurrency exchanges were abruptly shuttered by local regulators, part of President Xi Jinping’s ongoing crackdown on capital outflows and potentially embarrassing or destabilizing market forces in the weeks ahead of last month’s National Party Congress. But now that China’s new president emperor has cemented his grip on power by installing political allies on the Politburo and successfully lobbying to have his name enshrined in China’s Constitution, the exchanges are taking tenative steps to figure out if it’s safe to do business in China again, and what constraints would apply to their operations going forward. And while providing an online exchange for fiat-to-digital currency transactions is still expressly prohibited, a couple of the country’s biggest exchanges are rolling out an OTC model that resembles the popular peer-to-peer bitcoin trading website Local Bitcoins, and which will “also support fiat currency transactions.” Here’s CoinDesk: Some of China’s top bitcoin exchanges are now shifting to the over-the-counter (OTC) market in the wake of a crackdown by regulators in the country. In announcements made on Oct. 31, both OKEx and Huobi Pro said they will introduce peer-to-peer trading platforms that support fiat currency transactions, including the Chinese yuan, as an alternative for the country’s domestic cryptocurrency investors. Based in Hong Kong, the two exchanges had previously provided solely crypto-to-crypto trading since being founded by their respective parent exchanges, Beijing-headquartered OKCoin and Huobi. They will now pivot toward a combination of the existing structure and the direct, peer-to-peer model.
This post was published at Zero Hedge on Nov 4, 2017.
As observed yesterday, one of the main reasons for the post New Year’s Day surge in Bitcoin to above $1,000 both in China and the US, is that over the past week, in order to further curb capital outflows, Beijing implemented a new set of capital controls according to which Chinese banks would be required to report all yuan-denominated cash transactions exceeding 50,000 yuan (around 7,100 US dollars) to the People’s Bank of China (PBOC), down from the current level of 200,000 yuan, according to a PBOC document released on Friday. Cross-border transfers more than 200,000 yuan by individuals will also be subject to the report process. In terms of foreign currencies, the report threshold remains at the equivalent of 10,000 US dollars for both cash transactions and overseas transfers. Amusingly, as Xinhua reported over the weekend, “the policy stoked worries that the government is trying to impose capital control in a disguised form” to which PBOC economist Ma Jun had the following retort “It is not capital control at all.” Translation – it is. And that’s not all, because overnight, China’s currency regulators, the State Administration of Foreign Exchange (SAFE) added its own round of capital controls when it said that it wanted to close loopholes exploited for purposes such as money laundering and illegally channeling money into overseas property. While the regulator left unchanged quotas of $50,000 of foreign currency per person a year, citizens faced draconian new disclosure requirements from Jan. 1, first and foremost requiring foreign currency buyers to indicate how they plan to use the money and when they plan to spend it.
This post was published at Zero Hedge on Jan 3, 2017.
When former Chinese Politburo member Zhou Yongkang was arrested in 2014 on corruption charges, the scale of his ill-gotten gains was astounding, totalling some $16 billion. When sums that large are involved, most of the assets have to be invested in financial instruments and real estate. But the list of physical currency found in his homes is revealing: 152.7 million Chinese yuan (valued at the time at $24.5 million), 662,000…10,000…55,000 Swiss francs — and US$275 million. The former head of China’s internal security services and one of the 10 most powerful men in China apparently preferred to keep his “petty cash” mainly in U.S. dollars. He’s not alone. China lost around $1 trillion to capital flight in 2015, before clamping down hard at the beginning of 2016. Much of this money leaves China via fake invoicing in Hong Kong, where the local currency is pegged to the U.S. dollar. Illicit outflows are also facilitated by casinos in the Philippines, South Korea, and on remote Pacific islands, all of which operate primarily in dollars. Predictions of the dollar’s demise and eventual replacement by the Chinese yuan, are a staple of global economic punditry, but they have little basis in reality. Of course China has become an important component of the global economy, accounting for more than 15 percent of global gross domestic product. But when Chinese people themselves prefer to hold dollars, there is little chance that the Chinese yuan will ever replace the U.S. dollar as the world’s key currency.
This year is seen going down as the worst since 2011 for China’s stock investors as the memory of last summer’s rout lingers and speculative buying switches to the housing market. The Shanghai Composite Index will end the year at 3,075, according to the median forecast in a Bloomberg poll of 10 strategists and fund managers. That implies a 13 percent drop over the 12-month period, the steepest in five years, and a gain of 2.9 percent from Wednesday’s close. Fading prospects for monetary easing, a slowing economy and the risk of higher U. S. borrowing costs spurring yuan weakness were among factors weighing on the nation’s shares, the survey showed. Turnover on the world’s second-largest stock market has collapsed to a two-year low as China’s army of investors, unnerved by 2015′s plunge in equity values, charged into other assets. After a frenzied bet on commodities futures soured, they have set their sights on a bigger target – property. With new home prices now jumping the most in six years, analysts are scaling back projections for interest-rate cuts. ‘The property market and the stock market are like a seesaw,’ said Li Lifeng, a strategist at Sinolink Securities Co. in Shanghai. ‘If the ‘fever’ in the property market doesn’t cool down, funds will flow from equities into real estate.’ Small-cap technology stocks are the least preferred by analysts in the survey because of stretched valuations, while building companies are favored thanks to government efforts to boost infrastructure investment.
Here’s the latest uncertainty facing China’s currency: sky high house prices. A runaway boom in the largest cities will push investors to look for cheaper alternatives overseas, draining money out of China and putting downward pressure on the yuan in the process, according to analysis by Harrison Hu, Chief Greater China Economist at Royal Bank of Scotland Group Plc. in Singapore. An ‘enlarged differential between domestic and foreign asset prices will lead to capital outflows and depreciation, until parity is restored,’ Hu wrote in a note. He said that the 30 percent year-on-year price gain in Tier 1 and leading Tier 2 cities implies a 25 percent rise in dollar terms, which far outpaces the 5 percent gain in major U. S. cities. That ratio is here in red:
China’s surging credit in August boosted property sales while barely moving the dial on private investment, underscoring the challenge for policy makers striving to support growth while reining in debt risks. Aggregate financing jumped to 1.47 trillion yuan in August ($220 billion), helping fuel a 39 percent jump in property sales by value in the first eight months. Medium and long-term new loans, mostly mortgages, climbed 528.6 billion yuan. Private investment in fixed assets, meanwhile, stalled at 2.1 percent for a second straight month in the January through August period, matching a record low. Months after an unidentified ‘authoritative person’ told the Communist Party’s People’s Daily newspaper that China must face up to risks associated with soaring debt levels, policy makers are grappling with how to do that without growth slipping below a target of at least 6.5 percent. At the same time, there’s scant evidence of progress on pledges to rein in excess capacity in industries from steel to cement that are at the center of President Xi Jinping’s efforts to restructure the economy.
China Debt Default? To alleviate its debt problem, China should adopt appropriate macro-economic policies encompassing currency depreciation and cutting interest rates to an ultra-low-level within two to three years, believe Nomura analysts. Yang Zhao and team said in their September 14 research piece titled ‘China: Solving the debt problem’ that they believe RMB depreciation will continue and forecast USD/CNH at 7.1 at the end of 2017. China Debt Default – China should join ultra-low interest rate club Also see the Big Short II – hedge funds bet on major fall on yuan Zhao and colleagues highlight two stylized ‘facts’ which haven’t been properly understood: high debt versus low leverage and the ever-rising M2-to-GDP ratio, which has been growing for over three decades, except during 2004 to 2008. The analysts argue that China faces a debt problem, but not a leverage problem. They highlight that while the country’s debt-to-GDP ratio is breathtakingly high, its corporate debt-to-asset ratio is generally low. They attribute the low leverage ratio largely to fast-growing asset values, driven by fixed asset investment and rising property prices.
Chinese companies’ borrowing costs have never been so low. That’s little consolation to firms cutting debt rather than investing amid a slowing economy. The amount of local yuan bond sales minus maturities fell 39 percent in August from a year earlier for non-financial firms to 124 billion yuan ($18.6 billion), data compiled by Bloomberg show. Net issuance since March 31 has slowed to 496 billion yuan after a record 810 billion yuan in the first quarter of 2016. Yields on AA and AA rated five-year securities dropped to record lows this month. The decline in bond financing and the lowest fixed-asset investment growth since 1999 suggest central bank monetary easing will have trouble reviving growth that’s forecast to slow through next year. China must balance cutting corporate debt, which more than doubled in five years to 111.7 trillion yuan at the end of 2015, with steps to revive the world’s second-biggest economy. ‘Firms are adjusting their balance sheets by slowing further investments and hoarding cash because they see more uncertainty with economic growth,’ said Xia Le, chief Asia economist in Hong Kong at Banco Bilbao Vizcaya Argentaria SA. ‘For the aggregate economy, it means slower growth because fewer companies are expanding.’
Back in early July, Bloomberg published a rather curious article that sounded like it was written from within the People’s Bank of China – or any other global central bank for that matter. The most prominent correlation over the past year had been CNY and everything else; or, as I wrote earlier in the year, CNY down = bad. The Bloomberg piece, written under the byline of Bloomberg ‘news’ no less, acknowledged that but with a determined emphasis on it being a historical artifact and nothing more. The last time China’s currency was sinking this fast, investors around the world responded by fleeing riskier assets. Now, they’re taking the declines in stride. Global investors are growing more comfortable with a weaker yuan after China’s central bank improved its communication with markets and took steps to prevent a downward spiral of depreciation and capital outflows. HSBC Holdings Plc sees little chance of a return to January’s turmoil, while Beijing Gao Hua Securities Co. says the Chinese currency will be stronger against a basket of trading partners by year-end. ‘This time, it’s different,’ said Song Yu, the Beijing-based chief China economist at Gao Hua, the mainland joint-venture partner of Goldman Sachs Group Inc. He has been the top-ranked forecaster of China’s economy since Bloomberg began its ranking in 2013. ‘The recent depreciation in the yuan didn’t result in large volatility in financial markets around the world, and there weren’t heavy speculative positions shorting the currency or individuals trying to convert their yuan holdings into the dollar in a panic.’
Under traditional ‘rules’, devaluing of a currency is supposed to bring about a measurable, even obvious increase in the export sector of the country undertaking the manipulation. The Japanese have been notorious for believing in the paradigm, and not just in the past four years under QQE and the whispers of it. Some people still believe that China is merely the latest to desperately employ the tactic. A more than 6 percent slide in the yuan against the dollar over the past year appears to have done little to help China’s exporters in the face of stubbornly soft global demand and weak commodity prices. Exports in China fell 4.4% in July in dollar terms, another ‘unexpected’ contraction despite it being now the sixteenth out of the past seventeen months (with the only positive in March due to the Golden Week holiday and more than canceled out by February). June exports were revised significantly (and unusually) lower to show a 6% contraction instead of the -4.8% first reported. In local RMB terms, Chinese exports rose by 2.2% in the latest month which in reality isn’t any different from any of this. If it isn’t 30% in either dollars or RMB, then China is in big trouble. As the Chinese economy sputters, it is both because of the global economy and further trouble for it. After imports were nearly flat in May, triggering an almost optimism panic of confirmation bias among economists and the media (redundant), they contracted sharply again in the months after; -9% in June and now -12.5% in July. This was, again, seasonality. In 2015, imports crashed to start the year, dropping more than 20% in January and February, before ‘improving’ to -6.3% by June 2015 and eliciting all the same optimism and confidence that the bottom had been reached. By September, imports were contracting by 20% again.
In early 2005, the US Senate began debating a bill seeking to impose a broad 27.5% tariff on Chinese exports to the United States. Congress was emotionally moved by the supposed problem of pegging the yuan to the dollar, then at about 8.28 CNY for every USD. In reality, the problem wasn’t so much dollars as ‘dollars’, meaning that because of the flow of finance across borders the flow of goods could be, though for only a short while longer, a one-way trade. In other words, even the government started to notice that so much of the stuff Americans were buying during the housing bubble was stamped ‘Made in China.’ The Chinese, for all the bluster on both sides, did listen. Symbolically, the PBOC in late July 2005 finally let CNY appreciate by a whole 2.1%. The official central bank statement declared that it was done ‘with a view to establish and improve the socialist market economic system.’ The Chinese could afford it because they had already dominated the American market and were by then starting to do the same in Europe and elsewhere. In 2004, the Chinese had managed a merchandise trade surplus of about $33 billion. This was a dramatic change from fifteen years or so prior where an agrarian China imported almost every industrial product, from cars to microwaves and anything in between. ‘Something’ came along in the late 1990′s that completely changed the global trade paradigm. If we take out the US trade surplus from China’s 2004 figures, however, the trade terms flip to a $47 billion deficit. It wasn’t until early 2005 that the rest of the world began to buy what America already had been for many years. American ‘demand’ was the primary basis and core of that which built China, all financed by eurodollar explosion in both directions.
Business ‘ July 22, 2016 An ability to whistle past trouble has marked the progress of U. S. stocks for seven years. But getting to records while staring at a threat that had investors whimpering just four months ago is something new. Whatever became of the falling yuan, celebrated villain of American equity corrections in January and August? Devaluation of the Chinese currency was supposed to foretell the end of liquidity, a world whose main engine of growth was seizing up, tolling the bell for risk-on euphoria. Except now it doesn’t matter. The yuan has swooned 3.3 percent since reaching its 2016 high of 6.45 per dollar in March, on pace with the drop it took in the months leading up to the 11 percent selloff in the S&P 500 Index at the start of the year. This time it happened as the benchmark gauge for U. S. stocks rallied 8.6 percent to records after the U. K.’s vote to leave the European Union and amid speculation the Federal Reserve will hold rates steady this year. Since the start of the bull market, there hasn’t been another time the S&P 500 got to highs amid a depreciation of more than 3 percent in the yuan in the prior three months.
China’s yuan traded near the weakest level in almost six years as a plunge in imports signaled declining demand in an economy growing at the slowest quarterly pace since 2009. The nation’s inbound shipments shrank more than estimated in June and exports dropped for a third month, according to data released Wednesday, while figures due Friday are projected to show a 6.6 percent expansion in April-June gross domestic product. Any disappointments could prompt analysts to bring forward forecasts for interest-rate cuts, Tim Condon, head of Asian research at ING Groep NV, wrote in a note Thursday. The yuan was little changed at 6.6878 a dollar as of 4:48 p.m. in Shanghai, according to prices from the China Foreign Exchange Trade System. That’s about 0.2 percent away from a level it reached in November 2010. The currency traded in Hong Kong dropped 0.09 percent to 6.6962. A Bloomberg replica of the CFETS RMB Index tracked by the People’s Bank of China fell for the first time in three days to 94.4.
China’s shadow banking system will soon begin to suck money out of the country’s economy at a mind-bending rate, according to analysts at HSBC. This news couldn’t be coming at a worse time. The global economy is on tenterhooks after the the UK decided to leave the European Union in mid-June. That issue prompted China to devalue its currency, the yuan, by the most since August. Generally when that happens, cash starts to flow out of the country. The problem with China’s shadow banking system right now is that there are a few things going on – like falling interest rates – that could make it a source of capital flight while also siphoning off much-needed cash flowing through the economy into a dark, black hole, like a parasite. A big, fat money tick.
The yuan’s worst quarterly performance on record is raising the risk of capital flight. China’s currency has slumped 2.9 percent since the end of March, the most since the nation unified the official and market rates at the start of 1994, to trade near its lowest level in five years. Losses deepened after the U. K.’s vote to secede from the European Union led to a jump in the dollar and dented the outlook for Chinese exports.
If the cost of flour is higher than the price of bread, what should a baker do? Chinese property developers are choosing to buy more flour. Prices for land, the main ingredient of the property world, have hit record highs in auctions this year in many Chinese cities. The average land price per square meter for the top 100 cities in the first five months of this year jumped nearly 50% from the same period last year, according to Wind Information. Some land prices are even higher than housing prices nearby. State-owned developer Poly Real Estate, for instance, bought a piece of land in a Shanghai suburb for 5.5 billion yuan ($835.5 million) last month. This translates to roughly 44,000 yuan per square meter of buildable space. Houses in the region meanwhile go for around 40,000 yuan per square meter. After taking into account construction costs, taxes and other expenses, property prices would have to nearly double for the developer to make money.
Chinese investors used more borrowed money last month to buy bonds amid a note market rebound, as authorities try to balance efforts to revive economic growth with steps to staunch excessive leverage. The outstanding amount of repurchase agreements in China’s interbank market, used by bond traders to amplify their buying power, jumped 17 percent in May to 7.8 trillion yuan ($1.2 trillion) from April. In that month it had dropped to 6.7 trillion yuan, the lowest since August. Last month’s increase was the sharpest since December, when the measure hit a record high of 9.7 trillion yuan. While a jump in leveraged wagers indicates rebounding confidence in the debt market after panic selling in April, any sustained increases would raise concerns about financial stability.
China’s central bank is expanding the fight to monitor and control risks emerging in the burgeoning market for loosely-regulated shadow lending. The People’s Bank of China has started collecting data from the murky world of online financing, in which firms make loans for everything from weddings to mining projects. It’s a growing part of a shadow banking market that ballooned 30 percent last year to 53 trillion yuan ($8.1 trillion), or four-fifths the size of the economy, Moody’s Investors Service data show. The PBOC also wants to make trading in some commercial loans transparent by building an exchange for transactions, according to local media reports. The PBOC has switched gears from stimulating growth in an easing cycle that started late 2014 to clamping down on the financial and debt risks that threaten to derail a tenuous stabilization in the world’s second-largest economy. The monetary authority is taking on an expanded role among watchdogs as top leaders plan an overhaul of the nation’s regulatory structure. ‘The central bank feels the urgency to improve oversight,’ said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. ‘Online financing remains in the shadows, but an increasing number of the public who are more vulnerable to defaults than institutional investors are joining for the sake of high returns.’
The yuan drew close to eclipsing the lows reached during January’s turmoil as factory data failed to damp concern about the economic outlook and speculation mounted that the Federal Reserve is preparing to raise interest rates. The Chinese currency fell 0.05 percent to 6.5815 a dollar as of 5:11 p.m. in Shanghai, about 0.2 percent away from its five-year low in January. The exchange rate dropped as much as 0.25 percent on Wednesday, but pulled back amid talk of state support as well as a surge in the euro. Manufacturing gauges released Wednesday showed activity remained subdued in May, after April economic data trailed estimates. Investors are now predicting a 53 percent chance the Fed will raise interest rates at its July meeting, up from 26 percent a month ago. The U. S. and China will hold their annual economic meeting next week. ‘Today’s PMI reports and the recent dollar strength both point to further weakening pressure on the yuan,’ said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. ‘The People’s Bank of China may also want to let the currency follow market forces to weaken ahead of the U. S.-China economic dialogue later this month.’
An investor who used Chinese stock-index futures for hedging triggered a flash crash Tuesday, the China Financial Futures Exchange said. Contracts on the CSI 300 Index due in June dropped by the 10 percent daily limit at 10:42 a.m. local time before recovering almost all of their losses in the same minute. The sudden drop was triggered by the unidentified trader’s order for 398 contracts at current market prices. They were filled consecutively, which prompted the broader selloff, the futures exchange said in a statement. The slump follows a similar drop in Hang Seng China Enterprises Index futures on May 16 in Hong Kong, a move that heightened anxiety among investors facing slower Chinese economic growth and a weakening yuan. Volume in China’s stock-index futures market, which was the world’s most active as recently as July, has all but dried up after authorities clamped down on speculative trading during the nation’s $5 trillion equity crash last summer. Tuesday’s volatility had little impact on the underlying CSI 300, which rose 3.4 percent. ‘Liquidity in the market is really thin at the moment,’ Fang Shisheng, Shanghai-based vice general manager at Orient Securities Futures Co., said by phone. ‘So the market will very likely see big swings if a big order comes in.’