Posts Tagged ‘currency’

Iran fixes currency rate in bid to stop rial collapse

April 10, 2018


© AFP/File | The rial has reached a series of record-lows in recent weeks driven mostly by speculation the US would pull out of the nuclear deal with Iran next month

TEHRAN (AFP) – Iran took the drastic step of fixing the rate of its currency against the dollar on Tuesday in a bid to arrest a slide that has seen it fall by a third in six months.The rial has reached a series of record-lows in recent weeks, and stood at 58,650 to the dollar at the close of business on Monday, driven mostly by speculation that the United States would pull out of the nuclear deal with Iran next month.

After an emergency session of the government on Monday night, Vice-President Eshagh Jahangiri said the rate would be capped at 42,000 rials to the dollar and foreign exchange offices would be brought under the control of the central bank.

“Unfortunately in recent days, incidents have happened in the rate of foreign currency which have caused concern for the people,” he said in comments on the state broadcaster.

He blamed “non-economic, unjustified and unpredictable factors” for driving the rial’s collapse, given that its exports were performing strongly.ADVERTISING

“There should not be such incidents in an economy that always has a surplus of foreign currency. Some say interference by foreign hands is disrupting the economic climate and some say domestic machinations are spurring these things in order to destabilise the climate in the country,” added Jahangiri.

US President Donald Trump has threatened to walk away from the nuclear deal and reimpose sanctions on Iran next month unless new restrictions are placed on its missile and atomic programmes.

Analysts say that has encouraged Iranians to horde dollars in the hope of selling them for a profit when the currency collapses further.

Jahangiri said currency sold beyond the set rate would be considered “contraband”.

“Just like the smuggling of drugs, no one has the right to buy or sell it… If any other exchange rate is formed in the market, the judiciary and security forces will deal with it,” he warned.

The rial stood at around 40,000 to the dollar in October, when Trump said he would no longer certify Iran’s compliance with the nuclear deal, and has been falling steadily since.

No exchange rate was fixed for the euro or sterling which have also seen massive gains against the rial in recent months.


China Is Studying Yuan Devaluation as a Tool in Trade Dispute With Trump

April 9, 2018
 Updated on 
  • Chinese leaders are weighing options as trade tensions rise
  • Trump bashed China’s currency policy on the campaign trail

China is evaluating the potential impact of a gradual yuan depreciation, people familiar with the matter said, as the country’s leaders weigh their options in a trade spat with U.S. President Donald Trump that has roiled financial markets worldwide.

 Image may contain: one or more people

Senior Chinese officials are studying a two-pronged analysis of the yuan that was prepared by the government, the people said. One part of the analysis looks at the effect of using the currency as a tool in trade negotiations with the U.S., while a second part examines what would happen if China depreciates the yuan to offset the impact of any trade deal that curbs exports.

The analysis doesn’t mean officials will carry out a devaluation, which would require approval from top leaders, the people said, asking not to be named as the information is private. China’s central bank didn’t immediately respond to a faxed request for comment. The yuan erased early gains on Monday, weakening 0.1 percent to 6.3110 per dollar in onshore trading at 3:32 p.m. local time.

While Trump regularly bashed China on the campaign trail for keeping its currency artificially weak, the yuan has gained about 9 percent against the greenback since he took office as China’s economic growth stabilized, the government clamped down on capital outflows and fears of a credit crisis receded. The Chinese currency touched the strongest level since August 2015 last month and has remained steady in recent weeks despite an escalation of trade tensions between the world’s two largest economies.

Other markets have been far more turbulent as both the U.S. and China proposed tariffs on $50 billion of goods and Trump instructed his administration to consider levies on an additional $100 billion of Chinese products.

The S&P 500 Index has slumped more than 9 percent from this year’s peak in January, while the Shanghai Composite Index has lost 12 percent on concern that the skirmish between the U.S. and China could devolve into a full-blown trade war. Yields on U.S. Treasuries have also declined from this year’s highs as investors shifted into haven assets.

While a weaker yuan could help President Xi Jinping shore up China’s export industries in the event of widespread tariffs in the U.S., a devaluation comes with plenty of risks. It would make it easier for Trump to follow through on his threat to brand China a currency manipulator, make it more difficult for Chinese companies to service their mountain of offshore debt, and undermine recent efforts by the government to move toward a more market-oriented exchange rate system.

It would also expose China to the risk of local financial-market volatility, something authorities have worked hard to subdue in recent years. When China unexpectedly devalued the yuan by about 2 percent in August 2015, the move sent shock-waves through global markets.

“Is it in their interest to devalue yuan? It’s probably unwise,” said Kevin Lai, chief economist for Asia ex-Japan at Daiwa Capital Markets Hong Kong Ltd. “Because if they use devaluation as a weapon, it could hurt China more than the U.S. The currency stability has helped to create a macro stability. If that’s gone, it could destabilize markets, and things would look like 2015 again.”

— With assistance by Steven Yang, and Helen Sun


China’s Yuan rallies on expectations that China will further open up its markets — Trump’s provocations could spur Chinese reforms

March 27, 2018

The currency rallied after China’s central bank lifted its daily reference rate, as the two countries began talks on improving US access to mainland markets

South China Morning Post

PUBLISHED : Tuesday, 27 March, 2018, 1:57pm
UPDATED : Tuesday, 27 March, 2018, 1:57pm

China’s yuan rallied after the central bank lifted the daily currency reference rate up sharply Tuesday morning, signalling that China was not looking to use a currency war to retaliate against the US’ new tariff plan and amid rising speculation of a possible “New Plaza Accord”.

On Monday, a report by The Wall Street Journal said the two biggest countries in the world had quietly started talks on improving US access to Chinese markets, led by China’s vice-premier Liu He and US Treasury Secretary Steven Mnuchin.

That fuelled speculation of a possible New Plaza Accord, where China might compromise and allow further yuan appreciation to reduce the US-China trade imbalance, Ken Cheung Kin-tai, senior Asian foreign exchange strategist at Mizuho Bank said.

In any case, the yuan’s appreciation was in line with China’s move to resume the internationalisation of its currency and opening up the capital account, Cheung said.

In the 1980s, Japan was the rising Asian power that challenged that US economic prowess. And in response to US protectionism, Japan moved auto plant and production to the US and Japanese domestic producers moved up the value-added chain. The yen rose sharply in two years after the Plaza Accord in 1985.

US provocations could spur Chinese reforms, which ultimately are likely to benefit China and Chinese President Xi Jinping’s agenda, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

“China’s leadership seemed prepared to respond to the US, by objecting, making some low-scale expressions of displeasure, and seizing the opportunity to pursue long-awaited reforms,” he said.

China’s leadership seemed prepared to respond to the US, by objecting, making some low-scale expressions of displeasure, and seizing the opportunity to pursue long-awaited reforms

Many observers have projected the worst-case scenario from a Sino-US trade conflict, and the prospect of so-called currency wars in the foreign exchange market, despite China’s benign response, given the retaliatory steps that seemed symbolic and the relatively small impact on trade.

On Tuesday, the People’s Bank of China raised the daily yuan reference rate by 0.60 per cent to 6.28160 against the US dollar. The level was the highest since August 10, 2015, before the central bank depreciated the currency by nearly 5 per cent in three days, which may suggest that Beijing was not pursuing a weak currency policy nor a protectionist stance.

“The yuan fixing is a gesture to show that the PBOC has no intention to escalate trade tensions,” said Jimmy Zhu, chief strategist at Fullerton Markets in Shanghai.

The yuan’s reference rate is used as a mid-point, allowing trades of up to 2 per cent on either side for the day. The onshore yuan rose to 6.2563 against the US dollar on Tuesday.


Iran currency hits record low — “The issue is psychological rather than economic.”

March 26, 2018


© AFP/File / by Eric RANDOLPH | Iranians trade money at an currency exchange office in a shopping centre in Tehran on December 28, 2016

TEHRAN (AFP) – The Iranian rial fell to a record-low on Monday, breaking through the 50,000-to-the-dollar mark for the first time, with analysts blaming uncertainty stemming from Washington.

The rial has lost around a quarter of its value in the past six months to reach 50,860 against the US dollar according to the Financial Information Market, a trusted website for fluctuations on the open market.

The gap with the official rate, which stood at 37,686 on Monday, has continued to widen.

Iran’s government took drastic measures last month to stem the decline in the free market rate, arresting foreign exchange dealers, freezing speculators’ accounts and raising interest rates, as well as buying up millions of dollars in a bid to lower the price.

But on the streets of Tehran, long queues continued to gather outside foreign exchanges in the build-up to the Nowruz New Year holiday, which is running for another week.

“The issue is psychological rather than economic. There’s no reason to buy dollars except in the hope that you can sell them later at a higher rate,” said Esfandyar Batmanghelidj, founder of the Europe-Iran Forum, a business network.

He said Iranians were reacting to worrying headlines from the United States, where President Donald Trump recently appointed two hardline anti-Iran figures to his administration: Mike Pompeo as secretary of state and John Bolton as national security advisor.

Many analysts believe Trump will pull out of the 2015 nuclear deal with Iran when it next comes up for renewal in May, bringing back crippling sanctions.

“I see many people looking to invest in neighbouring countries because this fear is spreading about the future of the JCPOA (nuclear deal),” said Navid Kalhor, a Tehran-based financial analyst.

Local officials have complained that Iranians are hoarding billions of dollars, while local banks run short of cash

“I have friends who go to banks and ask for 15 or 20 million rials ($300 or $400) and they’re told to come back in a week because they’re out of cash,” said Kalhor.

The devaluation poses a major problem for President Hassan Rouhani’s government, which had hoped to attract massive foreign investment in the wake of the nuclear deal.

Already facing huge obstacles from remaining, non-nuclear US sanctions, the collapsing currency will serve as another deterrent to potential investors, said Batmanghelidj.

“Even in an instance where an investor is willing to operate in Iran, the devaluation is very concerning. If you invest now and the currency falls even 15 percent, you have to discount that from your returns, and that’s very difficult to hedge against,” he said.

“This will be difficult for the government. There is very little they can do about the mentality of individuals.”


One of Europe’s Biggest Funds Is Betting on the Dollar

March 22, 2018

Image result for dollar, photos


By John Ainger

It’s cheap and just about every investor is short the currency. That makes the dollar a screaming buy for Allianz Global Investors.

The fund, one of Europe’s biggest, is betting against the trend on conviction that a turnaround is in the cards. Buying the greenback versus a basket of currencies including the euro and the Canadian dollar is one of Allianz’s strongest trades, now that gains following the election of Donald Trump as U.S. President in 2016 have reversed.

That runs contrary to how traders are shaping up, with positioning the most bearish in four years, according to the latest CFTC data. The dollar is the worst performer among Group-of-10 currencies in the past year.

“The narrative should still be for a long dollar,” said Kacper Brzezniak, a fixed-income money manager at Allianz, which oversees 498 billion euros ($612 billion). “The dollar is a lot cheaper fundamentally than it was a year ago. Positioning is extremely short, so only quite a small move can cause a big turnaround.”

U.S. fiscal expansion and increasing interest-rate differentials are reasons to favor the dollar, while flattening yield curves elsewhere could help weaken currencies such as the euro, according to Brzezniak. Since a peak in early January 2017, the Bloomberg Dollar Spot Index, a trade-weighted measure, has lost around 12 percent.

Uncle Sam’s Trillion-Dollar Customer Is Having Its Doubts — Japanese investors shifting toward selling U.S. Treasury bonds?

February 27, 2018

A container ship is loaded at a port in Tokyo on Feb. 15, 2016. For years, the U.S. economy has relied on Japan and China to recycle their trade surpluses back into the U.S. by buying American debt. Photo: FRANCK ROBICHON/EPA/Shutterstock


By Kosaku Narioka in Tokyo and Saumya Vaishampayan in Hong Kong
The Wall Street Journal
February 27, 2018


Today’s bond vigilante may be speaking with a Japanese accent.

Some Japanese investors say they are shifting toward selling U.S. Treasury bonds and other dollar-based debt after fears have picked up in recent weeks that the Trump administration’s budget and other policies add up to a weak dollar.

The concerns expressed by asset managers could be short-lived and are hard to measure precisely in data, so far. Still, any questioning in Tokyo of the dollar or of the U.S. Treasury is significant because Japanese holders including the government own nearly $1.1 trillion in Treasury bonds, a close second to China. For years, the U.S. economy has relied on Japan and China to recycle their trade surpluses back into the U.S. by buying American debt.

Japan’s suspicions were fanned by Treasury Secretary Steven Mnuchin’s remark in January that “a weaker dollar is good for trade.” He quickly walked it back, but the president’s economic report, issued Feb. 21, revived the idea by saying a lower dollar would be an “important corrective mechanism” for the U.S. trade deficit.

“The advent of the Trump administration is certainly causing concerns that the dollar may no longer be the same key currency as before,” said Masahiro Kawagishi, chief investment officer for fixed income at Nomura Asset Management Co. “A portfolio that’s concentrated on the dollar isn’t sound.”

He said his team has been shifting funds to debt securities in India, Malaysia and other emerging economies from dollar-denominated assets.

In the three weeks through Feb. 17, Japanese investors sold a net ¥2.1 trillion ($19.6 billion) worth of international debt securities, according to Ministry of Finance data. The selloff of international securities, including stocks, in the week to Feb. 17 was the largest weekly amount since April 2017. The ministry doesn’t break down the data by country.

Data for Japanese purchases of U.S. Treasury bonds since the beginning of 2018 aren’t available yet, but Japanese investors were already growing cautious in the latter part of 2017. They sold a net ¥3.6 trillion worth of U.S. sovereign bonds in the three-month period through December, according to Bank of Japan data.

Hans Redeker, global head of foreign-exchange strategy at Morgan Stanley in London, said the selling of foreign bonds by Japanese investors was an important driver for the recent fall in the dollar against the yen. The dollar has fallen 5% against the yen so far in 2018, while dropping less against the euro and British pound.

The weak dollar is puzzling on one level because the yield on the 10-year U.S. Treasury bond has risen near 3% recently, compared to less than 0.1% for the 10-year Japanese government bond and 0.65% in Germany. Normally that would lure global investors to the dollar so they could take advantage of returns unavailable at home.

But this time, concern over U.S. budget and trade deficits is keeping Japanese investors away, said Bart Wakabayashi, Tokyo branch manager for State Street. Pointing to talk of new U.S. spending after a recent tax overhaul that may reduce revenue, Mr. Wakabayashi asked, “Where is the money going to come from?”

It is a reminder of the “bond vigilante” talk from the 1990s, when President Bill Clinton felt compelled to improve the U.S. fiscal balance in the face of bond investors’ selling campaigns triggered by fears of inflation.

Hiroyuki Nomura, who manages government bonds and stocks at Japan Post Insurance Co., said the Trump administration’s move to lower taxes and raise spending during a robust economic period was a rare policy mix. It could further heat up the economy and lead to sharper inflation if interest-rate increases were delayed, he said.

At Mitsubishi UFJ Kokusai Asset Management Co., Tatsuya Higuchi, who runs the company’s $4.9 billion sovereign bond fund, cut dollar-denominated debt to 38% of the portfolio at the end of January from 39% at the end of December and 46% a year ago. He lifted the fund’s weighting of euro-zone debt to 30% from 21% a year ago.

Despite the concerns, the vigilant Japanese investors aren’t going full-bore with their campaign because there are no clear alternatives to the dollar and U.S. government bonds. Developing nations such as India don’t have the huge and liquid markets for debt offered by the U.S., while yields in Europe mostly don’t measure up to Treasury bonds.

Masafumi Irisawa, who manages currency exposure at Nippon Life Insurance Co., said he believed a strong dollar remained in the U.S. national interest. “If you look at the context of Trump’s expansionary fiscal policy, it is critical for the U.S. to issue bonds at the lowest possible rates by continuing to raise funds from countries around the world,” said Mr. Irisawa, whose company holds $173 billion in foreign-currency-denominated assets.

Nomura Asset Management’s Mr. Kawagishi said he would consider adding U.S. debt if the 10-year Treasury yield rises above 3% and stabilizes there, but he wasn’t as confident as Mr. Irisawa that the U.S. administration wanted a strong greenback. Among other things, he said, the motivation to use currencies to address the trade deficit would increase ahead of U.S. midterm elections in November.

“There are various factors that press the dollar weaker,” he said.

—Suryatapa Bhattacharya in Tokyo contributed to this article.

Write to Kosaku Narioka at and Saumya Vaishampayan at

ECB minutes highlight policymakers’ fears over currency wars — Is the Trump administration was deliberately trying to engage in currency wars?

February 22, 2018

Image may contain: skyscraper, sky and outdoor

Claire Jones in Frankfurt
Financial Times (FT)

The extent of European officials’ concerns over the weakness of the dollar was laid bare on Thursday in a set of European Central Bank accounts that highlighted fears that the US administration was deliberately trying to engage in currency wars.
The accounts of the ECB’s January monetary policy vote also reveal that the governing council’s hawks pushed for a change in the bank’s communications, saying economic conditions were now strong enough to drop a commitment to boost the quantitative easing programme in the event of a slowdown.Mario Draghi, ECB president, last month hit out at US Treasury secretary Steven Mnuchin’s claim that a weak dollar was good for the American economy, saying Washington needed to uphold the rules of the international monetary system, which forbid nations from deliberately devaluing their currencies.

Image result for Mario Draghi, photos

Mario Draghi

The remarks were seen as a signal that the US could ditch its strong dollar policy — and in so doing damage euro exports and lower imported inflation. US President Trump has since reaffirmed the strong dollar policy.

The accounts of the January ECB meeting, published on Thursday, show Mr Draghi’s fears were widely shared among the bank’s decision makers. “Concerns were . . . expressed about recent statements in the international arena about exchange rate developments and, more broadly, the overall state of international relations,” the account said. “The importance of adhering to agreed statements on the exchange rate was emphasised.” Those agreements explicitly rule out competitive devaluations.

The volatility in the euro was, the account said, “a source of uncertainty which required monitoring”.

The decline in the greenback following Mr Mnuchin’s remarks led the euro to soar to $1.25 in the days following the January 25 meeting of the ECB. The euro is now trading below $1.23.

The minutes highlighted dissent over the bank’s communications on its policy intentions, an element of what policymakers dub “forward guidance”.

The dissent was over the ECB’s promise to boost QE should economic conditions disappoint or financial conditions worsen.

“Some members expressed a preference for dropping the easing bias regarding the [QE programme] from the governing council’s communication as a tangible reflection of reinforced confidence in a sustained adjustment in the path of inflation,” the account said. “However it was concluded that such an adjustment was premature and not yet justified by the stronger confidence.”

The central bank is now buying €30bn of bonds a month under the €2.5tn QE programme.



Fast Europe Open: UK retail sales, Czech Republic GDP

February 16, 2018

View From Hong kong

Financial Times (FT)

Image may contain: sky and outdoor


Alice Woodhouse in Hong Kong — 0800 GMT, February 16, 2018

Beware the pollutants in your bathroom cabinet.

Volatile chemicals from everyday consumer items such as cleaning products, aerosols and even perfumes now rival vehicle emissions as a cause of air pollution.

A research team led by the National Oceanic and Atmospheric Administration (NOAA) reached the surprising conclusion after assessing the source of chemicals that reacted in the air to form fine particles and other lung-damaging pollutants in the US city of Los Angeles.

“As transportation gets cleaner, those other sources become more and more important,” said Brian McDonald, the project leader. “The stuff we use in our everyday lives can impact air pollution.”

In markets, Japanese stocks rallied as the rebound in global equities showed little sign of slowing following the sharp sell off last week. The Topix was 1.2 per cent higher although Australia’s S&P/ASX 200 dipped 0.1 per cent. Markets in China, Hong Kong, South Korea, Singapore, Taiwan and Vietnam were closed for the lunar new year.

Meanwhile, the dollar resumed its downward trajectory with the dollar index, a measure of the greenback against a basket of peers, falling 0.3 per cent to 88.305, a three-year low. The yen strengthened further to ¥105.75, a 15-month high.

Futures tip the FTSE 100 to open 0.5 per cent higher, while the S&P 500 is set to open up 0.2 per cent.

Corporate earnings and updates for Friday include Air France, EDF, Danone, Renault and Allianz. The economic calendar believes three is the magic number (all times London):

08.00: Czech Republic Q4 gross domestic product
08.20: European Central Bank’s Benoit Coeure speaks in Macedonia
09.30: UK retail sales


Image may contain: sky and outdoor

Czech Republic

The economy had a strong showing in 2017: Growth picked up pace in three consecutive quarters, and indicators suggest the momentum carried over into the final quarter. Industrial production and retail trade turned in positive results again in November, albeit moderating from the prior month. Furthermore, the manufacturing PMI continued climbing throughout the quarter, clocking a multi-year high in January. However, while consumer confidence improved in January, business confidence slipped. Politically, the sailing is less smooth. President Milos Zeman, an ally of Russian president Vladimir Putin, won a second term on 27 January; he is one of the few allies of Andrej Babiš, who has been prime minister since December. Babiš, who lost a no-confidence vote on 10 January, has been unable to garner majority backing to form a government. However, the Communist Party agreed to restart talks over possible support of a Babiš-government. The combination of Zeman and Babiš could, however, strain relations with the EU further as both men oppose further EU integration.

See more:

China’s Outlook Seems Darkest From a Distance — China’s import-export machine roars back to life

February 9, 2018


By Enda Curran and Ye Xie

Some China-based investors say observers abroad are missing a healthy pickup in the economy.

When it comes to analyzing China, distance seems to make investors’ views of the world’s second-largest economy grow, shall we say, less fond. Whether it’s George Soros (who’s likened China to the U.S. before the 2008 subprime mortgage crisis) or Kyle Bass (who’s said the Chinese economy is built on sand) or Jim Chanos (who’s said, memorably, that China is on a “treadmill to hell”), there’s no shortage of gloomy outlooks. Over-investment, too much debt, bubbly markets, faked data, Ponzi-like financial structures—the litany of looming pitfalls seems inescapable to many investors, especially hedge funds, based in financial hubs from Connecticut to Canary Wharf.

 Image may contain: sky and outdoor

That negativity is a sharp contrast to the majority opinion held closer to Beijing or Shanghai. There, booming consumption, a pickup in global trade, and an increasingly innovative private sector are fueling bets that China’s generation-long economic miracle still has plenty of room to run, albeit at a slower rate than the average gross domestic product growth of almost 10 percent a year since the early 1980s. “I find it scary how many self-proclaimed US based China experts with real influence have barely lived in China, barely speak Chinese and barely have a clue …” tweeted Shaun Rein, Shanghai-based founder and managing director of China Market Research Group and author of The War for China’s Wallet, on Dec. 26. Later he was on Twitter again, wagering that the “same tired group of China’s watchers will predict China’s collapse for the 40th year in a row… and they’ll be wrong for the 40th time but western media will keep quoting them breathlessly as experts.”

It’s almost time for New Year’s Predictions on China’s economy – my prediction? Same tired group of China’s watchers will predict China’s collapse for the 40th year in a row… and they’ll be wrong for the 40th time but western media will keep quoting them breathlessly as experts

Rein may have a point, but there are plenty of investors across the Pacific who take a longer view on China. Corporate America, for one, has long seen through the fog of gloom. Chicago-based Boeing Co. is building its first overseas “completion center” for 737 aircraft on Zhoushan Island south of Shanghai. In 2016 Walt Disney Co. opened a $5.5 billion theme park in Shanghai—its biggest-ever foreign investment. Tesla Inc. says that within the next several years it plans to begin making automobiles in China, where surging demand for electric cars contributed 15 percent of the company’s revenue in 2016. Meanwhile, in December, the world’s biggest Starbucks—all 30,000 square feet of it, about half the size of a soccer field—opened in Shanghai.

Western banks, which have long coveted the vast Chinese market but had mixed success entering it, are looking at new opportunities now that President Xi Jinping promised to open up the sector to greater foreign competition. UBS Group AG is in discussions to acquire a majority stake in its Chinese securities joint venture, and Morgan Stanley and Goldman Sachs Group Inc. have signaled a desire to take majority stakes in their own Chinese ventures. BlackRock, Fidelity International, UBS Asset Management, and Man Group are among global fund managers expanding in China.

If much of the commentary on China from the West remains bearish, blame Japan. Some analysts and investors base their assessments on the assumption that China is destined to share the fate of Japan, whose three-decade boom hit a wall in the early 1990s. This supposition is questionable. China is still at a much lower stage of development than Japan; on a per-capita basis, China’s GDP in 2016 was less than 40 percent of where Japan was in 1970, according to World Bank Group data. What’s more, China is a vast, multiregional economy—not an island. That means it can keep posting world-beating growth even when some regions do turn down, as happened in 2016 and early 2017 when the industrial northeast slowed as the government pushed through an economic rebalancing that promotes consumption and services.

Illustration: Matt Chase

As China enters the lunar Year of the Dog, the gloomy bears say it’s unlikely that plans to curb loans and credit expansion can succeed without denting growth. Mark Williams, chief Asia economist at Capital Economics Ltd. in London, for instance, thinks government statistics have inflated GDP readings. He reckons China’s GDP growth will slow to 4.5 percent this year, whereas the more than 100-strong research team at China International Capital Corp., the country’s first Sino-foreign investment bank, thinks the economy will actually accelerate to 7 percent.

CICC downplays the negative impact of total borrowing, which has risen to more than 2.5 times China’s GDP and is generally seen as the No. 1 risk factor facing the economy. The investment bank argues that both the state sector and households have more than enough cash on hand should trouble strike. In addition, CICC says, the most indebted sector—corporates—is sitting on cash equivalent to about 40 percent of current debt. That, according to Liang Hong, the company’s chief economist, means that while government reforms to cut debt levels in China are important, they needn’t translate into negative growth.

Another point missed by the Connecticut-set mentality is this: China’s debt is largely self-funded and will remain that way as long as the country hangs on to a healthy current account surplus, according to Michael Spencer, global head of economics at Deutsche Bank AG in Hong Kong. “Hedge funds in New York have been saying for seven years it’s going to be a crisis, but it clearly hasn’t been the case,” he says. “China is not investing New York hedge fund money. It is investing Chinese home savings.”

That’s not to say the China bears don’t have legitimate concerns. The country’s total debt from the government, households, and nonfinancial companies reached 256 percent of GDP in June 2017, already surpassing that of the U.S. (250 percent), according to the Bank for International Settlements. That’s up from 146 percent a decade ago, and it marks a faster pace of debt accumulation than occurred in the U.S. during the period leading to the housing crisis. Even officials in Beijing are taking the possibility of asset-price collapse seriously: Outgoing People’s Bank of China Governor Zhou Xiaochuan in October warned of the risk of a debt-induced Minsky Moment, and Xi has prioritized financial stability through his second term in office.

Confidence in the ability of China’s policymakers to manage the economy wavered in 2015, when an epic stock market crash and bungled exchange rate reform sent global markets into a tailspin. But more than two years on, the clear takeaway from that episode is the need to distinguish market ructions from real economic activity: Economic growth largely held up through that crisis as authorities used levers such as capital controls to stem the fallout.

For all the talk of reform, the central government retains a firm grip on the economy. The heavy fist of the state still often trumps the invisible hand of markets, credit is still channeled from state-owned lenders to state-owned firms, and local governments can still ramp up infrastructure investment at the first whiff of a slowdown. That sort of investment rationale is behind one of Xi’s signature policy initiatives—the Belt and Road initiative that Beijing says will pump $1.3 trillion into roads, ports, and other construction projects designed to connect China to trading partners across Asia and into Europe. While the state and local involvement is a plus for near-term stability, it could also be a tax on the future if capital is misallocated.

Banks are often identified as China’s weakest link. A deep-dive analysis by the International Monetary Fund in 2017 recommended that the nation’s lenders should increase their capital buffers to protect against any sudden economic downturn. Kevin Smith, Denver-based chief executive officer and founder of Crescat Capital LLC, says a banking implosion is inevitable; the only question is when. Smith has held short yuan bets since at least 2014, a position that helped his global macro fund gain 16 percent in 2015 when the PBOC surprised the world with its minidevaluation.

Smith was less fortunate last year when China’s economic recovery and tightening capital controls helped the yuan to rally. His fund lost 23 percent in 2017. The loss cut the fund’s annual return since its 2006 inception to 11 percent, which still outpaced the S&P 500 index’s gain of 8.8 percent during the period. Smith is undaunted. “We remain grounded in our analysis,” he says. “Credit bubbles burst. Ponzis implode. In the end, we believe China will be forced to print trillions of U.S. dollars equivalent of new money to recapitalize its banking system and bail out its depositors.” In that scenario the currency will crash, Smith says, who’s also short on various Chinese equities.

He wasn’t alone in getting the yuan bet wrong last year. Consensus estimates at the start of 2017 forecast the dollar would buy 7.15 yuan by yearend; it ended at 6.50 yuan. Headline economic data don’t tell the story of trends and developments actually taking place on the ground, from the industrial northeast to the high-tech south and the agricultural interior, says Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. And the government’s firm hand on the tiller, he says, needs to be closely watched. “The further away students of China are located, the more easily such nuances get lost, leaving many to focus more on the risks than on the promises of the country’s economic future,” Neumann says.

Because changes across China’s extensive economy tend to be subtle and gradual, it’s often hard to get a feel for the pace of development, according to Mo Ji, Hong Kong-based chief economist for Asia ex-Japan at Amundi Asset Management, who called a bottom to China’s slowdown in late 2015, well before it was a consensus view. She’s been working for the past 13 years with the Nobel laureate economist Joseph Stiglitz on analyzing China’s economy, having first met him when she studied under him for a doctorate at Columbia University. “The further away from China, the more difficult to feel all the real changes,” Mo says.

Stephen Roach may spend a lot of time in Connecticut—he’s a senior fellow at Yale in New Haven—but he’d never be accused of being part of the Connecticut set. A former nonexecutive chairman of Morgan Stanley in Asia, Roach first went to China in 1985 and still travels there four or five times a year. He says there’s a tendency to project the West’s crisis-prone outcomes onto China. “Connecticut-based hedge funds and Washington-based politicians,” he says, “are equally guilty of this long-standing bias.”

Curran is chief Asia economics correspondent in Hong Kong. Xie is a market blogger in New York.


BEIJING (Reuters) – China’s trade machine kicked up a gear in January after stumbling the previous month, with exports and imports both growing much more than expected, pointing to a strong start to the year for global demand.

 Image may contain: sky and outdoor

FILE PHOTO: Container ship is seen at the Yangshan Deep Water Port, part of the Shanghai Free Trade Zone, in Shanghai, China September 24, 2016. REUTERS/Aly Song/File Photo

Thursday’s robust data, along with last week’s strong manufacturing and service surveys, suggest China’s economy remained resilient at the start of 2018 and may even have picked up some momentum, despite crackdowns on factory pollution and riskier financing that are driving up borrowing costs.

Exports in January rose 11.1 percent from a year earlier, picking up from a 10.9 percent gain in December, official data showed. Analysts had expected growth to cool for a second straight month to 9.6 percent.

Imports surged 36.9 percent, the General Administration of Customs said, the fastest pace since last February and smashing analysts’ forecast of 9.8 percent growth.

China’s import growth had sharply decelerated to 4.5 percent in December, raising fears that its domestic demand was slumping as Beijing forced northern smelters and mills to curtail production to reduce thick winter smog.

Commodities again led the way in January, with China’s crude oil imports hitting a record and iron ore imports at the second highest on record.

The figures left the country with its smallest trade surplus in 11 months at $20.34 billion, compared with December’s $54.69 billion and forecasts for a $54.1 billion surplus in January.

However, data from China in the first two months of the year must always be treated with caution due to business distortions caused by the timing of the long Lunar New Year holidays, which fell in late January 2017 but start in mid-February this year.

Some of the jump in imports may have been due to inventory building ahead of the holidays rather than a pick-up in consumption, though economists said the data was still positive.

“January trade data may be affected by the always changing timing of the Chinese New Year holiday…(but) such strong import data indicates that domestic demand momentum remains healthy going into 2018,” Louis Kuijs, head of Asia economics at Oxford Economics, wrote in a note.

Kuijs expects China’s import growth to slow in coming months due to unfavorable comparisons with high levels last year and an expected slowdown in overall economic activity.

China’s imports surged nearly 16 percent last year, the best since 2011, as a construction boom added to its insatiable demand for raw materials.


China benefited from a global trade boom in 2017, which helped its exports grow at the fastest pace since 2013. The unexpected strength was also one of the key drivers behind the economy’s forecast-beating 6.9 percent expansion last year.

However, while global demand is tipped for another strong year, expectations of growing trade disputes with the United States could weigh on China’s shipments in 2018.

The latest trade data showed China’s goods surplus with the United States, a sore spot in relations between the two nations, narrowed last month, but that is unlikely to appease Washington.

China’s trade surplus with the U.S. was $21.895 billion in January, a customs spokesperson told Reuters, down from $25.55 billion in December.

But its 2017 surplus with the United States was $275.81 billion, topping the previous record in 2015 of $260.8 billion.

No automatic alt text available.

President Donald Trump slapped steep tariffs on imported washing machines and solar panels last month. China is the world’s biggest solar panel producer.

Trump also is considering recommendations on import restrictions for steel and aluminum or other trade sanctions against China over its intellectual property practices.

In response, China’s commerce ministry launched an anti-dumping and anti-subsidy probe into imports of sorghum from the U.S. over the weekend.

The moves have rekindled concerns of a trade war.

“The uncertainty surrounding Sino-US trade ties remains a key potential downside risk in the near term,” said Betty Wang, senior China economist at ANZ in Hong Kong.

Sharp gains in the yuan are also threatening China’s competitiveness, with an official business survey last week suggesting the currency’s appreciation led to a decline in big exporters’ activity last month.

Chinese Yuan Poised for Biggest One-Day Drop Since 2015 Devaluation

February 8, 2018

Slide began about the time new China trade data showed imports grew more than exports in January

Image may contain: 1 person

The Chinese yuan dropped 1.1% against the U.S. dollar Thursday, on track for its biggest one-day decline since the Chinese central bank devalued the currency in August 2015.

In recent action, the dollar traded at 6.3287 yuan in the onshore market, putting the Chinese currency on track for a 1.1% loss against the dollar. It fell as much as 1.4% earlier in the session. One dollar had bought 6.2596 yuan at the 4:30 p.m. close of domestic trading Wednesday.

Analysts said it wasn’t immediately clear what sparked the move. The yuan started to slide about 11 a.m. in Asian trading hours. That was about the time China released trade data for January, which showed that Chinese imports grew more than exports last month, leading China’s trade surplus to narrow by more than expected.

As well, the yuan’s strength against the dollar earlier this week had made it an outlier; while it had advanced against the dollar through Wednesday, other global currencies such as the euro and pound had fallen against the greenback.

Image may contain: one or more people

The yuan’s drop Thursday eclipsed moves in other major currencies. The euro rose 0.1% against the dollar, while the Japanese yen fell 0.3% against the greenback.

Many fund managers went into the year betting on a stronger yuan, fueled by expectations for further dollar weakness. As the yuan started dropping Thursday, those investors may have been caught off-guard, said Zhou Hao, a Singapore-based economist at Commerzbank AG .

“The market was too one-way and too crowded,” he said.

The pace of the yuan’s rally in recent weeks had surprised many analysts and investors. At its peak this year on Wednesday, it had advanced roughly 4% against the dollar, putting it around its strongest level since China devalued the yuan on Aug. 11, 2015.

Earlier, the Chinese central bank set the dollar’s reference rate at 6.2822 yuan. The currency pair is allowed to trade 2% above and below that level, which is known as the fix.

In the offshore market, where the yuan trades more freely, the yuan fell 0.5% to 6.3485 per dollar.

Write to Saumya Vaishampayan at