China's foreign currency loan-to-deposit ratio sinks again; gold, oil and monthly FX reserve changes

The People's Bank of China released Q2 data today, showing the foreign currency loan-to-deposit ratio declining again. Chinese firms have been "hoarding" U.S. dollars and there may be a large net short position at the corporate level. The short positions come in part from U.S. dollar borrowing; now firms are holding U.S. dollars because they do not expect yuan appreciation and others are repaying their dollar loans. The result is a plunging foreign currency loan-to-deposit ratio-a slide larger than the decline in 2008.

The yuan was weak in May and stabilized slightly in June, now we see that this weakness coincided with a decline in China's foreign exchange reserves. We saw a similar situation in November-December of 2011, when the yuan was weaker and FX reserves declined.

Below are charts of gold and oil against the yuan. Hugh Hendry proposed the 2008 oil bubble was related to the value of the Chinese yuan (Yuan and Oil-The Bubble Connection?) and that once the yuan stopped appreciating, this carry trend ended, sinking oil prices.

Gold replaced oil as a favorite of Chinese traders post-2008, and while they haven't blown oil or gold into a bubble, there's definitely some correlation. The yuan has slightly depreciated in 2012 and both oil and gold are down for the year.

The story here is less about China, however, than it is about the global economy. Manufacturing is at the higher stages of production and the sector leads the broader economy. China's economy was hurting in early 2008 and it's stock market both plunged and bottomed first (along with many other emerging markets). Combined with economic data from the developed world and the continuing crisis in Europe, the parallels with 2008 are growing stronger.

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