China Faces Two Dilemmas, Bears Await A Mistake

iFeng: 中国正面临两个“两难”抉择:做空者正静待中国出错
China is currently facing two "dilemma" choice, the first one is how to balance the loose monetary policy and the yuan stable relationship , before central bankers said on many occasions excessively loose monetary policy will increase the devaluation pressure. The second is how to balance the intervention and foreign exchange reserves declining relationship , the purpose of the intervention is to prevent excessive depreciation of the renminbi, but the intervention will consume foreign exchange reserves, foreign exchange reserves fell too fast and if they may trigger a new round of devaluation expectations.

To strike a balance while comparable tightrope, and short overseas who experienced the war of public opinion after the first round, is quietly waiting for China mistakes.
Short sellers logic is very simple, it is these two staring China "dilemma." First, in order to maintain the stability of RMB if China do not dare to use monetary easing, then the bet in the case of absence of loose monetary policy, the economy could accelerate the decline, which Forced China change yuan policy attitudes. Secondly, since mid-January, China's foreign exchange reserves to defend the continued use of the RMB exchange rate stability, in the case of the remaining reserves of 3.2 trillion US dollars in the short term to avoid the edge. But the "dead bite" China's foreign exchange reserves data, once foreign exchange reserves continue to be more than 100 billion US dollars per month rate of decline, then the rate of decline of foreign exchange reserves by propaganda and liquidity and authenticity, creating panic questioned reserves data, especially "instigation" added Aunt domestic purchase of foreign troops, and thus make a profit.

It should be said that this is a very high degree of difficulty balancing game, but since January, the central bank seems to do both balanced and in the central bank to maintain the stability of the money market liquidity situation without creating a new devaluation pressure.
This battle isn't measured in months, but years, and until the fundamentals change, China has to win every single month.
The latest central bank announced in January the central bank balance sheet shows a substantial expansion of the balance sheet, total assets increased from December 31.78 trillion yuan to 33.7 trillion yuan sharp end of January, monthly growth of 1.92 trillion, an increase of a record high . It also reversed the central bank balance sheet from the start of March 2015 contraction trend (Figure 2). Although the foreign assets of the central bank's balance sheet by the impact of capital outflows further decline, but other depository bonds [ 0.01% ] rapid increase right (as shown in the table), leading to the rapid expansion of central bank balance sheets of the main reasons.
Since December last year, the RRR rate cut due to fears unleashed loose signal may increase the devaluation pressure on the central bank more cautious in the use of traditional monetary policy tools, but fortunately the new currency lending standing facilities and medium term facilitation including borrowing the use of open market operations and conventional policy tools, making the territory of liquidity in the case of capital outflows remain relaxed. While the yuan has not been the central bank balance sheet impact of rapid expansion, begun to stabilize since mid-January, indicating that compared with the traditional monetary policy, concealment new monetary policy tools better, the negative impact of RMB emotions surface It is relatively small. The central bank announced last week routine open market operations also means the central bank more inclined to use the new monetary policy tools and open market operations to maintain an accommodative monetary policy and the exchange rate stable equilibrium.

...But balance does not mean twist devaluation expectations. The SAFE latest data also show that foreign exchange market sentiment is still fragile. January sale of foreign exchange forward contract increased from $ 21.5 billion in December to $ 28.4 billion. Enterprise forward exchange since September last year the central bank has begun to collect 20% of the reserve, once fallen sharply, but the past two months the figure rose again (Fig. 5), show that although rising costs, but companies are still inclined to long-term potential to hedge the risk of devaluation.
In fact, companies have already begun to deleverage foreigndebt, both from international banks or SAFE published external debt data reported to the Bank for International Settlements Chinese claims of view, this trend is evident (Figure 6). It should be said, is the impact of corporate deleveraging can be estimated. RMB biggest enemy is not the overseas business is not short sellers, but the household sector. Although in 2015 the household sector foreign currency deposits surged $ 18.4 billion, but the proportion of residents of foreign assets is still very low (Figure 7). "Hidden Meeting the people" has become a slow devaluation of original sin. Therefore, I believe that the central bank wire may not finish.

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