2021-02-20

China Monetary Growth Slows Below Red Line

Chinese M2 growth was 9.4 percent year-no-year in January, below the 10 percent red line that has previously resulted in rapidly slowing economic activity. I measure the rolling 3-month change in M2 as a faster indicator, and it was 12.2 percent in January compared to 16.7 percent in 2020 and 16.4 percent in 2019. Chinese lending tends to be front-loaded because of all the state-directed investment. The 3-month change in M2 has typically peaked in either January or March. This leaves room for a lending binge that negates the current slowdown in credit growth.
Total social financing has slowed, albeit not as much:
China has benefited from inflows though, and is talking about opening up the capital account again. SCMP: China mulls allowing investment in overseas stocks, insurance, says foreign exchange official
China is considering plans to allow investment in overseas securities and insurance within the annual individual quota of US$50,000, a foreign exchange official said on Friday, in a move that could signal a slight easing of the country's strict capital controls.

China will push forward with the opening up of its financial derivative market in 2021, Ye Haisheng, the head of capital account management department at the State Administration of Foreign Exchange (SAFE), told China Forex magazine, a magazine under the administration.

"We will study the impact on China's balance of payments, yuan exchange rates and financial markets from overseas unconventional stimulus policies," he said.

That last sentence tells me nothing will happen if markets don't cooperate. They're still at the mercy of the eurodollar.

Measured against M2, China's forex reserves in dollars are down to 9.3 percent of money supply.

Reserves become more volatile the more they are dedollarized. If the dollar is in a bear market, macro trends will work in China's favor. If the dollar surprises the market and turns higher again, China is more vulnerable than before.
As for the U.S. Dollar Index, it isn't looking too good at the moment. The chart has turned a little more bullish in the short-term, but only a little. The trade weighted U.S. dollar, a broader measure that includes currencies such as the Chinese yuan, is coming up on major support. If the dollar breaks support, China will have the wind at its back and the capital account will probably open a little. If the greenback reverses, the narrative around the global economic recovery will shift quickly and we could be talking about yuan devaluation by the autumn again. The trade weighted dollar is about 1 percent away from support.

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