Chinese Brokers Drop Currency Forecasts To Avoid Angering Regulators
By Michael Every of Rabobank
Yesterday’s Chinese data were a real shock. In particular, retail sales were up only 2.5% y/y in August vs. 7.0% expected and only 3.0% 2y/y. This is hardly what one calls a robust consumer recovery – and given industrial production was only slightly weaker than projected, explains why China is running such large trade surpluses: supply is up, demand is flat. Enter ‘Common prosperity’ – which Wall Street is still struggling to understand given it will read anything else but the actual instruction manual. Yet there was another report out yesterday –beyond Evergrande, which today just suspended all its onshore bonds — just as shocking in some ways, and which Wall Street is not only refusing to read, but apparently to print. Reuters reported: “EXCLUSIVE China brokers drop yuan forecasts to avoid regulators’ ire”.
It claims “Brokerages in China have dropped detailed currency forecasts from their research notes, or have restricted access to them, underlining the growing sensitivity in the financial sector to a regulatory clampdown on speculative investment. Their disappearance follows pressure to avoid stockmarket forecasts as well as a ban by authorities on publishing commodity prices, amid a series of sprawling crackdowns that are re-shaping China’s economy and upending financial markets….analysis of months of notes from four brokers in China shows once-detailed forecasts for the Chinese currency against the dollar have now vanished or grown fuzzy, with precise predictions replaced by ranges or vague statements.”
Reuters notes: “It also comes at a delicate moment for the yuan, which China has sought to promote as a global reserve currency but which is tightly managed by the central bank and has been stubbornly firm recently despite a broadly strong dollar. The market effect of publishing only generalised forecasts is unclear, particularly as foreign institutions continue to offer precise ones.” Also, Chinese clients can apparently access FX projections *privately*. Yet are those two gaps –foreign/domestic, private/public– to remain or close, and if so in which direction?
For alexic Wall Street, dual exchange rates were common in Soviet economies. After initial demonetisation, Lenin’s pro-market New Economic Plan shifted to sovznaks (paper currency) and chervonetz (gold-backed currency, supported by a positive balance of payments). Guess what? Capital markets liked the latter: money is money. Under Stalin, the USSR walked away from Wall Street, not vice versa, and shifted to a command economy where the Soviet ruble –not fully-fungible domestically– had a dual exchange rate: high on official markets, which only a privileged few could use; and very low on the unofficial black market.
We are very far from this situation today. Indeed, unlike the post-Lenin USSR, and its own recent wobbles, China is flush with dollars right now on the back of capital inflows and Covid-related trade surpluses. So why the avoidance of FX forecasts? Reuters suggests that the aim is to avoid Chinese corporates, with dollar holdings of nearly $1 trillion –meaning official FX reserves of $3.2 trillion are artificially low— coming to any FX consensus and taking a counterparty view against the PBOC. If they all decided to either buy or sell the dollar, it would push the USD/CNY exchange rate around hugely. In short, the aim is for stability over all else, even if that means opacity.
Or, it could perhaps mean there could be a sharp devaluation, or appreciation, ahead: opacity is exactly the space in which these kinds of speculation will occur, especially on the back of recent weak data suggesting the need for more stimulus in a debt-constrained economy. Indeed, there is an obvious trade-off for this FX stability: it won’t help internationalize CNY. Foreign firms and CFOs are not going to enjoy FX opacity when doing their balance-sheet planning. Even if they continue to forecast CNY, if their Chinese counterparties have very different views due to an information gap, this will ironically create potential FX volatility!
Logically, the best way to keep long-run FX stability and to internationalize CNY is to make sure the currency is trading in line with its fundamentals. Yet even that implies volatility, because fundamentals change. For example, there are valid arguments CNY is too weak right now given the trade and capital inflows being seen – yet China does not seem to want a stronger currency for a variety of reasons; and there are equally valid views CNY will be much weaker in the future given the pressing domestic and external issues China is grappling with – but not too far, or too fast, it would seem. Which means the remaining logical conclusion if you want a stable, international currency is to make sure the fundamentals are favorable for its strength. Yet this is both a domestic and an external issue, and they are linked.
On that external front, and linked to FX markets even if FX markets can’t yet link to it, see the front page of the Financial Times: “US Builds Bulwark Against China with UK-Australia Security Pact”; or, as the Guardian puts it: “US, UK and Australia forge military alliance to counter China”. In short, we now have a new global security pact “AUKUS”, which will see deep military integration between $22.7trn US GDP/331m people, $3.1trn UK GDP/68m people, and $1.6trn Aussie GDP/25m people. The pact includes Australia dropping a 2017 contract with France to build diesel-powered subs in favour of US nuclear-powered ones to be built in Adelaide. There will also be deep trilateral co-operation on new technologies such as cyber, AI, and Quantum, and no doubt across a growing number of other industrial sectors, as well as regional foreign policy. Might Canada also sign up after its looming election? Meanwhile, on 24 September the White House is holding an in-person Quad meeting with Japan ($5.4trn GDP/126m people) and India ($3.1trn GDP/1,381m people) joining in.
Yes, AUKUS (+Japan+India) is no integrated bloc like the EU, which saw an ebullient State of the Union address yesterday talking about building a domestic semiconductor ecosystem. Yet once again ‘precise predictions were replaced by ranges or vague statements’, and that EU goal will require a shift to industrial policy and protectionism just as AUKUS (+Japan+India) opens the door to larger-scale military-industrial policy, which is where all the cutting edge R&D actually occurs.
“The world is a jungle,” the former French ambassador to Washington, Gérard Araud, observed on Twitter. “France has just been reminded this bitter truth by the way the US and the UK have stabbed her in the back in Australia. C’est la vie.” When the rest of the EU sees the Indo-Pacific is where US and UK military energies are now focused, not Europe/Russia, they will no doubt agree. One would imagine China’s retort will be sharper – and fuzzier to forecast for Wall Street(?)
And in the region, today saw a bumper 2.7% q/q, if lopsided, Q2 Kiwi GDP number, which is some consolation for them not being invited to join AUKUS. It also suggests the RBNZ may indeed start to hike rates ahead despite the wobbles in Chinese retail (and in shares of infant milk formula firms), which will make the AUD/NZD cross interesting if so. We also had the always-fuzzy Aussie jobs number, which saw a print of -146K under lockdown vs. -80K expected, but with the unemployment rate confusingly dropping to just 4.5%. There were far worse whisper numbers out there – but this is not a rate-hiking number. At least there is the prospect of lots of maritime/engineering jobs in Adelaide ahead to help diversify and fortify the economy.
Thu, 09/16/2021 – 09:31