China Hard Landing Bets Rise As It Now Costs More To Bet On Renminbi Strength Than Weakness

Tyler Durden's picture

About a week ago, Goldman Sachs closed its tactical short USDCNY Non-Deliverable Forward trade, which was opened on June 10, 2010 and which expired a year later for a 4.2% gain. Goldman added: "Our view has not changed. The necessary adjustments to global imbalances demand a weaker US Dollar, and especially so vs the CNY. The cyclical and political backdrop remains supportive along those lines. Moreover, we expect $/CNY depreciation to continue/extend in the months to come. We remain positioned for the theme via our $/CNY NDF recommended Top Trade with longer initial maturity, expiring on 4 December 2012." Nonetheless, something appears to have shifted in the derivative CNY market, where as Bloomberg points out, it now costs more to bet on RMB weakness than strength. It adds: "China appears headed for a hard landing as the country’s housing market shows more signs of weakness. Currency traders have reduced their expectations for more appreciation of the yuan versus the dollar in the derivatives market, meaning they expect Chinese policy makers to fundamentally shift their approach to the currency due to economic softening. Other markets may soon follow currency’s lead." As the attached chart shows the USDCNY 3 Month 25 Delta Risk Reversal for the first time since September 2009, there appears to be some outright bearishness on the renminbi appreciation scenario. Does this mean that yesterday's decline in the official fixing rate to 6.4736 on Thursday, lower than the record high of 6.4683 on Wednesday is more than a one time adjustment and is the start of a new trend? We will find out soon enough.

USDCNY internals:

More from Bloomberg:

A number of signs point to a decline in Chinese housing. The Bloomberg Brief Population Weighted National Home Price Index shows that while housing prices are still rising year over year, the rate of appreciation is diminishing as government tightening measures aimed at quelling the bubble have taken effect. Growth slowed to 4.1 percent in May from 5.9 percent in January, and is approaching the nation’s one-year deposit rate of 3.25 percent.

With inflation above five percent, this decline means housing has joined deposit rates in negative territory in real terms, reducing investor incentives to put money into real estate. Transaction volumes also appear to be slowing, which may point to lower prices ahead.

There are also declines in other related data series. Sales of excavators have fallen 9.6 percent year over year, and sales of heavy-duty trucks needed for building are down 22.4 percent.

All of this likely fed into Standard & Poor’s recent revision of its outlook on Chinese housing to negative from stable. S&P expects home prices to fall 10 percent over the next year.

A decline in home prices may cause significant wealth destruction in China. The country’s investors essentially have only three main options: bank accounts, equity markets, and property. With real deposit rates in negative territory since February 2010, many Chinese have been pushed into property and equity markets. According to a survey by Hurun reported on by Forbes in May, about 20 percent of Chinese millionaires get their money from the country’s “hot real estate market.”

Growing concerns about a hard landing are definitely on display in the currency market, where betting that the yuan will fall recently became more expensive than backing its appreciation for the first time since September 2009. US D/CNY three-month 25 delta risk reversals, which measure the skew of out-of-the-money options to determine the direction of the spot rate over the next three months, turned positive on June 13.

This is remarkable given that the yuan is largely a political tool in China, held at lower levels than it should be to encourage exports and allowed to appreciate only gradually by Chinese policy makers under pressure from foreign counterparts to lessen global imbalances. In a hard landing scenario, Chinese policy makers would likely stop allowing appreciation, as strong exports would become a more important tool for bolstering the economy.

Bloomberg's proposed solution to what may be the start of China's downturn? Why print more of course:

Eventual government action may borrow from Fed Chairmen Alan Greenspan and Ben Bernanke’s playbooks. Their moves to loosen monetary policy in response to faltering markets became known as the Greenspan and Bernanke puts. In China, support would likely include fiscal as well as monetary policies focused on increasing investment into low- and middle-income housing and infrastructure as outlined in the country’s 12th five-year plan, as well as the lifting of certain borrowing restrictions for new homes. This “Jiabao” put would help put the economy back on sounder footing while likely engineering a soft landing for China.

Luckily, the financial markets have already put the stranglehold on the "Jiabao" put, and unless China promptly agrees to commence the printing, the interbank liquidiy market as we have been showing for the past week, is about to die a gruesome death.

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GeneMarchbanks's picture

China housing crash= Aussie housing and Canadian housing crash, no?

qussl3's picture

Bizarrely a Chinese crash may see more not less money move to the traditional haunts.

Oz is fucked regardless, its housing bubble is pervasive, the bubble has reached even border bush towns.

Canada, not so much Vancouver is crazy town but the other capitals are nowhere near as nutty.

Financial Newbie's picture

Toronto still ain't pretty.

And I can't help but wonder if the problem that will come with economic slowdown will be *massive* declines in Canadian workers' earnings, thus blowing the bottom out on housing affordabillity...

hugovanderbubble's picture

Exactly Gene

Short Asian Reits

Specially Hong Kong, Japan and Australian ones


* Also SRS US EQUITY long

*Short EWH till 16.00$

GeneMarchbanks's picture


Should this not then lead to a banking sector crises in the big 4 Australian banks? Maybe that's a huge short. Certainly I was looking for this last summer-never happened though.


SMG's picture

Excessive debt/fiat fueled growth, then pull the plug.  The Oligarchy/Bankster/Illuminati have been using this as one of their strategies to increase their power and achieve their goals for the last couple hundred years.  Japan was a big collapse as was the us in 29, but this next one will be the largest in human history.   China's pride is great right now and the collapse will be so bad there, that they will see war as their only way out.  

Which is great from an oligarch's perspective.  They gain power and wealth from the war business and kill off possibly billions of useless eaters. 

I hope somebody can stop it this time.  Maybe if the truth gets out before it's too late. 

trav7777's picture

headline doesn't match article?

besnook's picture

a china crash will be more like a change in delta from 10% growth to 4-5% growth. good for china as it catches up with itself. bad for the rest of the world.

longshortflat's picture



Your headline "

"Renminbi Strength Than Weakness" is backwards from story content


KickIce's picture

The landing will be even harder if there are food shortages due to the droughts.

S-hai High's picture

"With inflation above five percent, this decline means housing has joined deposit rates in negative territory in real terms, reducing investor incentives to put money into real estate"

But, there are no credible alternatives – the bank account deposit rate is even worse and stock market has not performed this year... so, its the best option still.

"A decline in home prices may cause significant wealth destruction in China"

Since an enormous number of people in china own their home outright, there is no requirement to meet mortgage re-payments. I therefore fail to see where significant selling pressure would come from.

To illustrate in a different way – (and perhaps a point to debate, since I've not thought it through fully) - if every American owned their own homes 100%... and had no credit card debt... or personal loans... would there have been a collapse in house prices?