Yuan Tumbles To 11-Month Lows As China Home Price Growth Slows

Tyler Durden's picture

It would appear that the widening of the daily trading bands (we discussed last night) are having a directional effect on USDCNY as the devaluation continues on the back of forced carry-trade unwinds. At 6.19, CNY is its weakest in 11 months (2.5% weaker than its lows in January) and the last 2 months have seen by far the biggest weakening in the currency on record. This 'implied' easing is modestly supporting the stock market and copper for now (though we suspect that is more spillover from risk-on squeezes post-Ukraine). While Goldman and BofA are adamant that widening the bands will not mean a change in trend overall, it seems clear that hot money is outflowing and driving a trend change anyway as corporate bond prices are not rising and home-price appreciation is slowing in the major cities.


USDCNY drops 100 pips to 6.19 - lowest in 11 months...


Chinese home price appreciation slows notably... (h/t @M_Mcdonough)


Via The WSJ,

China's decision to squeeze speculators out of its currency is causing pain for local companies and individual investors.




China is attempting to reduce the amount of money flowing into the country from foreign investors looking to profit on a rise in the yuan. The government sees this cash as inflating asset prices and making the economy more vulnerable to financial shocks.


But the currency's decline is having a broader impact, particularly on Chinese companies that had placed bets on an appreciating yuan, traders and analysts say.


These companies have placed such bets in recent years to guarantee steady revenue from exports as the currency's value climbed steadily against the dollar.


Many companies borrow money to make these trades, magnifying gains when the yuan rises but opening them up to big losses if the currency falls.


With the yuan down 2% against the dollar this year, more of the bets are losing money, said Geoff Kendrick, head of Asian currencies and rates at Morgan Stanley.




He estimates that paper losses on one popular way companies hedge their yuan exposure and individual investors bet on the yuan, through what is known as target redemption-forward products, have hit $2.3 billion, on contracts valued at $150 billion.




"In the past, when the [yuan] had a clear one-way trend, it used to be really easy for corporates. But now, with two-way volatility it becomes very tricky for them to manage," he said. "It's going to be a very different market from here."




For now, most of the losses remain on paper because investors and companies haven't yet sold their positions. However, banks are asking both corporate and individual clients with losing bets to pony up more collateral, traders in Hong Kong say. Banks also are advising companies to restructure their investments around weaker levels for the yuan, a cheaper alternative than completely unwinding millions of dollars of the products, which were originally designed to help companies hedge against gains in the yuan.


While the recent declines likely aren't big enough to trigger a stampede out of the yuan, the added volatility in the exchange rate may give some investors pause.




"If the currency appreciation is no slam dunk anymore…part of the attraction of owning Chinese equities and bonds is being erased," said Greg Anderson, global head of foreign-exchange strategy for BMO Capital Markets, a subsidiary of BMO Financial Group. "The result will probably be less foreign portfolio investment in China."




"Some hedge funds are closing up positions,"... Even a small drop in the yuan could trigger big losses. Many investors are vulnerable if the yuan weakens to 6.20 to the dollar

And with home price appreciation slowing, perhaps things are moving a little too fast for the PBOC to manage?

As we warned before, Simply put, if the CNY keeps going (whether by PBOC hand or a break of the virtuous cycle above), then things get ugly fast...

How Much Is at Stake?
In their previous note, MS estimated that US$350 billion of TRF have been sold since the beginning of 2013. When we dig deeper, we think it is reasonable to assume that most of what was sold in 2013 has been knocked out (at the lower knock-outs), given the price action seen in 2013.

Given that, and given what business we’ve done in 2014 calendar year to date, we think a reasonable estimate is that US$150 billion of product remains.


Taking that as a base case, we can then estimate the size of potential losses to holders of these products if USD/CNH keeps trading higher.


In round numbers, we estimate that for every 0.1 move in USD/CNH above the average EKI (which we have assumed here is 6.20), corporates will lose US$200 million a month. The real pain comes if USD/CNH stays above this level, as these losses will accrue every month until the contract expires. Given contracts are 24 months in tenor, this implies around US$4.8 billion in total losses for every 0.1 above the average EKI.

As Morgan Stanley warns however, this has much broader implications for China...

The potential for US$4.8 billion in losses for every 0.1 above the average EKI could have significant implications for corporate China in its own right, as could the need to post collateral on positions even if the EKI level is not breached.


However, the real concern for corporate China is linked to broader credit issues. On that, it’s worth reiterating that the corporate sector in China is the most leveraged in the world. Further loss due to structured products would add further stress to corporates and potentially some of those might get funding from the shadow banking sector. Investment loss would weaken their balance sheets further and increase repayment risk of their debt.


In this regard, it would potentially cause investors to become more concerned about trust products if any of these corporates get involved in borrowing through trust products. In this regard, this would raise concerns among investors, given that there is already significant risk of credit defaults to happen in 2014.

Remember, as we noted previously, these potential losses are pure levered derivative losses... not some "well we are losing so let's greatly rotate this bet to US equities" which means it has a real tightening impact on both collateral and liquidity around the world... yet again, as we noted previously, it appears the PBOC is trying to break the world's most profitable and easy carry trade - which has created a massive real estate bubble in their nation (and that will have consequences).


The bottom line is the question of whether the PBOC's engineering this CNY weakness is merely a strategy to increase volatility and thus deter carry-trade malevolence (in line with reform policies to tamp down bubbles) OR is it a more aggressive entry into the currency wars as China focuses on its trade (exports) and keeping the dream alive? (Or, one more thing, the former morphs into the latter as a vicious unwind ensues OR the market tests the PBOC's willingness to break their momentum spirit).

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Soul Glow's picture


If Russia and China sanction the West, the West will pay them with inflated currency.  So if China is going to continue to participate in Treasury auctions, they will pay them with inflated yuan.  Round and round the toilet bowl it goes.  When it stops nobody knows.

Bonapartist's picture

Russia is sitting a shitload of the most valuable commodity known to man- oil- the Chinese not so much so they're the ones standing with their dick in their hand and the most to lose.

disabledvet's picture

Russia definitely picked a bad time to invade if this was some type of "coordinated" thingy.
Certainly goes a long way towards explaining "the abstention."

We'll see if "yesterdays's news" (big market surge in both Russia and the USA) is simply masking the kick off to an extensively broad deflation...not only in Europe (well underway) and Japan (going on for decades) but now in China and maybe even in Russia as well.

To paraphrase Star Wars "these are not the invasions you are looking for."

Seasmoke's picture

This doesn't look good for Gold. Just what the Fucking Fed wanted. 

disabledvet's picture

again..."hard to tell." broad based price declines generally are a great time to hold on to the "barbaric relic." you definitely want to be careful about owning a copper mine. (China just bought one of course.)

And of course anything with massive amounts of debt or "bad growth prospects" (lack of internal growth properties...i.e "reliant on oligarch monies") should be avoided.

We could see a big market sell-off starting tomorrow (start of a large correction?) as "chaos in Moscow" hasn't had to have been priced in since 1917.

this was a great time to buy US equities...initially. "but then the war ended."

long-short's picture

someone is quietly selling gold overnight.

how bad do you think it can get, seasmoke?  test recent support at 1180--1200 again?

looks like a lot of people would want to get back in at $1000....

Soul Glow's picture

Seasmoke - Let's look at the YTD for the USD/Yuan and gold.  Both are up on the year.  Gold is up 15%.  So far so good.

Rukeysers Ghost's picture

Ghost cities just aren't worth what they used to be.

Quantum Darwinism's picture

Gee I wonder what'll happen when prices DROP... Which has to happen significantly. Prices still have a long way to go down before realisticly matching avrage income.

Unless the PBOC starts mad printing.

FieldingMellish's picture

PMs in another nosedive. Is it the Chinese selling now? They have a LOT to sell. Slave labor makes their cost of production virtually nil. Drive the price down and shut down all the other gold resources on the planet. Buy them for pennies on the dollar... or less.

Make_Mine_A_Double's picture

I just got back from a biz trip to Thailand, Cambodia & Laos. Chinese fast money is flooding into these countries in the form of RE purchases and lux condo farms, upscale malls and shitty hotels (albeit on prime river front properties).

The general impression is that those with liquid assets are getting as much out as fast as possible.

zionhead's picture

Ouch a 0.18% TUMBLE is a real killer isn't it?

Lot's of money moving out of the YUAN and into the EURO.

But massive rubles going into yuan, and even more rubles going into euros.


Moral of the story, everybody wants EURO's, ... including zio-con.

TheMeatTrapper's picture

While this is largely anecdotal, I can tell you that shit in China ain't what it used to be. 

China buys our fur. American trappers sell fur they catch - and almost all of it goes to China. Last year, prices were booming to unheard of levels. Southern coon that normally sold for $10 were selling for $40. High Western bobcats were selling for $700 - $1000 because Chinese women consider bright spotted cat fur as a status symbol. 

This season, every good ol boy and his brother went out and bought a shit load of traps. They caught everything they could catch. 

Problem is, the Chinese stopped buying. 

There are tens of thousands of unsold hides in warehouses. Prices cratered. Trappers sent pelts to auction and they sit there unsold. Auctions have been delayed, rescheduled and cancelled. 

I can see a direct correlation between fur prices and the Chinese financial bubble. 

Fortunately I trap for food, not fur; and I eat everyday. Provide for yourself - don't rely on buyers or brokers to give you money so you can then buy your food. 

Learn To Trap Your Food

iLiquid's picture

Never expect last winter's fashion still being fashionable this year... The fur is its own microbubble.

ActionFive's picture

Oh please. Pile on the China stories. USDCNY was getting ugly.

Adjust the dials, like gold.

iLiquid's picture

The PBoC has been setting the dails every morning (China standard time) since 2005.  It's what they do for a living.

ebworthen's picture

Flat screens and computer parts will be cheaper, if it gets passed on.

They're probably not too worried about it, will help to crush the competition.

Even if they have a currency/credit crises they will still have the manufacturing facilities and workers.

thestarl's picture

Just no one to sell the shit to, games just about over pal.