We have written extensively over the course of the last few weeks on the increasing rhetoric from Asia over currency fluctuations and furthermore how China was playing the US and Europe off against one another in a quasi-trade-war gambit. A flurry of headlines today/tonight via Bloomberg reminded us to revisit what is also a very worrying trend in Chinese CDS (and more broadly Asian sovereigns), as perhaps sophisticated investors look for the cheapest low cost long vol trades on a non-decoupled world devolving to its lowest common denominator.
Between Carney's 'substantially undervalued Yuan' comments, record slides in Dim Sum Bonds, growing concerns over growth longevity, Japanese retail sales, Aussie home prices, Sony's troubles in currency-land, and Barclay's warning of a restart to the Yuan peg in the case of global recession - contagion and transmission channels appear alive and well in global trade.
Via Bloomberg, this morning:
*CARNEY SAYS ADMINISTRATION `REVIEWING' CHINA CURRENCY BILL
*CARNEY SAYS CHINA CURRENCY `SUBSTANTIALLY UNDERVALUED'
followed quickly by:
Yuan Drop Spurs Record Slide in Dim Sum Bonds: China Credit
Yuan-denominated (Dim-Sum) bonds in Hong Kong are headed for record monthly loss, erasing gains for the year, as worsening outlook for global economy fuels concern China will slow pace of its currency’s appreciation.
which was 'helped' by this evening's comments:
*CHINA MAY RESTART YUAN PEG IN GLOBAL RECESSION, BARCLAYS SAYS
*STRONG CASE TO PEG YUAN TO BASKET OF CURRENCIES, BARCLAYS SAYS
And growing concensus that growth in China will slow significantly:
In the latest Bloomberg Global Poll of investors, most global investors and analysts, or 59 percent, foresee China will register economic gains of less than 5 percent annually by 2016.
that were around the same time as Sony's headlines hit:
*SONY SAYS EURO WEAKNESS TO HAVE `HUGE IMPACT' ON EARNINGS
*SONY SAYS IT HAS NO COUNTERMEASURES AGAINST WEAK EURO :6758 JP
...noting that "Sony doesn’t buy many components from Europe, limiting its ability to benefit from euro weakness"
Which leaves Chinese CDS (denominated in USD remember) hitting their highest levels since early March 2009 as the spread between 5y and 10Y Chinese CDS rises to record wides of 74bps
While we suspect much of the steepening and widening of China sovereign CDS is speculative revaluation/global-recession bets, Chinese CDS still has a long way to go to meet up with the other global majors in terms of its risk relative to government bonds (since CDS have the implicit currency/devaluation premium and not just technical default).