Four Big 'Troubles' In Little China

While not quite as dramatic as Kim Cattrall in a cheongsam, the recent group-think of 'heads bulls win, tails bears lose" on the back of seemingly ever-rising strike prices on central bankers implied-puts is becoming crescendo-like. Nowhere is this more evident in China currently, as the world views every inflation, growth, and lending print as either positive because of more stimulation or positive because of global growth. Of course all of this ignores the 'trap' that is/has already sprung in Japan (ZIRP, deflation, and zombification), US (ZIRP, addiction, and energy prices), and Europe (print, subordinate, and alienate foreign bond purchasers) and the care with which even insane printers must tread for fear of upsetting the world economy. Tonight we hear from China's Premier Wen that, via Bloomberg, China seeks to establish social democracy and much to Chuck Schumer's chagrin we pre-suppose, that the Yuan is close to equilibrium levels. Furthermore the veiled threat that China-US cooperation is better than confrontation, which brings us to four charts we found interesting in their potential to upset the euphoria of a global race-to-the-bottom which apparently makes US stocks invincible.

1. The USD just experienced its 3rd largest 10-day Appreciation against the CNY ever and has broken above the 100DMA for the first time since SEP10. How's that going to help US trade deficits and our newly found export growth (especially with that freshly created consuming Chinese public now exporting their wage growth).



2. The magnitude of Chinese Central Planning USD Selling to offset the market's incessant CNY Selling has been dramatic from the lows of the US equity market in SEP/OCT but has been negligible since 2012 began.

This chart (based on our post here inspired by work from China Economics Seminar) attempts to distinguish between intraday and interday changes in the USDCNY exchange rate and implicitly those controlled and driven by the PBOC's fixing efforts (Interday) and the market's trading view (intraday). What is clear is that the 'market' is relatively 'flat' now (the red line is near 0 from Jan06 to now) and that almost the entire move by the CNY has now been handled by the PBOC.

The stability of that relationship (note the green ovals of massive intervention are not present) over the last few months is perhaps why Wen is so positive that we are near equilibrium? What's interesting is the timing of these massive USD selling episodes (Q4 2008/Q1 2009) and Q3 2011 to Q1 2012 are the stand outs) just happen to coincide with huge liquidity-fueled rushes in US equities.

3. Despite the largest stimulus and growth efforts, the Chinese equity market remains dramatically poorly valued seemingly reflecting considerably less confidence in the global growth story than the US and Japan appear to be.

Chart: Bloomberg's Chart Of The Day


4. The Chinese sovereign bond curve continues to flatten, diverging bearishly from the Chinese equity market's recent performance.

As we discussed here, this suggests the bond market is much more concerned about the potential for a hard landing than equities appear to be.


In summary, Wen's comments aside, we have the USD appreciating at record speeds against the world's most cash rich and consumer-growthy nation, the Chinese Central Bank potentially done intervening to juice the USD and implicitly the USD-based asset markets, a dramatically under-valued Chinese equity market suggesting significantly more hard-landing concern that other major markets, and finally the Chinese sovereign bond market flashing harder-landing signals than the recent equity strength would have us believe.

Trade accordingly.


Charts: Bloomberg


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