FXStreet (Delhi) – Michael Every, Head of Financial Markets Research, Asia Pacific at Rabobank, notes that the clock is ticking towards further negative surprises for Chinese Yuan and the recent policy responses from PBOC aimed at encouraging stability are actually worsening the situation.
Key Quotes
“In terms of growth, it is hard to envision what new driver can keep GDP at the desired 7% YoY level absent the kind of deregulation that the government is retreating from rather than moving towards; a retreat back to state pump-priming and infrastructure/property spending, which may be inevitable, will only worsen debt issues and is already seeing ever-less ‘bang’ for each ‘buck’.”
“On the equities front, prices are still too high based on fundamental metrics such as Price-to-Earnings ratios, especially with the economy (i.e., earnings) in decline; PBOC buying can’t mask that, and neither can mass arrests (now totaling around 200) of stock market scapegoats who allegedly led the index lower with their illegal actions.”
“Meanwhile, on the currency front capital continues to flow out of the country as the economy slows. True, July FX reserve data showed a massive USD3.65 trillion war-chest, but this is down from nearly USD4.0 trillion in mid-2014: indeed, given China is still running large trade surpluses every month, this FX total should be rising, not falling.”
“How much longer can this all go on? Not too much longer, in our view. That USD3.65 trillion Chinese FX reserve pile may already have dropped by as much as USD200bn in the last few weeks of August.”
“So, putting the present rate of FX drain in context, it means we may hit a critical FX threshold by early December, at which point the PBOC will almost certainly have to step back from propping up CNY and it will fall much further.”
(Market News Provided by FXstreet)