Chinese Money Has Changed the Face Of Hong Kong's Skyline

China’s Wealth & Power

Italian fashion house is said to be one of the several top firms in Western countries to have found themselves on the other side of shaky real estate boom in Hong Kong. In prime locations of the city, the price of commercial property seems to have almost doubled up since U.K. had handed it over to China two years back, being the most expensive across the globe. Since several changes have taken place in Hong Kong after the historic handover in 1997, China’s increasing wealth and power is said to be at the core of confusion.

 Chinese companies, level with cash seemed to have given way to trophy office space in central districts, motivating up prices. According to brokers and developers, firms like Burberry –BBRYF and Gucci have resorted to cheaper office location in distant areas. No comments have been provided by the two fashion brands.

 Inflow of firms from the Chinese mainland tends to reveal a wider move in the role of Hong Kong as a business hub. The head of research for Hong Kong, Denis Ma had commented at a property brokerage JLL that `at the time of the handover, Hong Kong was seen as a stepping stone for multinationals looking to tap in the China market’.

Government Policies Progressively Opened Mainland Firms

He further added that in a sense it is still true though we have seen over the last few years is that (mainland Chinese) firms had begun to take a same view of Hong Kong as a stepping stone to engage with the wider world.

According to real estate services firm CBRE, the growing supremacy of China Inc. over Hong Kong seems difficult to go unnoticed and there are presently around 1,123 Chinese companies in the territory which is almost thrice the number 20 years back. This tends to account for 64% of the stock market capitalization of the city, up from 16% in 1997.

The government policies have progressively opened up mainland firms for Hong. Chinese businesses have been encouraged by Beijing to grow abroad with large sums of money being flooded out of China since its economy tends to have dropped in recent years. The persistent rush of Chinese money has increased in the real estate market.

Hong Kong Ranks Least Affordable City

According to CBRE, landlord tend to collect $264 on an average per square foot each year by way of rent for prime office space in central Hong Kong, which is quite high than the West End of London - $146 or Midtown Manhattan in new York - $144.

Being a property holder in Hong Kong tends to be a lot difficult since prices have increased by 89% since 1997, according to CBRE. Hong Kong tends to rank as the least affordable city for seven years in succession, as per Demographia, a public policy firm. The mounting prices have compelled some of the multination companies to move to other areas of Hong Kong though few have been quitting the region completely.

The numbers have actually doubled more over the past two decades from 3,069 to 6,863 according to CBRE. The president of the American Chamber of commerce in Hong Kong, Tara Joseph, considered the fall as comparatively small and put it down to the cost of rent and a recession in some industries, especially retail.

IMF Says World at Risk of 'Economic Derailment’

Global Economy Faces Rising Risk of Economic Derailment - IMF

The International Monetary Fund – IMF has advised that the global economy tends to face a rising risk of economic derailment. David Lipton, Deputy Director has called for urgent steps to increase global demand. He had mentioned in his speech to the National Association for Business Economics in Washingtonrecently, that they are clearly at a delicate juncture. He warned that the IMF’s latest reading of the global economy indicates once again a weakening baseline.

His comments have come up after weaker than expected trade figures from China portrayed that the exports had plunged by a quarter from a year ago, in February. With the second largest economy of the world often stated as `the engine of global growth’, weaker global demand for its goods seems to be read as an indicator of the general global economic climate. IMF have already mentioned that it would be likely to downgrade the present forecast of 3.4% for global growth when it tend to release in April, the economic predictions. International lender had warned last month, that the world economy seemed to be highly susceptible and had called for new efforts to spur growth.

Downside Risks Clearly Pronounced

Ahead of last month’s Shanghai G20 meeting, in a report, the IMF had mentioned that the group need to plan a co-ordinated stimulus programme since the world growth had reduced and could be derailed by market turbulence, the oil price crash as well as geopolitical conflicts. In his speech in Washington, Mr Lipton had stated that the burden to lift growth falls more squarely on advanced economics which tend to have fiscal room to move.

He added that the `downside risks are clearly much more pronounced than earlier and the case for more forceful and concerted policy action has become more compelling. Moreover risks seemed to have increased further with volatile financial markets and low commodity prices creating fresh concern about the health of the global economy’. A swing of weak economic data had lately been added to these apprehensions and the US ratings agency Moody’s had downgraded its outlook for China from `stable’ to `negative’.

Time to Support Economic Activity

The rising unemployment is also another worry as Beijing tends to slowly shift its economy from over dependence on manufacturing and industry to more services and consumer spending. The economy of China seems to be growing at the slowest rate in 25 years which has resulted in considerable uncertainty in the financial markets all over the world leading to sharp falls in commodity prices.

Lipton has commented that `together with bank repair wherever needed and with adequate targeting on infrastructure, this approach could create jobs and probably reduce public debt-to-GDP ratios in the medium term by motivating nominal GDP as well as support credit and financial stability. On strengthening the global outlook, this coordinated action could hurry healing in the banking sector and prevent continent liabilities for the government which appear in case of inaction.

 Moreover it would also have considerable positive spill-overs to susceptible emerging economics comprising of commodity exporters which would be unable to participate in the fiscal expansion, directly. He added that at the recent G20 meetings in China, he thinks that `there was broad recognition of these risks and priorities and now is the time to support economic activity and put the global economy on a sounder footing’.

Asian Shares Slip, Though China Ekes Out Gain

Shares of China Eked Gains

Shares of China have eked out gains though most of the Asian markets have reviewed some of their latest rally, with traders assimilating weaker than expected trade data from the mainland. A market analyst at IG, Angus Nicholson had informed sources that plenty of the latest rally in stocks had been driven by major reversal or short covering in financials, materials as well as energy. However, he mentioned that momentum decreasing in the other sectors have now been falling in these sectors also.

The trade data of China that was released at about 10.30 a.m. SIN/HK time was also not positive for sentiments with the February exports dropping to 25.4% in terms of U.S. dollar, while imports fell by 13.8%, with the drops wider than anticipations. Since 2009, the decline in exports had been the largest on year drop according to Reuters.

 The Chinese markets ended higher with the Shanghai composite ending up 2.57, or 0.1% at 2,899.91 with the Shenzhen composite up 8.89 points or 0.51% at 1,750.56. Nicholson had noted that the foreign exchange reserves data of China, released overnight would probably have totally reassured markets around the prospect for further Yuan devaluation.

Official Data Released – Marked Fourth Straight Month of Decline

An official data released recently after the market close, portrayed foreign currency reserves on the mainland dropped to $3.2 trillion towards the end of February, declining from $3.23 trillion the earlier month, thus marking the fourth straight month of decline. However, the pace of outflows slackened substantially and the February figure was in line with analysts’ potentials portrayed in Reuter’s poll.Among other markets, benchmark of Japan, Nikkei 225 closed down 128.17 points or 0.76 percent at 16,783.15 extending Monday’s drop of 0.6%.

Reuters had reported revised government data, before the market opened, showing Japan’s economy had shrank at an annualized 1.1% in the final quarter of 2015 which was revised up from a initial reading of 1.4% contraction. Through the Korean Strait, the Kospi had closed down 11.75% or 0.60% at 1,946.12 while in Hong Kong; the Hang Seng index had closed down 148.14 points of 0.73% to 20,011.58.

Main Miners – Australia, Given up on Early Gains

The main miners in Australia had given up on early gains with Rio Tinto closing at 2.60% BHP Billiton less by 1.83% with iron ore producer Fortescue dropping 9.42% after surging almost 24% on Monday. Fortescue had announced before the market open that it had been in talks with Vale in order to work together to blend iron ore to meet up the demands of its consumers.

 According to the announcement there was a possibility of seeing the Brazilian miner take a 5-15% minority stake in Australian miner. On the other hand, Gold miners saw an uptick with the shares of Newscrest closing at 1.30% while Alacer Gold added 0.72%. HK/SIN time spot gold traded high at $1,269.57 for an ounce though below the Friday peak of $1,279.60, which was the highest since February 3, 2015 as of 3.13 p.m. U.S. gold for April delivery had gained overnight by 0.5% to $1,269.90 an ounce.

Suzuki Motor, Japanese automaker had closed at 3.76% after a report in the Nikkei stating that the company would issue 200 billion yen in zero-coupon convertible bonds, using most of the profits in spreading its setup in India.

China Replaces Securities Regulator Xiao Gang

Xiao Gang Replaced by Liu Shivu – China Securities Regulatory Commission

China has removed the head of its securities regulator after a stormy period in the country’s stock market, by appointing a top state banking executive in his place since leaders tend to move in restoring confidence in the economy. The announcement on the official Xinhua news agency recently trails a string of assurances from senior leaders succeeding the Lunar New Year holiday which China would be supporting in slowing economy as well as steadying its shaky currency.

According to media report, Xiao Gang has been replaced by Liu Shivu as the chairman of the China Securities Regulatory Commission – CSRC as it tried to tackle main volatility in its stock markets. Mr Xiao had been in charge when China’s market had crashed in mid-2015 at one point and the Shenzhen and Shanghai stock exchanges had lost around 40% of their value. Mr Xiao who had become the CSRC chair in March 2013 had faced criticism for mishandling the crisis. Under his supervision, the new circuit breaker mechanism of China which was designed to limit any market sell-off had been organized twice in January in reaction to the stock market drop though was then scrapped totally after it had cause additional panic.

Departure of Xiao – Not a Surprise

Zhang Kaihua, fund manager of Nanjing-based hedge fund Huyang Investment stated that the departure of Xiao was not a surprise after the recent stock disaster and this is a role which is vulnerable to public criticism since most of the Chinese retail investors are intended to lose money in such markets. Xiao and the CSRC had come under fire as Shanghai and Shenzhen stock markets of China had collapsed to about 40% within a few months last summer.

It was a further blow when a stock index circuit breaker that had been introduced in January to limit stock market losses had to be deactivated after four days of use since it was responsible for worsening a sharp selloff. The online media had labelled Xiao as `Mr Circuit Breaker’. According to Reuter’s reports, Xiao 57 had offered to resign after the `circuit breaker’ failure.A Shanghai-based analyst at Capital Securities Corp, Zheng Chunming had informed Bloomberg News that someone had to shoulder the responsibility after the suspension of the circuit breaker system.

Liu – Experience in Financial Sector

Mr Liu 54, had been the vice governor of China’s central bank, the People’s Bank of China, prior to becoming the chairman of the Agricultural Bankof China, which was the country’s third largest lender in 2012. On Weibo, the Chinese micro-blogging site, commentators recently played on Mr Liu’s name speculating if his tenure would bring about a `bull market’ of leave a `dead fish’ behind. Zhang stated that `Liu had a lot of experience in financial sector though there would be some policy uncertainty in the short term since it would take at least six months for the earlier banker to get used to his new role.

The managing director, sales trading at Haitong International Securities Group in Hong Kong, Andrew Sullivan said that removing Xiao had been mainly expected but by bring in the AgBank chairman; they are really not bringing anybody with a fresh market perspective but a political insider. Liu had spent major part of his career at the People’s Bank of China escalating to deputy governor, holding the post from 2006 till he left in late 2014 to head the AgBank.

IMF Cuts Global Growth Forecast As China Growth Slows

IMF Cuts Forecast of Global Growth

Recently the International Monetary Fund – IMF had cut its forecasts of global growth for the third time in less than a year, as the new figures from Beijing indicated that the Chinese economy in 2015, had been at its slowest rate in a quarter of a century. The IMF, to support its forecasts had cited a sharp slowdown in China trade and weak product prices which were hammering Brazil together with the other emerging markets.

 The Fund had forecast that the world economy would tend to grow at 3.4% towards 2016and 3.6% in 2017; both the years would be down by 0.2% point from the earlier estimates made last October. It has stated that policymakers need to consider means of bolstering short-term demand.

The updated forecast of the World Economic Outlook came as global financial markets were shaken by worries over the slowdown of China as confirmed by official Chinese data on Tuesday together with the plunging oil prices. IMF had maintained its earlier China growth forecasts of 6.3% in 2016 and 6.0% in 2017 representing sharp slowdowns from 2015.

Concern over Beijing’s Hold on Economic Policy

According to China’s report, growth for 2015 had hit 6.9% after a year wherein the world’s second biggest economy had suffered huge capital outflows, a slip in the currency as well as summer stock market crash. There was a rise in shares in Europeand Asia and the dollar gained after the China data had been released, while investors expected greater effort by Beijing to spur growth.

 There was concern over Beijing’s hold on economic policy which had shot to the top of global investors’ risk list for the year 2016 after drop in its stock markets as well as the Yuan fuelled worries that the economy would be quickly weakening.

The Fund also mentioned that a steeper slowing of demand in China seemed to be a risk to the global growth. The weaker than expected Chines imports as well as exports had been weighing heavily on the other emerging markets as well as commodity exporters.

Major Risk Aversion/Currency Depreciation/Dollar Appreciation

Maurice Obstfeld, IMF economic counsellor had mentioned in a videotaped statement that `they do not see a big change in the fundamentals in China compared to what is was seen six months ago though the markets are certainly very spooked by small events there that they find it hard to interpret’ He further added that the global financial markets seems to be overreacting to the oil prices drop as well as the risk of a sharp downturn in China and it was critical that China is clear about its overall economic strategy inclusive of its currency.

At a news conference Obstfeld had stated that `it is not a stretch to suggest that markets may be responding very strongly to rather small bits of evidence in an environment of volatility and risk aversion. The oil price puts strains on oil exporters, but there is a silver lining for consumers worldwide, so it is not an unmitigated negative’.

The IMF report states that continued market upheaval would also tend to help in dragging growth lower if it heads to major risk aversion and currency depreciation in the emerging markets. Besides this, other risk would comprise of further dollar appreciation and acceleration of geopolitical tensions.

China Stocks Recover, Asian Markets Breathe Sigh of Relief

Shares Recover in Asia- Chines Yuan Stable for 3rd Day

Trading seemed to remain uneven on the mainland stock market though shares recovered in Asia recently as the Chinese Yuan become stable for the third straight day. The Shanghai Composite Index SHCOMP, +0.17% increased 0.4% to 3028.04 though traded up and down as around 1% from its earlier close.

The main stock market of China dropped 5.3% last week amidst fear that the authorities of China seemed to be unable to stem the latest chaos in the financial markets as well as s slowdown in the larger economy. In another place, the Australian S&P/ASX 200 XJO, -O.14% dropped 0.1%, South Korea’s Kospi SEU, -0.21% was flat while Hong Kong’s Hang Seng Index HSI, -0.84% rose 0.2%.

Where the markets seemed to be closed for national holiday on Monday in Japan, the Nikkei Stock Average NIK, -2.71% tracked Monday’s regional losses dropping 2%. The Chinese Yuan sustained to steady on Tuesday but the central bank directed the slightly weaker currency. Previously, the Chinese authorities had fixed the Yuan at 6.5628 per U.S. dollar when compared with 6.5626,on Monday.

Offshore Currency Hits Strongest Level

China’s onshore Yuan that could trade 2% below or above the fix, had traded last at 6.5733 per dollar, weaker than 6.5695 at Monday’s close and the currency had reached a five year low of 6.5956 last week. Offshore currency had hit its strongest level from the beginning of the year on Tuesday and had trade last at 6.5705.

The offshore Yuan, which tends to trade freely, on late Monday, strengthened by around 1.5% to 6.5827 to one U.S. dollar when compared to the earlier close, which helps to contract the gap between the onshore and offshore Yuan to its tightest in two months. Traders are of the opinion that the offshore Yuan is strengthening since state-owned Chinese banks tend to buy the currency, which is an intervention by central bank of China.

This had limited the supply of the offshore Yuan, thereby tightening the liquidity and sending the rate at which the Hong Kong banks tend to lend Yuan to each other overnight, to a record high of 66.815%, on Tuesday. The rate soared to 13.4% on Monday from 4% on Friday.

According to Tommy Ong, head of Wealth Management Solutions at DBS in Hong Kong commented that `a lot of channels bringing money from onshore to offshore market has been blocked which also tends to contribute to the shortage of Yuan in Hong Kong.

Beijing Continues to Affect Global Market Mood

The regions’ stock gains Tuesday, tends to offer some absolution after the chaos of the earlier week caused by a faster than anticipated depreciation of the Yuan, when the currency had fallen 1.5%. The stock regulators also seemed to come in last week in order to calm the trading stating that they would do away with a circuit breaker which tends to aggravate selling and extend a ban on big shareholders from selling the shares.

However, China shares are presently roughly just 3% above their summer low on August 27 after a 3 month retreat wiped trillions of U.S. dollars from the marketplace, sparking a global selloff. Traders as well as analysts state that they are uneasy since Chinese authorities oppose with the prospect of increasing the capital outflows from the world’s second largest economy.

Market analyst at Brokerage IG, Bernard Aw,in a morning note had written that `for now, it may seem like the tweaks that Beijing makes will continue to affect global market mood.

The Chinese Yuan is Going Global

Yuan Part of Selected Basket of Currencies

According to the International Monetary Fund – IMF, the Yuan is now part of selected basket of currencies which till now included only the US dollar, the Japanese yen, the euro and the British pound. The Yuan would not generally be a part of the basket till September 2016 and this move would not be having any immediate influence on the financial markets.

This gesture seems to be a significant one and an indication that China has been progressing faster and further on the global financial stage. It has been predicted by Nomura Securities that by 2030, the Yuan would become one of the highest three major international currencies, `a peer to the US dollar as well as the euro, as the most used currencies in the world’.

However, it all depends on whether China tends to continue its financial reforms which have been one of the major reasons of the IMF’s verdict of including the Yuan in this choice basket currency. The IMF has informed that` the decision was an important milestone in the integration of the Chinese economy in the global financial system’. It would bring a more robust international monetary as well as financial system.

China – Important to the Global Financial System

Nomura has informed that though the share of yuan’s trading volumes in the international currency market tends to be small, less than 2% comparative to China’s share of global gross domestic product, its daily trading volume had tripled between 2010 and 2014 from $34bn to $120bn. This indicates that there is a lot more yuan on the markets.

For the last few years, China had been working towards this and it is amazing that their extremely managed currency seems fit to enter this special basket of freely traded currencies. Beijing considers the inclusion of the yuan as an indication of how important China has become to the global financial system.

The world’s second largest economy had to push through numerous changes in recent times inclusive of enabling foreign investors in accessing its stock markets, to make this happen. The main determinant as to whether the yuan gets to the next step will depend on how transparent China would be about the way it tends to run its financial market.

Chinese Official under Pressure/Scrutiny

Considering the slowing economic growth in China, analysts have accepted that there have been some disturbing signs which the government is trying to either roll back on some the key financial changes or that those in charge may not know what they are doing. The point is that earlier this year, the effective devaluation of the year had taken the markets by surprise and the People’s Bank of China was disapproved for mishandling the communication around how the events had unfolded.

Chinese officials are now under more pressure as well as scrutiny in getting their message right. Moreover the world would also be watching to see what type of influence more yuan would have in circulating in the international markets. Should the yuan tend to be a fixture of the global economy, there is a possibility that the rest of the world would become even more exposed to what Beijing does, which will make it more important that the leaders of China push through meaningful financial changes.

The Truth about China's Dwindling War Chest

China – The World’s Largest Creditor

China is considered to be the world’s largest creditor and the enormous money reserves of Beijing presently stands at a $3.6 trillion, which is still the leading owner foreign holder of US government debt. For over two decades, China, the world’s second largest economy had developed a war chest of foreign currency assets as a shield against the global winds.

However, on August 11, the decision taken to tweak its exchange rate regime to engineer the biggest single devaluation of the renminbi in 21 years has put forth the query of reserve depletion in severe aid. After deserting its peg with the US dollar for anachieveddrift, those in authority have been compelled to get involved on a huge scale to prop up the renminbi.

China had gone through reserves due to this failed devaluation, at an unmatched pace this summer wherein the reserves had dropped by $93.9 billion in August. This was the biggest monthly fall on record as well as the largest with regards to percentage terms since May 2012. This is set to continue for at least the remaining of the year. China would be slowly moving towards a much flexible exchange rate though not yet willing to feature a considerably weaker renminbi

Quantitative Tightening

As per UBS analysis, almost 70% of China’s reserve accumulation between 2005 and 2014 was from the country’s enormous present account excesses. The total reserves emaciated at $4 trillion in August 2014 had been on a steady decline since then.

As for the composition, UBS note that almost two-thirds around 62% was held in US dollar assets with about $1.27 trillion in the US treasury bonds. China had shifted from being a net buyer to a net seller of dollar assets to defend the value of the renminbi and this has given rise for concern that Beijing’s actions tends to have a stifling effect on the global credit as well as liquidity conditions.

This occurrence named as `quantitative tightening has been seen as concern when China can no longer play a part as the driver of global economic prosperity, at a time when the Federal Reserves is ultimately poised to begin normalising the monetary policy. In the midst of the trouble surrounding China’s prospects, economist tends to remain optimistic, speculating the fears of a dwindling war chest are possibly overdone.

China/Emerging Markets – Offload Foreign Currency Assets

Bumper reserves of Beijing, at $3.6 trillion, seem to be adequate in continuing to establish the currency and covering 20 months of imports of goods and services. All this, states, Tao Wang at UBS, `while the country continues running a current account surplus of over $300bn a year’.

Others consider that Beijing’s intensive reserve accumulation had been developed to confront precisely the kind of headwinds presently facing the country and are not surprising that the Politburo is now organizing them for the same purpose.

The authorities have also other various tools to fight off tighter monetary conditions. With regards to the impact on the growth of China on the rest of the world, the QT theory for intuitive appeal is still to be materialised in the form of rising bond yields with higher debt costs in the developed world.

China together with the other emerging markets could be offloading their foreign currency assets to handle their individual exchange rates though these may not be destined to drive up the bond prices according to economists.

China Economic Transformation Painful and Treacherous

China’s Economic Changeover – `Painful & Treacherous’

China’s changeover from an economy which is greatly dependent on manufacturing is a painful and treacherous one. China’s economic reformation has entered its most critical phase and authorities should deepen improvements in significant areas, eliminate barriers and restore the framework. Various challenges and tough times will be faced ahead.

This would create rare investment opportunities together with volatility and fluctuations and investors need to be positive and alert, looking for options to profit from the changes. China’s Premier Li Keqiang answered queries during a meeting on September 2, 2015, with foreign company executives at the World Economic Forum – WEF, in China’s port city Dalian and stated that China should embrace its global obligations with regards to combating climate change and that the country was already under huge pressure to meet emission reduction goals.

He admitted that the country is on track in achieving its target this year. He had informed the audience at the event that it was difficult to achieve 7% growth domestic product – GDP growth as China has targeted in 2015. However the nation’s new growth drivers as it tends to move from factories to a broader, service based economy would speedily tend to take shape.

Leaders Not Influenced by Short-Term Fluctuations

Li added that the Chinese economy has a bright future to what is known as the Summer Davos saying that `this is not unrealistic optimism’. Li further commented that China would be continuing in reforming its markets which included adopting an open and transparent capital market and relax restrictions on capital flow in the country.

He adds that over 10,000 new businesses are being registered in China each day and `sharing economy’ have been making new ways in creating growth.As the changeover takes place, leaders of China would not be influenced by short-term fluctuation in the economy, according to Li, who describes the company as shock-resistant and resilient.

His message reverberated to a statement which had been made by Finance Minister, Lou Jiwei earlier at the G-20 meeting in Ankara, Turkey wherein he had informed that China was not focused on monthly data. The position is at add with some of the economists who believe that what data is available from China, indicate that the world’s second largest economy is probably heading for a recession.

Risk of Falling into Deflation

Recession is usually demarcated as two successive quarters of a contraction in GDP. The influential Citigroup chief economists and a former member of the Bank of England’s interest rate-setting committee, Willem Buiter, have cautioned in a note that `there is a high and rising likelihood of a Chinese, EM – emerging market and global recession scenario playing out’.

Later on he also informed CNBC that the official data which had been provided by China was `largely meaningless’ and as per Citi’s own model, the economy of China had increased by 4 percent in 2014 and not at 7.3 percent since the number was studied down, by China earlier in the week.

The data that was released recently indicated that consumer inflation had accelerated in August when producers’ prices had fallen deeper into deflation. The CPI – China’s consumer price index increased to 2% in August from the previous year against expectations for a 1.8% increase from Reuter’s poll, following July’s gain of 1.6%. Chief China economist, Li-Gang Liu, at ANX stated that `as PPI remains negative for over three years, China is still facing the risk of falling into deflation’.

China Money Market Stabilises After PBOC Injections; Investors Eye More Easing

Medium-Term Lending Facility – MLF Eased Market

China’s main money rates had been mixed recently as the confidence of the investors in the market seemed to recover a bit followed by huge fund injections by central bank earlier this week. Liquidity situations seem to be tightened over the last 10 days though traders had informed that they are speculating on another major easing move soon, by the central bank.

One trader has commented at a city commercial bank in Shanghai, that that they have experienced a difficult week. Mostly it is impossible to purchase overnight repos in the first two days. The medium-term lending facility – MLF and injection achieved to ease the market and these movements relieved investors and major banks, Some of the major banks have begun providing funds

The outcome of China’s surprise yuan devaluation on August 11, market viewers are concerned of the investors moving quickly out of yuan assets and into dollars, forcing yuan liquidity as well as the money market. Constricted liquidity could have also been a factor in the large equity market sell-off.

Central Bank – Address Liquidity Concerns

Trailing after a partial recovery earlier in August, benchmark of China’s CSI 300 equity index had fallen down by 11% on the week by The volume weighted benchmark seven day repurchase agreement –repo rate, considered the best indicator of short term liquidity conditions in China, increased by 11 basis points from August 11 to August 20 eventually hitting 2.58% on Thursday afternoon.

The central bank moved to address liquidity concerns on Wednesday and Thursday by lending 110 billion yuan to 14 banks through it medium term lending facility as well as injecting 120 billion yuan in money markets through the operation of open market. Central bank’s open market injection this week of 150 billion yuan was the largest since early February.

The repo of seven day eventually responded on Friday with trading at 2.5475 percent late morning with a modern fall of 3.26 basis points from the earlier day’s closing average rate. However, liquidity was yet under pressure owing to client dollar demand as well as real borrowing rates remaining high further down the yield curve. Traders are anticipating easing measures to come up soon.

Push Down Long Term Rates/Dissuade Borrowers – Short Term Money

A trader had mentioned that the central bank is subtle and they have to take into consideration the potential yuan devaluation as well as economic pressures in the next half year and once the direct injections is not capable of offsetting the liquidity shortfall adequately, central bank would have to cut interest rates.

One day repo had gone up by 0.99 basis point at 1.82% against Thursday’s closing and the 14 day repo was up, 1.75 basis point at 2.71%. The Shanghai Interbank Offered Rate – SHIBOR, for same tenor increased to 2.5990 percent up 1.30 basis point from the earlier close.

 In order to decrease speculation and guide more funds in long term productive investment, central bank has been making efforts to push down long term rates and dissuade borrowers from easy short term money. However a shaky stock market tends to keep it under pressure in keeping short term rates low in order to support share prices.

Long term rates on safe haven government debt and policy bank bonds seem to have fallen severelysince equity modification in late June and yields on corporate debt have scarcely shifted.

Ground Zero'- China's Stock Market Crash Up Close in Shanghai

China Facing Plunging Stock Market

For years the Chinese Communist Party has been capable of keeping control on democracy disputes, protestors, the legal system as well as the military. However it has now been facing a more headstrong opponent in the form of a plunging stock market. Fast paced and invisible defiant market forces have confronted the efforts of the party led government in arresting the month long slide in Chinese stock market and if the same tends to continue, the fall in stock prices could slow the economy as well as weaken the faith in the party’s leadership and power, according to experts on China and economics.

 Three months back the state run People’s Daily had spoken that the increased stock prices were the `carriers of the China Dream’ and the confirmation of President Xi Jinping’s signature vision for what he calls, the great rejuvenation of the Chinese nation. However, what had been addressed as a bull market turned out to be a bubble burst. The main share index of Shanghai is down a third since its peak of June and trading in almost three quarters of listed shares were frozen due to limit declines or completely suspended and the securities regulators were also speaking on a mood of `panic’.

Stock Collapse – Reveals Impromptu Policy Makers

Since the stock market collapsed, the Chinese authorities instructed brokerages as well as insurers to buy, barred insiders from selling, tapping the nations’ sovereign wealth to pile up shares. Moreover, the government also raised patriotism blaming foreigners and arrested rumour mongers.

The Chinese stock collapse has been` a total revelation of how impromptu the policy makers could be in managing the transition to market-driven capital markets and that’s the question of the moment’ comments Daniel Rosen, a partner at the rhodium Group, which is a New York based economic advisory firm. He further adds, that `the question for tomorrow is whether that immaturity applies to their ability to regulate other aspects for the economic transition as well’.

Wary at the prospect of further losses, the Chinese government has taken action by agreeing to establish fund worth 120 billion yuan - $19.4 billion in purchasing shares in the largest companies that were listed in the index. Besides Beijing has also reduced the interest rates, relaxed restriction on the purchase of stocks with borrowed money as well as imposed a moratorium on initial public offerings.

Boom Powered by Retail Supporters

According to Financial Times, the recent dip in the Chinese stock market trailed an extraordinary bull period wherein the Shanghai composite increased by 149 percent through June 12 and the boom was powered by retail supporters who had been new to investing where more than 12 million new accounts had been opened on the stock exchange in May alone. Once controlled by the elites, the stock market progressively has now become a vehicle for China’s developing middle class.

Two thirds of the households who had opened accounts in the first quarter of 2015 had not even finished high school and the Equity market passion had spread to China’s universities, where 31% of the college students of the country had invested in stock, three quarters of which had used money that had been provided by their parents. Chinese have generally put their excess savings in housing, in recent years, however the uneven performance of real estate has prompted their interest in other direction for domestic investments.

Due to strict capital controls it has been very difficult for most of them to move money out of the country and more have turned to stock market. As per Bloomberg, more than 90 million people in China is said to have invested in equities, which is greater than the total membership in the Chinese Communist Party. The recent fall in prices has affected the fortunes of a huge number of people. Should this be a cause of worry for those outside China? Perhaps not.

China Stock Markets – Isolated

China’s stock markets are quite isolated due to a heavily combined global economy which is now the world’s second largest. Foreign investors tend to hold only 2% of all equities of China where equities account for around 5% of the overall financing. The aggregate bank deposits of China are around $2.1 trillion, providing a buffer against huge market fluctuations.

Moreover, the long bulls run which led the June’s collapse had not faded totally and the Shanghai composite is yet up by 20% since January 1. Nonetheless, these types of volatility in the world’s second largest equity market props up questions about the overall health on the economy of China. The GDP increased by 7% during the first quarter of 2015, which was its weakest mark in six years, while stimulus measures implemented by the government is yet to reverse this slide. As per Chief Economist at Deloitte, Ira Kalish, `China’s slowdown already had consequences beyond its borders’.

He has written in ChinaFile that `already the halving of China’s growth has wreaked havoc with global commodity markets and has negatively influenced growth in those East Asian economies that are a vital part of China’s manufacturing supply chain. It could be argued that the imbalances in China’s economy thus represent more of a risk to the global economy than the current and much discussed situation in Greece.

Russian And Chinese Financial Markets

Chinese Yuan and Russian Ruble have recently experienced major setback, but for very different reasons. The announcement of the Chinese government to let the Yuan move in a range of plus or minus 2 % has created a surprise in the markets. In the days following this statement, the Chinese currency has indeed dropped to an 11-month low against the dollar.

In reality, this decision was expected, since the fall of 2013, the Governor of the Central Bank warned of the upcoming expansion of the trading band of the Yuan. It is true that the sudden depreciation of the early days, especially against the dollar, was fairly quickly resolved. If the depreciation that proves the strongest since 1994, it remains in proportions not only measured but controlled by the Central Bank. Thus, beyond the announcement effect, the markets do not seem to feed strong concern about the evolution of the Yuan and even less about the health of the Chinese economy.

Especially since this return to flexibility of the Yuan down as well as up, is precisely to further solidify the foundation of the Chinese economy. China has embarked on a process of re balancing of growth towards domestic demand as well as a consolidation of public finances. According to him, any measures to boost the economy also helps to reassure people whose financial and social demands are constantly increasing. It is also the objective of a sound and sustainable growth which explains the choice of the Chinese Government to allow a large company to go bankrupt very heavily subsidized renewable energy sector. The company Chaori could therefore meet its debts to its investors. It will clean up some of its financial system, subject to excess debt and opaque practices.

The Chinese government has chosen not to support non-viable enterprises, let alone those who receive large subsidies, in order not to increase the burden of its banks and impose market logic. Until then, the belief that the state would not let such events happen has led to excess in the amount and nature of funding. The latter had to make a choice between business support and support for local communities, also very involved in the shadow banking. Cannot decently leave recent bankruptcy, the Government has favored the establishment of a strict control with the creation of a Court of Auditors Chinese to limit debt and achieve sustainable deflation of this bubble harmful healthy growth.

This is however not the case of the Russian currency, battered since the beginning of the Ukrainian crisis. If the volumes traded in rubles remain incomparably lower than those on the Yuan, the fact is that political tensions between Ukraine and Russia had the effect of attracting new investors, including individuals. He was so good omen to play down a currency bearing the brunt of foreign policy of President Putin. Despite the intervention of the Central Bank of Russia on the changes announced on March 3 despite taking opposite positions past , the depreciation of the Ruble continued until mid- March Rubles against the Euro.

Recall that the currency had already experienced a wave of mistrust in January, as many is emerging market currencies. Since the only vain and the Russian Central Bank intervention the ruble is evolving freely. But not necessarily down. The evolution of the situation in Crimea, who voted in a referendum for unification with Russia, indeed helps to stabilize the ruble since the weekend of March 14. The Yuan and the Ruble does not seem more or engaged in a clear trend but subject to strong price fluctuations under the influence of many political and economic events. Rigorous monitoring of current is necessary for investors who want to try their luck.

Housing Bubble is going to burst in China!

For the last few months the financial analysts fore saw a financial crunch in China and their predictions were come to alive and now China is facing the beginning of the credit crunch now and it will accelerate further. According to the sources in China, most of the real estate developers owe billions of Yuan from the Banks and individuals which leads in turn to Bankruptcy.

Usually the defaults to the bank loans and bankruptcies are quite common but the quantity of amount borrowed as loan by the realtors in China caused the panic. The Chinese News service reported that Zhejiang and Xingrun real estates over 2.4 billion to Banks and 1.1 billion Yuan to private investors. Subsequent to these the real estate sector of the Shanghai stock exchange fell down by one percent

While some analysts are trying to reassure by stating that there will be no domino effect, it certainly begs to believe, but nothing is less certain ... Others point out, however, that real estate developers active in the Zhejiang region face serious difficulties last year, battered by intense speculation, including Ningbo and Wenzhou, two cities that have seen property prices strongly fall.

China's real estate market is showing signs of slowing since the end of last year, mainly because of measures taken by the authorities to contain prices. Many experts also believe that the failure to pay Chaori Solar, occurred on March 7, is related to the Chinese authorities' desire to impose greater rigor in the functioning of credit channels.

Another notable element according to banking and industry sources, many banks have reduced up to 20% of their loans to certain industries. They are worried due to the financial health of these sectors, which tends to be oversized in China.

In September 2013, the Chinese central bank had said for his part that the loans granted in August in the Middle Kingdom had almost doubled in a month, reaching 1.570 billion Yuan. But even more serious element is only 45% of them are bank loans and the majority of loans are informal credit (shadow banking), which already concerned at the highest point to the analysts.

In June 2013, already, the rating agency Fitch indicated that a bursting of a credit bubble unprecedented in the history of the modern world could explode in China.

The Chinese interbank market, on which financial institutions lend money daily , was facing a severe shortage of liquidity,. Chinese Central Bank had injected 17 billion Yuan (2.8 billion Euros) in the banking system.

In February 2013, we had already talked about our fears of analysts. These are alarming excessive growth of bank loans to the private sector, and the loans outside the formal sector were more and more and went up and difficult to repay. These lead to the high level of bad loans held by Chinese Banks.

Hence the Monetary authorities and Chinese policies now wish to terminate the very rapid credit growth in recent years. A situation that pushes the government to "clean up" the banking market, closing the valve to riskier institutions, a policy may lead some into bankruptcy.                                        

                                                                                                     (to be continued)

China Now Issues Bonds In Euros

Here is hot news that should displease the United States and more to the Fed (U.S. Federal Reserve) and Janet Yellen, its new boss. The China is now on the market for Euro-denominated bonds. The dollar God has longer to behave them. In late September, the oil giant China National Offshore Oil Corporation (CNOOC) has raised € 500 million within a short span of seven years and closely followed by their competitor Sinopec, with 550 million Euros in the same period.

 Experts believe that it is too early to identify a trend in the bond market; the trend is expected to grow according to them. They expect indeed that, in order to diversify their sources of funding Chinese groups continue to try to issue in Euros, and especially the Chinese domestic market does not seem big enough to meet its needs. Encouraging data, the two programs have met with strong demand; some even consider it quite exceptional.

The issue of Sinopec will thus attract a total of 279 investors demand to € 3.3 billion. Another factor to consider: the U.S. fiscal crisis will have prompted investors to turn to the European markets, while Old Europe can regain its appeal as a safe haven. Since the end of 2010, Chinese companies have flooded the credit markets with a dramatic speed.

In the space of a few years or a few months, China has become the first issuer of bonds in foreign currency, surpassing Korea with an average of $ 25 billion. According to Yves Jacob; in 2010, China raised less than $ 5 billion per year, which is an insignificant amount across international markets. For 2013, expects that will up about $ 100 billion. The current context of liberalization of the Chinese economy to alleviate the exchange control system will also gradually open the door to Chinese companies for a program on international markets while now offering the ability to repatriate funds in China.

 Element which should accelerate the movement signed early October a currency swap agreement between the European Central Bank (ECB) and the People's Bank of China, for a period of three years, including facilitating business transactions. The agreement, called “swap “concern more than 350 billion Yuan, 45 billion Euros. What is the third largest amount behind Hong Kong (400 billion Yuan) and South Korea (360 billion Yuan), largely below the agreement signed by the Bank of England (200 billion Yuan) in Paris. Through this agreement, banks in the Euro zone may obtain Yuan in exchange for Euro, China could in turn receive Euros in exchange for Yuan.

China lending outside the banking sector under control

While loans in China outside the banking sector have increased in recent months - investors shunning banks - the chairman of the Banking Regulatory Commission (CBRC), said Liu Mingkang the risks associated with such loans remained "manageable". History of secure markets or otherwise attempt to limit such practices as implying they could be riskier than it seems?

Remember, Chinese banks have been submitted last year to restrictions on the volume of new loans. In early September, the rating agency Fitch said it could lower the sovereign rating of China in the next two years. Reasons: the heavy debts of the Chinese banking sector, the latter having provided massive loans in recent months.

But outside the banking sector, all is not rosy: credits "parallel" have indeed conduits some borrowers into bankruptcy, particularly in the area of Wenzhou (East), which has about 400,000 companies. In recent months, more than 90 patrons fled the city in debt and two suicides were to be deplored the dead who are forced to face repayments to their creditors. Analysts said at the national level, the informal credit sector would weigh 4,000 billion Yuan (454 billion), about 8% of outstanding bank loans.

In early July, the rating agency Moody's had indicated that for its public debt in China amounted to 36% of its Gross Domestic Product (GDP), taking into account the share of the debts of local governments for which Beijing assume direct responsibility. A few days earlier, the National Audit Office indicated that the debts of the provinces, municipalities and districts in China amounted to 27% end of 2010 China's GDP, representing a total of 1.163 trillion Euros. The same office was, however, insisted that 63% of this debt would be repaid through revenue budget.

But some of these claims, considered doubtful threaten the banking system so that the Credit Suisse sees the same "time bomb" the most dangerous of the Chinese economy. Much less "alarmist" shall we say politely, the Chinese government estimates for its public debt to about 20% of GDP. But it does not include in its calculation the financial elements of local governments, which are however not allowed to borrow directly.

Now where the rub is that they have borrowed huge amounts from the global financial crisis, via means of ad hoc structures called "financing platforms" or PFL. But according to the National Audit Office, the "ability to pay is low and faces potential risks in some areas and in certain industries." Indeed, in a snowball effect, some local governments have had to make new loans ... to repay debts previously contracted, also depends heavily on land sales to meet their deadlines. According to the auditors of governments of China, 108.3 billion Yuan (11.8 billion) of loans were made or used fraudulently, the money ends up in Banks real estate or stock markets.
A bit worried, Moody's said in turn that the Chinese banks lent 8,500 billion Yuan (905 billion) from a total of 10'700 billion Yuan (1.163 trillion Euros) to local governments ... a situation that causes a high risk exposure. "These debts existed before the global financial crisis, but they quickly accumulated over the past two years while investment by local governments has been used as one of the main tools" to revive the economy, adds Moody's.