The word dollar didn’t even come up when the Bundesbank signed the agreement with the People’s Bank of China. President Xi Jinping and Chancellor Angela Merkel looked on. It was serious business. Everyone knew what this was about. No one ha…
As a confirmation of a significant downward adjustment to China’s growth (discussed here), a battery of economic reports this morning all came in materially below expectations.
1. Fixed asset investment:
2. Industrial production:
3. Retail sales:
Clearly there is a seasonal component to these indicators, which may have been impacted by the New Year’s holiday. But on a year-over-year basis much of that should have been reflected in the forecasts.
BW: – “The fairly dramatic slowdown is unusual in Chinese economic history of the last decade” and the figures were “shockingly weak,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong. “It points to a major deceleration of momentum in the beginning of 2014,” wrote Kowalczyk in a research note.
Not surprisingly, over the past few days the equity market has been reflecting these worsening fundamentals.
|Large cap PRC equities ETF (ticker: FXI) – down 6% in 5 days|
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The thesis of China facing weaker nearterm economic growth is widely accepted at this point. Moreover, the slowdown in the nation’s manufacturing sector this month (see chart) has provided some support for this view.
China reduced its holdings of treasuries in December by the largest amount since 2011, raising some eyebrows among economists and debt investors. The sentiment among analysts is that this reduction is related to Fed’s taper, which of course doesn’t bode well for treasuries in the near-term.
Bloomberg: – “The Chinese move to sell suggests central banks are becoming more wary of taking duration risk now with the Federal Reserve firmly into the tapering process,” said Aaron Kohli, an interest-rate strategist … at BNP Paribas … “If China continues to sell again in the next month or two, than more worries will arise as to who will buy the country’s debt.”
What’s interesting however is that China’s treasury position “adjustments” throughout last year seem to follow treasury prices (inverse of yields). This is akin to a retail investor buying high and selling low – chasing the market with everyone else. While analysts often assign some degree of sophistication to China’s investment strategy, the positioning in the chart below resembles a fairly incompetent trading behavior, an unsuccessful attempt to “time” the market.
|Source: The US Treasury|
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As the emerging markets contagion spreads, the BRIC nations are coming under increasing pressure in the capital markets. As discussed previously Brazil and Russia are witnessing new multi-year/record lows in their currency valuations. The Indian rupee is still above the all-time low (last summer), but at 63.5 rupees to the dollar, we are not far from that record.
Germany remains the euro area’s powerhouse, with manufacturing expansion there accelerating further, driving up the aggregate measure.
The U.S. dollar has been the world’s de facto reserve currency for almost 90 years.
But this financial dominance may be nearing its end.