China Denies New-Year Celebrations

Narendra Modi and Global Investors had a similar fate in year 2015 and both would want to forget it as a nightmare. Narendra Modi lost two key state elections, failed to implement key reforms and remained clueless on foreign policy on Pakistan. Global investors failed to generate risk-adjusted returns despite the ultra-eased monetary policy adopted by major central banks. Global markets continued to struggle against weak consumer demand, falling commodity prices, Greece Drama, US FED hike & Chinese crisis.

Unfortunately, Year 2016 did not start well for global investors as Chinese equities crashed 7% on the very first day. One of the key reasons of recent sell-off in Chinese markets has little to do with on-ground condition, which remained fragile, and more to do with steps taken by Chinese authorities. Chinese authorities experiment with index circuit failed as Chinese markets hit circuits within first 20 minutes of trading, forcing authorities to scrap it and extending the ban on sale of share by large share-holders. While taking aggressive steps to stem the fall Chinese authorities must understand that these steps spoof the investors lead to uncertainty, which is dreadful for markets.

Perhaps the only good news for Chinese Yuan in last couple of weeks would be that Zimbabwe Central Bank, which has been fighting against hyper-inflation, has official adapted Chinese yuan as its domestic currency. Off-shore Chinese Yuan spiked to 6.75 levels as Chinese manufacturing PMI slipped below 50 levels, indicating contraction in economic activity and service PMI remain mildly above 50 Mark at 50.2 levels. December’s trade balance numbers, which are scheduled to release on 13^th Jan, will be acid test for Chinese equity markets and Yuan.

On currency front also Chinese authorities have been forced to take aggressive steps as spread b/w off-shore and on-shore Yuan spiked to more than 100 pips. PBoC has intervened heavily in both off-shore and on-shore markets to narrow down spread levels and it has banned selected foreign banks from trading in Chinese Yuan. Interestingly, PBoC has been successful to create artificial shortage of CNH, leading sharp increase in borrowing cost. The borrowing cost in off-shore Chinese Yuan CNH spiked to 57% making it very costly to short Chinese Yuan.

At-last, One should not forget that on-going Chinese crisis is a structural problem, which just can-not be resolved in short term. 

Source : Bloomberg, People Bank of China