<p><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"><p class="source"><span>Reuters</span></p></div><p></p></div></div>In the early days of 2016, volatility in China has dominated global markets.</p><p>That means that to stay ahead, US traders have to start looking at something new when they wake up: the spread between the onshore and offshore yuan (or renminbi).</p><p>To recap, the onshore yuan, or<span class="s1"> CNY, is set by the government, while the offshore yuan, or CNH,</span><span class="s1"> is set by the market.</span></p><p>We know that understanding the yuan is crucial because weakness in the yuan led Chinese stocks - and subsequently global stocks - down all of last week.</p><p>It's becoming increasingly clear that a depreciating yuan means volatility.</p><p>Global foreign-exchange markets are now more <a href="http://www.businessinsider.com/chinese-yuan-driving-global-currencies-2016-1">correlated with the renminbi than with the dollar.</a></p><p>At the same time, though, understanding the fair value of the yuan has become more difficult over the last three months. The old relationship with the dollar is breaking down, and the Chinese government has been doing everything it can - in word and deed - to make the yuan seem stable.</p><p>Watching the spread between the onshore (CNY) and offshore (CNH) yuan is one of the few ways left for traders to get an understanding of the free-market value of the yuan.</p><p><span><span>"[O]ne of the best risk indicators for markets is the spread between onshore and offshore CNY-CNH currencies in China. It helps investors measure the speed of the devaluation and as China starts to cheat, this warning sign can be seen in the spread," <span>Grant O'Connor, a Bear Traps analyst, said in a recent note.</span></span></span></p><p><span><span><span>"Meaningful increases in the CNY-CNH spread have occurred </span><strong>before</strong><span> every significant </span><span>surge</span><span> in US equity volatility in the last 9 months," the note said (emphasis ours).</span></span></span></p><p>In other words, this spread has turned it into something for the entire world to trade on.</p><h2><div class="KonaFilter image-container display-table click-to-enlarge"><div><div class="image on-image"><a title_source="Bear Traps" title_caption="The Vix has spiked whenever the CNY-CNH spread widens." class="zoomin" href="https://static-ssl.businessinsider.com/image/56954442e6183efa428b5ddb-960/screen shot 2016-01-12 at 1.15.09 pm.png"><span class="sprites click-to-enlarge-icon" title="Click to enlarge"></span></a><p class="source"><span>Bear Traps</span></p><p class="caption">The Vix has spiked whenever the CNY-CNH spread widens.</p></div><p></p></div></div></h2><h2>Saw it coming</h2><p><span>There are a bunch of reasons why the government wants to keep the yuan stable, or at least manage the pace of the devaluation. </span></p><p><span>Last fall, it became an official World Bank-designated global-reserve currency. For that, it needed stability. After it got the designation, the yuan started to slip down.</span></p><p><span></span>Chinese officials saw this turmoil coming. That's why, at the end of 2015, they announced that they would de-peg the yuan from the dollar, which was appreciating against the yuan.</p><p>Instead, China said that it would start measuring the yuan against a basket of currencies - one with a lower value than the dollar. Consider this a kind of unofficial devaluation - especially since we don't know what is actually in the basket.</p><p>At the same time, in order to keep yuan-holders from selling as their currency loses value (outflows), the Chinese government has said that the yuan won't fluctuate too much. In December it spent $108 billion of its about $3 trillion in reserves to make sure that it didn't.</p><p>"Giving more consideration to a basket of currencies means the RMB's [yuan] value will be kept basically stable against the whole basket," said Ma Jun, chief economist of the People's Bank of China's research bureau.</p><p><span>"That will be the keynote of the yuan's exchange rate formation mechanism in the foreseeable future," he said.</span></p><p><span>So to review: The depreciating yuan has been de-pegged from the dollar and pegged to an unknown basket of currencies with an unknown value that reflects where the Chinese government should set the currency every day.</span></p><p><span>Not a lot of concrete answers there.</span></p><p><span><span>That is why the CNH has become so important to traders. It is more controlled by the market and, as such, reflects the outside world's view of the yuan's value.</span></span></p><p><span><div class="KonaFilter image-container display-table click-to-enlarge"><div><div class="image"><a title_source="Investing.com" title_caption="Yuan/dollar over the last month." class="zoomin" href="https://static-ssl.businessinsider.com/image/56954c5be6183e23008b8b9a-960/screen shot 2016-01-12 at 1.55.00 pm.png"><span class="sprites click-to-enlarge-icon" title="Click to enlarge"></span></a><p class="source"><span>Investing.com</span></p><p class="caption">Yuan/dollar over the last month.</p></div><p></p></div></div></span></p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/inventors-killed-by-inventions-titanic-marie-curie-hang-glide-2016-1">7 inventors who were killed by their own inventions</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="VsMGYwMDE6fvg6irQt8i2KueCbxtIwrO" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

This is the first thing investors should look at every morning

<p>2015 was the year of the dollar.</p><p>The greenback climbed 10.4% on a trade-weighted basis on the prospect of an improving <a href="http://www.businessinsider.com/us-gdp-q4-2015-second-estimate-2016-2">US economy</a> and the belief <a href="http://www.businessinsider.com/federal-reserve-rate-hike-december-2015-2015-12">the Federal Reserve would raise rates</a> for the first time since 2006.</p><p><div class="KonaFilter image-container display-table"><div><div class="image"><p class="source"><span>FRED</span></p></div><p></p></div></div></p><p>The dollar was especially strong against emerging market currencies, thanks to the presumed Fed rate hike(s) and that the slowdown of China's economy brought increased volatility to its currency, the renminbi.</p><p>While some EM currencies like the Indian rupee and Indonesian rupiah lost close to 5% others like the Mexican peso and Turkish lira lost 20% or more. </p><p><div class="KonaFilter image-container display-table"><div><div class="image"><p class="source"><span>Andy Kiersz / Business Insider, Bloomberg data</span></p></div><p></p></div></div></p><p>But, HSBC thinks things are about to turnaround for emerging market currencies, at least in the near-term. The firm attributes this to two factors:</p><p><strong style="color: #222222; line-height: 1.5em;"><span style="line-height: 1.5em;">1. An environment supportive of risk assets. </span></strong><span style="line-height: 1.5em;">T</span><span style="line-height: 1.5em;">he US yield curve is flattening as economic data improves. </span><span style="line-height: 1.5em;">This suggests a solid growth environment during a period when it looks like inflation will stay low. </span></p><p><span style="line-height: 1.5em;">HSBC says this "Goldilocks" scenario for the US economy will benefit EM through low funding costs, and by providing a backdrop that is supportive for global growth.</span></p><p><span style="line-height: 1.5em;"><div class="KonaFilter image-container display-table"><div><div class="image"><p class="source"><span>Andy Kiersz / Business Insider, Bloomberg data</span></p></div><p></p></div></div></span></p><p>Additionally, Fed Fund futures imply a less than 50% probability of a June rate hike, meaning a sudden rise in the cost of capital and an ensuing shock to EM currencies is deemed less likely.</p><p>At the same time, other central banks have recently cut rates (<a href="http://www.businessinsider.com/mario-draghi-european-central-bank-cuts-deposit-rate2016-3">ECB</a>, <a href="http://www.bloomberg.com/news/articles/2016-01-21/malaysia-cuts-bank-reserve-ratio-keeps-benchmark-rate-steady-ijo3dgir">Malaysia</a>, and <a href="http://www.businessinsider.com/r-new-zealand-central-bank-surprises-market-with-rate-cut-2016-3">New Zealand</a> to name a few), helping offset any tightening bias that might've been created by the Fed, according to HSBC. </p><p><strong>2. Markets are beginning to accept China's slowdown.</strong> In its recently released growth target, <a href="http://www.businessinsider.com/china-has-softened-its-growth-target-2016-3">China's National Peoples Congress</a> said it expects the Chinese economy to grow at a rate of between 6.5% and 7% in 2016.</p><p>While that's down from the 7% target in 2015, it's still pretty good in a world where growth is hard to come by.</p><p>Of course this is great news, if true, for emerging markets as they continue to see exports to China grow. </p><p><div class="KonaFilter image-container display-table"><div><div class="image"><p class="source"><span>HSBC</span></p></div><p></p></div></div></p><p>Additionally, traders are becoming less worried about a dramatic <a href="http://www.businessinsider.com/china-currency-devaluation-just-getting-started-2016-2">devaluation of the renminbi</a>.</p><p>In late 2015, the spread between onshore (CNH) and offshore (CNY) rates saw a dramatic widening, causing many to speculate a big devaluation of the currency was coming.</p><p>But that didn't happen, and now the spread is back near parity, suggesting things have calmed down, at least for the time being. </p><p><div class="KonaFilter image-container display-table"><div><div class="image"><p class="source"><span>HSBC</span></p></div><p></p></div></div></p><p>So where does HSBC see opportunity?</p><p>Recent market chatter has been centered on the end of the dollar's bull run.</p><p>This means now is the time to look at long EM versus the dollar for a trade. The firm likes carry currencies (<span class="tL8wMe EMoHub" id=":89.co">high interest rate currencies are carry currencies because you collect interest by owning them)</span> where the underlying fundamentals appear to be improving.</p><p>For that reason, the Indian rupee, Indonesian rupiah, and Turkish lira look attractive, HSBC says.</p><p>Finally, the bank thinks the Mexican peso looks attractive because of the Bank of Mexico's commitment to keeping its currency strong.  </p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/the-quality-meats-steak-marinade-recipe-grilling-2016-2">Try this renowned steakhouse marinade recipe for the ultimate steak</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="ljY283dzrwy86LXIDm9OQszSTUuB2o49" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

Emerging market currencies got trounced in 2015 - and HSBC thinks now is the time to buy

<span>India's third-largest private sector lender <keyword id="6355975" type="CITY" weightage="80" keywordseo="Axis-Bank">Axis Bank</keyword> is raising $500 million by selling bonds with five-and-a-half-year maturity. According to an executive of <keyword id="127691" type="CITY" weightage="80" keywordseo="Standard-Chartered-Bank">Standard Chartered Bank</keyword>, a banker to the issue, the bond is expected to be priced 195 basis points over the five-year US treasury, which was trading at about 1.58% on Monday. One basis point is 0.01 percentage point. </span>
<br /><br />

	"It is a $500-million bond issue and the book has been oversubscribed four times," said the executive.
<br /><br /> <keyword id="55717" type="COMPANY" weightage="80" keywordseo="Standard-Poor">Standard &amp; Poor</keyword>'s Ratings Services assigned 'BBB-' long-term issue rating to a proposed issue. The rating on the notes reflects the long-term counterparty credit rating on the bank. "The proposed notes will constitute direct, unconditional, unsecured, and unsubordinated obligations of Axis Bank. They shall, at all times, rank at par among themselves and with all other unsecured obligations of the bank," the rating company said. <br /><br /> "It is to be seen if banks would swap the dollar funds raised overseas into rupee. Most of the issuers could keep the proceeds in dollar form to fund their overseas branches and Indian corporates to expand offshore," said Harihar Krishnamoorthy, head treasurer at <keyword id="327299" type="COMPANY" weightage="80" keywordseo="FirstRand-Bank">FirstRand Bank</keyword>. <br /><br /> <keyword id="6653" type="CITY" weightage="80" keywordseo="ICICI-bank">ICICI Bank</keyword>, recently, raised about $600 million through Renminbi-denominated notes at a coupon of 4.2%. (Image: Axis Bank)

Axis Bank To Raise $500 Million Via Bonds

<p><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"><p class="source"><span>Reuters/China Photos ASW</span></p><p class="caption">The CEOs of eight small start-ups hit the bell to signal the start of the new board for small start-ups at the Shenzhen Stock Market in southern China June 25, 2004.</p></div><p></p></div></div>Brace yourselves.</p><p>China's about to open its "<a href="http://www.reuters.com/article/us-china-hongkongshenzhen-funds-idUSKCN10S0O5">Wild West</a>," tech-heavy stock market to the world.</p><p>Last Friday, Beijing announced that the Shenzhen-Hong connect will go live on December 5. The link will give international investors access into China's smaller, tech-heavy Shenzhen exchange.</p><p>Authorities toyed with the idea of launching the link last year, but the plan was delayed following the August 2015 market crash - back when China's currency, the renminbi, <a href="http://www.businessinsider.com/china-just-devalued-its-currency-2015-8">was devalued</a>.</p><p>The Shenzhen connect follows the November 2014 launch of the Shanghai-Hong Kong stock connect, which allowed international investors to access China's larger Shanghai exchange.</p><p>Notably, the Shenzhen exchange is a bit of a wild card and is the second busiest in the world - despite being only the 7th largest. Most of the firms listed are small and unknown and their overall valuations are higher than those in Hong Kong, <a href="http://www.reuters.com/article/us-china-hongkongshenzhen-funds-idUSKCN10S0O5">making them more expensive</a>. Plus, the exchange is known for speculative trading.</p><p>China's cabinet originally approved plans for the Shenzhen link back in August, although, <a href="http://www.reuters.com/article/us-china-hongkongshenzhen-funds-idUSKCN10S0O5">at the time</a>, analysts were not expecting a huge inflow of funds.</p><p><span></span><span>The recent weakness of the yuan versus the US dollar "may temporarily deter foreign (dollar-based) investors' interest in the A-share market on FX loss concerns," a<span> </span><span>Goldman Sachs team led by Kinger Lau wrote in a note. "Also, Shenzhen A-shares are relatively less covered by foreign brokers than those in Shanghai, which is a key input into the international investors' stock selection process."</span></span></p><p><span>"The Connect will benefit Hong Kong stocks more, because more money will flow southward due to yuan depreciation worries, and the huge discount Hong Kong small-caps enjoy," David Dai, a Shanghai-based investors director at Nanhai Fund Management Co. </span><a href="http://www.reuters.com/article/china-stocks-hongkong-close-idUSZZN2NVZ00">told Reuters</a> on Monday<span>.</span><span> </span></p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span><a href="http://markets.businessinsider.com/index/CSI-300">Markets Insider</a></span></p><p class="caption">The "Wild West" Shenzhen exchange.</p></div><p></p></div></div></p><p>An interesting angle to the Shenzhen connect's inauguration is the timing: the link will be going live at a time when China struggles with <a href="http://www.businessinsider.com.au/report-china-is-tightening-controls-to-limit-capital-outflows-2016-11">ongoing capital outflows</a> and a weaker renminbi.</p><p><span>"There are undoubted pressures on the capital account as the leakage from outflows caused by both a strong dollar and expectations of further RMB weakness, so the authorities are probably quite keen to open access to its capital markets through the connect and similar to the reason why the yuan's assimilation into the <a href="http://www.businessinsider.com/chinese-yuan-officially-joins-the-imfs-sdr-2016-10">IMF's SDR</a> occurred so quickly," a Jefferies team led by global equity strategist Sean Darby wrote in a note.</span></p><p>Notably, there will be a daily quota on the Shenzhen link: international investors can trade up to 13 billion yuan per day of A-shares in Shenzhen stocks, while mainland investors can trade up to 10.5 billion yuan per day of Hong Kong stocks.</p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Societe Generale</span></p><p class="caption">Greater interest Southbound (into Hong Kong) than Northbound (into China.)</p></div><p></p></div></div></p><p>Zooming out for the bigger picture, the decision to move forward with the Shenzhen exchange is seen as another play by China to slowly intermingle with global markets and to further advance its currency on the international stage. But it also happens to follow <a href="http://www.businessinsider.com/a-massive-blow-to-chinas-self-esteem-2016-6">MSCI Inc.'s June decision</a> to delay including China's domestic equities in the <span>MSCI Emerging Markets Index</span> for the third time. </p><p>At the time, Remy Briand, MSCI Managing Director and Global Head of Research, said that<span> China had taken significant steps in "</span><span>addressing the remaining accessibility issues [but] international institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China A shares market before its inclusion in the MSCI Emerging Markets Index."</span></p><p><span>In other words, investors were still uncomfortable putting their money to work in China, at least in regards to  concerns about accessibility.</span></p><p><span>And now, the Shenzhen connect could bolster the argument for including China's A-shares on global equity benchmarks, a <span>Goldman Sachs team led by Kinger Lau argued in a note.</span></span></p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Goldman Sachs</span></p></div><p></p></div></div></p><p>It's worth adding that there are differences between the Shenzhen link and the Shanghai link. While the Shanghai exchange is home to <a href="http://www.wsj.com/articles/china-aiming-to-launch-shenzhen-stock-trading-link-mid-december-1472113933">state-owned-enterprises</a> - or SEOs-, financials, and energy, the Shenzhen is tech-heavy, and includes consumer-related and healthcare companies. (As an interesting side note: this somewhat mimics China's agenda of moving from and investment-based economy to a consumption-based one.)</p><p>This "could generate greater enthusiasm from international investors," argued a Societe Generale team led by Frank Benzimra, the head of Asia Equity Strategy, in a note to clients. Moreover, "there are fewer dual listed companies, which were not attractive value propositions at the time of the Shanghai connect launch due to the premium at which these stocks traded versus their offshore peers."</p><p>However, <a href="http://www.nytimes.com/2016/11/25/business/dealbook/china-hongkong-shenzhen-connect.html">other analysts remain skeptical</a> that the move will actually grab investor attention in light of China's overall economic slowdown. Plus, the fact that the exchange is known for speculative trading has kept some investors feeling "wary," according to the <a href="http://www.wsj.com/articles/investors-gun-shy-as-china-pulls-trigger-on-shenzhen-link-1480251252">Wall Street Journal's Anjie Zheng</a>.</p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/how-to-cook-scrambled-eggs-anthony-bourdain-2016-11">The best way to cook scrambled eggs - according to Anthony Bourdain</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="psN3hvNzE62N5ruLSbkeV_x0ABLB78lG" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

China's about to unleash its roller-coaster tech market on the world

<p><div class="KonaFilter image-container float_right"><div class="image on-image"><p class="source"><span>AP Photo</span></p></div><p></p></div>The Chinese yuan continued its decline against the dollar, hitting 6.1259 yuan for a dollar on Wednesday. </p>
<p>The People's Bank of China (PBoC) fixed the <a href="http://www.chinamoney.com.cn/en/index.html">yuan at 6.1192 per dollar</a>, according to the China Foreign Exchange Trading System.</p>
<p>After rising 3% against the U.S. dollar in 2013, the onshore yuan (CNY) weakened against the greenback last week. The offshore yuan (CNH) has also  weakened.</p>
<p>This comes on the back of efforts by China's central bank, the People's Bank of China (PBoC), to curb yuan appreciation, forcing many investors out of bets that the currency will continue to rise.</p>
<p>Societe Generale's Wei Yao pointed out the yuan has the two key qualities of a carry trade 1. High interest rates onshore; 2. A trend of steady appreciation.</p>
<p>While the former may have been driven by the Federal Reserve's monetary policy, she points out that the appreciation is something the PBoC has a handle over.</p>
<p>She also doesn't think the yuan will depreciate too much further, especially if the offshore yuan (CNH) continues to hover below the CNY, as that would be a sign of outflows. In this case she thinks the central bank "will most likely choose to stabilize the yuan again."</p>
<p>Yao also points out that even as the yuan appreciated, China has continued to add Forex reserves even as it has publicly said that it has enough reserves. "These seemingly contradictory messages and signs, in our view, suggest that the PBoC never really wants too much yuan appreciation, especially if it is driven by short-term speculative capital inflows."</p>
<p>For actual reform, "the PBoC should move from daily to weekly (or even monthly) setting of the reference rate, while at the same time widening the currency band," Yao writes. For now the yuan can trade in a 1% band, but some expect that to be widened to 2% as Beijing moves to internationalize the renminbi.</p>
<p>UBS' Tao Wang has previously said that "the era of steady CNY appreciation may be drawing to a close," and that she thinks this "is likely government-guided and may signal a <a href="http://www.businessinsider.com/yuan-volatility-signals-change-in-exchange-rate-policy-2014-2">change in China's exchange rate policy."</a></p>
<p>Here's a one-week chart of the USDCNY from XE.com that shows the the USD rising against the CNY:</p>
<p><div class="KonaFilter image-container"><div class="image"><p class="source"><span>XE.com</span></p></div><p></p></div></p>

The Chinese Yuan Continues To Weaken - Here's What To Make Of It

<p><span style="line-height: 1.5em;"><div class="KonaFilter image-container display-table float_right click-to-enlarge"><div><div class="image"><a title_source="Business Insider" title_caption="" class="zoomin" href="https://static-ssl.businessinsider.com/image/54e622be6da811fb1699a7e9-960/raoul-pal-real-vision-television.jpg"><span class="sprites click-to-enlarge-icon" title="Click to enlarge"></span></div><p></p></div></div></p><p>Here it is surging against the yen.</p><p><div class="KonaFilter image-container display-table"><div><div class="image"></div><p></p></div></div></p><p><span><span><span>"The RMB's peg to the USD now does not make sense as Chinese exports are falling (due to the lack of competitiveness-wages in China have gone up significantly too), GDP is falling (because of exports and the debt burden caused by the massive over investment boom) and thus the Chinese are having to cut interest rates." <br /></span></span></span></p><p><span>Here's Chinese exports tumbling.<br /></span></p><p><span><div class="KonaFilter image-container display-table"><div><div class="image"></div><p></p></div></div><br /></span></p><p><span>Here's GDP.<br /></span></p><p><span><div class="KonaFilter image-container display-table"><div><div class="image"></div><p></p></div></div><br /></span></p><p><span>He continued: "It would be more realistic for the Chinese to unpeg from the dollar and let their currency fall in line with the JPY, EUR, AUD and the other major currencies to regain competitiveness and lessen the deflationary impacts of their strong currency." </span></p><p><span>Perhaps this is the big policy move that'll get China's slowing economy growing more robustly again.</span></p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/massive-escalator-10-floors-chongqing-china-2015-2">This massive outdoor escalator in China is 10 stories high</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="E4MnJhczpr-4OVHIvHLze5zQuiPf7GJI" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

RAOUL PAL: China's currency peg doesn't make sense for the economy

<p><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"><p class="source"><span><a href="http://pictures.reuters.com/C.aspx?VP3=SearchResult_VPage&amp;VBID=2C0BXZLKJC3ZM&amp;SMLS=1&amp;RW=1311&amp;RH=775">Reuters</a></span></p></div><p></p></div></div>In note to clients sent Thursday morning, Credit Suisse analysts Dong Tao and Weishen Deng suggest that Chinese corporates are going to extraordinary lengths to get around government restrictions on selling yuan.</p><p>The analysts noted that exports to and imports from Hong Kong have surged recently, and there is a widening gap between China's export data and Hong Kong's import data. Exports of electronic integrated circuits (EIC) have "jumped remarkably," according to the note.  </p><p>Here is the key bit of the note (emphasis ours):</p><p>"All of these features match those in the late 2012-early 2013 period when there were allegations that some of the trade data were affected by falsified trade activity. Based on this circumstantial evidence, <strong>we are inclined to believe that a large portion of the recent external trade improvement came from trade fabrication</strong> instead of strengthened demand."</p><p>China's exports contracted by 1.4% year-over-year in December, way ahead of the 8% decline the market expected. According to Credit Suisse, this trade data overstates trade growth in China. Their contacts in export manufacturing said any improvement was marginal.</p><p>Credit Suisse says a lot of that beat came from exports to Hong Kong. Exports to Hong Kong were up 10.8% year-over-year, and imports from Hong Kong surged a whopping 64% year over year. The Swiss bank says that doesn't match Hong Kong's trade data.</p><p>Additionally, exports to all of China's special trade zones increased, with electronic integrated circuit exports also surging. The growth in EIC exports is especially telling, according to the analysts, as the components are light in weight, easy to store and transport, and have a value that is hard to determine. </p><p>"Jewelry and electronic integrated circuits (EIC) were the popular candidates during the previous bout of trade data falsification," the note said. </p><p> </p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Credit Suisse</span></p></div><p></p></div></div></p><p>So that leaves us with the question - why would Chinese companies want to do something like this? </p><p>The answer goes back to the same thing that's been driving global markets from the beginning of 2016, the Chinese yuan or renminbi (RMB).</p><p>"It is about converting RMB assets to USD assets in a tightened environment for converting to foreign currencies on the expectation the RMB will depreciate," the Credit Suisse analysts said. </p><p>China's economy is transitioning from an investment-based economy to one based on consumption. As new drivers of growth are rising, the old drivers are falling faster than the government expected. This has become a huge strain on the country's economy, and the government has done a lot over the last year or so to keep money flowing around - like 6 interest rate cuts.</p><p>Around December, as part of this strategy to keep the economy moving along, the Chinese government started letting the yuan depreciate<em> very carefully</em>. That action has continued into 2016, and now it's driving markets.</p><p>And, according to Credit Suisse, it's also driving the Chinese to manipulate their trade data (from the note):</p><p style="padding-left: 30px;">In its simplest form, importing from overseas offers corporates a valid reason to exchange RMB for USD in order to pay for the imports. Subsequently, the USD sent offshore can be used for debt repayments, to unwind previous carry trades, or to buy USD assets.</p><p>Here is a longer explanation:</p><p style="padding-left: 30px;">It strikes us that Chinese entities and individuals are seeking opportunities to convert RMB assets to USD assets, amid heightened expectations of RMB depreciation. As official converting channels become more difficult (reportedly, some banks only allow USD2,000 to be exchanged per visit, and by appointment only, despite customers having an annual quota of USD50,000), some entities and individuals are becoming innovative. That adds pressure on the central bank and the exchange rate.</p><p>To be fair, Japanese bank Nomura noticed the same strange surge in Hong Kong data activity. It says "the improvement as at least partly due to arbitrage activity."</p><p>Who knows, really?</p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/chinese-executives-keep-disappearing-stock-market-meltdown-anti-corruption-china-2015-12">Why Chinese executives keep disappearing</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="g3eWdveTpepeZ-LdZ73HZ6YlFXtKq3ZB" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

CREDIT SUISSE: There's something totally messed up about China's latest data dump

<p><div class="KonaFilter image-container display-table"><div><div class="image"><p class="source"><span>Business Insider/Matthew Boesler (data from Bloomberg)</span></p><p class="caption">Chart 1: The Chinese yuan falls sharply.</p></div><p></p></div></div></p>
<p>This week, the Chinese yuan has suffered its biggest two-day loss against the U.S. dollar since December 2008.</p>
<p>The sharp drop follows an announcement over the weekend that the People's Bank of China would widen the trading band around the official reference rate it sets each day for the value of the yuan against the dollar.</p>
<p>This daily "fix" governs where the yuan can trade in spot markets. The new band allows the yuan to trade within 2% of the reference rate in either direction, while the old band only allowed the yuan to fluctuate within 1% of the fix.</p>
<p><span style="line-height: 1.5em;">The PBoC began lowering the fix about a month ago, reversing a long-running trend of higher daily reference rates and causing the yuan to depreciate rapidly as speculators closed out bets on continued appreciation. For much of the past year, it was trading near the top of the 1% band as capital inflows poured into China, putting upward pressure on the currency.</span><span style="line-height: 1.5em;"><br /></span></p>
<p><span style="line-height: 1.5em;">Today, it finally traded a full 1% below the fix - the edge of the previous band - for the first time since July 2012 (chart 2).</span></p>
<p><span style="line-height: 1.5em;"><div class="KonaFilter image-container display-table float_right click-to-enlarge"><div><div class="image"><a title_source="Business Insider/Matthew Boesler (data from Bloomberg)" title_caption="Chart 2: The yuan is now trading at the bottom of the PBoC's previous trading band for the first time since July 2012." class="zoomin" href="https://static-ssl.businessinsider.com/image/5328551969bedd663b1118bc-960/usdcny-spot-fix.png"><span class="sprites click-to-enlarge-icon" title="Click to enlarge"></span></a><p class="source"><span>Business Insider/Matthew Boesler (data from Bloomberg)</span></p><p class="caption">Chart 2: The yuan is now trading at the bottom of the PBoC's previous trading band for the first time since July 2012.</p></div><p></p></div></div>And if the yuan falls again tomorrow, it may trade into the widened band announced by the PBoC over the weekend for the first time.</span></p>
<p><span style="line-height: 1.5em;">The Chinese central bank has been guiding the reference rate lower in recent weeks to ready the marketplace for a wider trading band, an intermediate step toward eventually ceasing to set daily reference rates altogether and allowing market forces to fully determine the currency's value.</span></p>
<p><span style="line-height: 1.5em;">The PBoC had to engineer a depreciation of the yuan before widening the trading band because of the massive capital inflows China has received over the past year.</span></p>
<p><span style="line-height: 1.5em;">In a recent report, a team of JPMorgan analysts led by <span>Nikolaos Panigirtzoglou estimated using foreign exchange reserves and current account data that China received $100 billion in capital inflows between May and February, mirroring $100 billion in outflows from other emerging markets (EM) over the same period.</span></span></p>
<p><span style="line-height: 1.5em;"><span>As the U.S. dollar rose against freely-floated EM currencies and interest rate differentials narrowed, popular "carry trading" strategies designed to profit on wider yield spreads lost their luster. This was not the case in China, where the dollar continued to depreciate against the yuan, and the result was perhaps a rotation out of EM and into China.</span></span></p>
<p><span style="line-height: 1.5em;"><span>Now, especially as recent Chinese economic data points have shown weakness relative to consensus forecasts, analysts are concerned about the potential for capital outflows, and say this will determine the direction of the yuan going forward.</span></span></p>
<p><span style="line-height: 1.5em;"><span>The picture is further complicated by the proliferation of structured products called target redemption forwards designed to profit on yuan appreciation, which pose the risk of "non-linearity" in dollar-yuan exchange rate movements if the yuan continues to fall.</span></span></p>
<p><span style="line-height: 1.5em;"><span>Geoffrey Kendrick, head of Asian FX and interest rate strategy at Morgan Stanley, estimates Chinese corporates currently hold around $150 billion of these products, and could face severe losses should yuan depreciation continue.</span></span></p>
<p><span style="line-height: 1.5em;"><span>According to Kendrick's analysis, every 0.10 move above 6.20 in the dollar-offshore yuan exchange rate</span></span><span style="line-height: 1.5em;"> </span><span style="line-height: 1.5em;">would result in losses of $200 million </span><span style="line-height: 1.5em;">per month for those corporates as long as the rate stays above that level (today, the rate rose to 6.18).</span></p>
<p><span style="line-height: 1.5em;">Furthermore, between 6.15 and 6.20, Kendrick says banks that sold these products need to hedge their positions by selling dollars for yuan.</span></p>
<p><span style="line-height: 1.5em;">However, above 6.20, banks no longer need to sell dollars and instead need to buy volatility. That's where the risk of a "non-linear" yuan depreciation comes in.</span></p>
<p><span style="line-height: 1.5em;">All of this has been top of mind for China investors in recent weeks as the PBoC has intentionally weakened the yuan in preparation of a wider band, shaking leveraged carry traders out of their long-yuan trades.</span></p>
<p><span style="line-height: 1.5em;">Now, however, the big question is what happens next, especially given the exchange rate's proximity to this "danger zone" that could trigger non-linear yuan depreciation.</span></p>
<p><span style="line-height: 1.5em;">Kit Juckes, head of currency strategy at Société Générale, met with clients across Asia last week, and his big takeaway, which he detailed in a blog post, is that many expect yuan appreciation to resume.</span></p>
<p><span style="line-height: 1.5em;"><span>"The investor community in Singapore listen politely to views about Europe, the U.S. and financial markets in general, but the conversation pretty quickly turned to the renminbi," said Juckes.</span></span></p>
<p><span style="line-height: 1.5em;"><span>"Singapore is the private banking hub for Southern Asia, and benefiting from the combination of an ever-appreciating renminbi and higher yields than are on offer in either U.S. or Singapore dollars, is one the most popular investment strategies for their high net worth clients. The general view or hope of these investors is that the current PBoC-induced volatility in the USD/CNY rate is just a blip, which will not stand in the way of their investment strategy."</span></span></p>
<p><span style="line-height: 1.5em;"><span><span>Likewise, in mainland China, "when the talk turned to the domestic currency, I sensed nervousness and uncertainty," said Juckes. "That is unusual in Beijing, a place where there is usually certainty about the authorities' goals and little doubt that they will be successfully achieved."</span></span></span></p>
<p><span style="line-height: 1.5em;"><span><span>Finally, in Hong Kong, "<span>we were back to talking about China," says Juckes.</span></span></span></span></p>
<p><span style="line-height: 1.5em;"><span><span><span>"I was asked how far I think the USD/CNY rate may rise and retorted that if the idea was to reduce the appeal of the 'carry trade', then what I learned in Singapore is that those buying the renminbi are not feeling dissuaded yet. The glib remark that from the current 6.15, we are more likely to see the rate at 7 than 5 in the coming years caused real concern until I qualified it by saying that neither of these levels is likely. What did I learn is that a 2.5% depreciation is causing more anguish than a fall that magnitude should. And by association that there is more leverage in the trade than I had realised. That increase in leverage makes me concerned, particularly in the wake of the announcement this weekend that the daily trading band for USD/CNY is being widened."</span></span></span></span></p>
<p><span style="line-height: 1.5em;"><span><span><span>Kendrick and others are advising clients to pay close attention to incoming economic data out of China, which could determine the fate of portfolio flows and thus, the currency itself - at least for the time being.</span></span></span></span></p>

China's Currency Just Suffered Its Worst Two-Day Loss In Years

<p><div class="KonaFilter image-container float_right"><div class="image on-image"><p class="source"><span>Reuters</span></p></div><p></p></div>After rising 3% against the U.S. dollar in 2013, the onshore yuan <a href="http://www.businessinsider.com/chinese-yuan-drops-most-since-2011-2014-2">(CNY) weakened against the greenback</a> last week. The offshore yuan (CNH) also fell.</p>
<p>UBS' Tao Wang writes that "the era of steady CNY appreciation may be drawing to a close," and she thinks this "is likely government-guided and may signal a change in China's exchange rate policy."</p>
<p>But she doesn't expect large depreciation either, in part because of international pressure on China and in part because Beijing is trying to accelerate the internationalization of the renminbi.</p>
<p>This move away from steady appreciation could however unwind hot money inflows into China. 'Hot money' refers to non-foreign direct investment (FDI) capital inflows.</p>
<p>Naturally, the first concern would be the impact on foreign exchange inflows and on China's liquidity and credit growth. From Wang:</p>
<p style="padding-left: 30px;">So what is exactly the risk of a potential unwinding of "hot money" on China's domestic credit boom? Contrary to what many people may think, the scale of inflows has been negatively correlated to domestic credit growth. That is, arbitrage inflows tend to increase when China is trying to slowdown domestic credit growth - when many borrowers face tougher credit constraints and higher interest rates in the shadow banking sector, and decline when the domestic economy seems to be weak or external turbulence increases uncertainty in general. In the latter case, the government usually decides and has been able to increase domestic credit growth. Therefore, the unwinding of FX inflows may not necessarily result in a sharp credit tightening in China, as the government can and usually does offset such outflows.<br /><br />The risk is perhaps more on liquidity management. A sudden and large unwind of FX inflows could tighten domestic liquidity unexpectedly, and the central bank needs to react quickly and decisively to offset such contraction either through open market operations, other liquidity-injection facilities, or by cutting the still high reserve requirements and relax rules on loan-to-deposit ratios. Such a reaction may not always be seamless and without glitch. As a result, we could see volatility in the interbank market and in overall credit growth.  </p>
<p style="padding-left: 30px;">Another risk would be that companies and sectors that have relied on overseas funding may suffer as a result of this unwind: First, they can no longer find the funding they need, as these borrowers typically face tougher credit restrictions onshore (for example, property developers); second, they may face losses related to higher funding costs (due to the weakening of the exchange rate or a change in exchange rate expectations). Losses related to the exchange rate should be relatively limited, however. Given China's more than $3.8 trillion in FX reserves and the government's desire to defend the stability of the currency, we do not expect a major depreciation even in the case of a large "hot money" unwind or outflow. </p>
<p>Wang thinks Beijing will now be focused on "increased flexibility of the RMB as the key objective of further exchange rate reform."</p>

Volatility In China's Currency Could Mark The Start Of A Big Shift In Policy

<p><div class="image-container float_right"><div class="image"><p class="source">Photo by Feng Li/Getty Images</p></div></div><keyword id="1334" type="COUNTRY" weightage="60" keywordseo="China">China</keyword> wrapped up its third plenum earlier this month and <a href="http://www.businessinsider.com/shanghai-composite-falls-after-3rd-plenum-2013-11">announced a string of reforms. </a></p>
<p>Soon after, Zhou Xiaochuan, governor of the People's Bank of China, wrote an article on deepening financial system reforms in a 'Guidance Book' on the third plenum 'decision'.</p>
<p>"Though the article is very informative about reform ideas and strategies, it contains little new information. It neither gives a specific reform timetable nor hints at any imminent moves," writes Bank of America's Ting Lu.</p>
<p>Here are some of the PBoC's comments so far.</p>
<p>On Tuesday, it was reported that the central bank intends to widen the renminbi trading band, which currently trades in a range of 1%. Though officials have talked about widening the trading band before, it is now expected to widen to 5-10% around a central reference rate that will be set every month or quarter.</p>
<p>"The pace of reform in this regard has been significantly delayed despite frequent mentions of this reform," writes Ting. "We believe the PBoC will announce the band widening when the global macro environment becomes more stable and the spread between the RMB-USD fixing and spot is relatively stable and narrow."</p>
<p>Then, Chinese PBoC deputy governor Yi Gang, said "it's no longer in China's favor to accumulate foreign-exchange reserves," <a href="http://www.bloomberg.com/news/2013-11-20/pboc-says-no-longer-in-china-s-favor-to-boost-record-reserves.html">according to a Bloomberg report.</a> Yi added that "the marginal cost of accumulating foreign reserves has exceeded marginal gains." China's foreign exchange reserves now stand at $3.7 trillion. Again we had no timeline for this.</p>
<p>Capital account liberalization in terms of cross-border lending and equity portfolio investment will "remain quite slow, except for easing those flows related to allowing offshore RMB to return to China as a result of RMB internationalization."</p>
<p>Markets are also watching to see when the PBoC will <a href="http://www.businessinsider.com/china-needs-to-liberalize-deposit-rates-2013-7">lift the ceiling on deposit rates</a> and allow for true interest rate liberalization. From Ting:</p>
<p style="padding-left: 30px;">"In the near- to medium-term, PBoC will form a market-based rate system and improve central banks rate control and transmission mechanism. In the medium term, all rates will be liberalized. He reiterated that the PBoC will set up a deposit insurance system. Note that it's unclear how to define near-term or medium-term.</p>
<p style="padding-left: 30px;">"In our view, liberalizing bank deposits will be the core of China's future financial reforms. The PBoC has, in October, started a system to publish major banks' prime lending rates for rate-pricing guidance; the next steps could be to introduce interbank certificates of deposit (CDs) and to establish a deposit-insurance scheme. Then, China could introduce large-denomination negotiable certificates of deposit (NCDs) to corporates and individuals, and finally gradually loosen restrictions on policy deposit rates."</p>
<p>These iterations are a very clear sign that Governor Zhou is a reformer and that Beijing wants to be less interventionist. The theme of the third plenum was allowing markets to play a <a href="http://www.businessinsider.com/shanghai-composite-falls-after-3rd-plenum-2013-11">"decisive" role in the economy.</a> But "the market might be overly excited about the pace of financial reforms," writes Ting.</p>

ECONOMIST: Markets Might Be 'Overly Excited' About China's Financial Reforms

<p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Real Vision Television </span></p><p class="caption">Raoul Pal.</p></div><p></p></div></div>Raoul Pal comanaged the GLG Global Macro Fund for GLG Partners and retired at 36 in 2004. </p><p>Since then, Pal launched <a href="http://www.globalmacroinvestor.com/index.asp">Global Macro Investor</a> and <a href="https://realvisiontv.com/channel/realvision/videos">Real Vision TV</a>, a sort of "Netflix for finance," according to the website.  His newest venture, <a href="https://www.realvision.com/publications">Real Vision Publications</a>, launched earlier this month and aims to bring independent financial research to the average investor.</p><p>Business Insider recently caught up with Pal to learn about his thoughts on the market going into 2017 and t<span>he launch of his new business. The following a lightly edited transcript of the conversation. </span></p><p><strong>Wadhwa: </strong>Towards the end of the last year, you predicted a recession<span style="font-weight: 400;"> and you were actually quite bearish on the market compared with a lot of other analysts. Now that Trump is President and the markets are rallying, do you agree with the market's reaction, or do you think this is just the calm before the storm?</span></p><p><strong>Pal:</strong><span style="font-weight: 400;"> I think it's almost impossible to assess the impact that the new Trump administration will have on the US economy or the global economy, and for the markets to extrapolate some future Ronald Reagan within a few days after he was elected is naive and somewhat dangerous. So the speculative positioning in many parts of the market, be they <a href="http://www.businessinsider.com/hedge-funds-positioning-for-trump-2017-1">short bonds or long oil, and many of these things are now so far extreme that we've never seen this kind of positioning in the history of financial markets</a>. So all I'm saying is the economy is relatively strong right now. It's stronger than I expected. It was very weak at the beginning of last year and it's stronger than I expected, but I think everybody is betting on it remaining strong and for the markets to be in a kind of low volatility, goldilocks state going forward. I think the probability of that is low. </span></p><p><span style="font-weight: 400;"><em><strong><div class="KonaFilter image-container display-table float_left"><div><div class="image on-image"><p class="source"><span>Eric Schultz/AP</span></p><p class="caption">President Donald Trump holds up his book "The Art of the Deal" during a presidential campaign stop.</p></div><p></p></div></div></strong></em>I think the probability of the volatility coming out of the administration of which nobody understands what they're trying to do or what the impacts are. </span></p><p><span style="font-weight: 400;">Nobody understands what the impact of higher tariffs on trade means for the US dollar. If it means the US dollar goes up, then global trade falls. There are so many linkages and I'm not sure they are all thought through. And I think that's one of the issues we need to face, trying to assess the actual risk to these things rather than just assuming that a few tax cuts and fiscal stimulus will make America great again. It's much more complicated and nuanced than what the markets are expecting right now. </span></p><p><strong>Wadhwa: </strong><span style="font-weight: 400;">So are you long volatility? Do you expect it go up? </span></p><p><strong>Pal: </strong><span style="font-weight: 400;">The problem is, the market is record short volatility. And record short Vix ETFs and record Vix futures and their implied investment strategies are also short volatility strategies. So the market has taken a huge bet that volatility is not going to return. So there is a problem should the generalized level of volatility rise, it could cause enormous portfolio unwind and other stresses within the system. So we need to keep our eye on that right now. A small event could trigger a much larger event right now.</span></p><p><strong>Wadhwa: </strong><span style="font-weight: 400;">Over 2016 the dollar index strengthened significantly.  What's your view on dollar strength going into 2017? </span></p><p><strong>Pal: </strong><span style="font-weight: 400;">My view remains that Trump's policies of repatriation of profits and restriction of free trade are very dollar positive. If we take into account the dollar short position offshore in the Euro-dollar market, ie the Euro dollar interest rate market, which is about $10 trillion, the balance of probability remains that the dollar goes higher. </span></p><p><span style="font-weight: 400;"><div class="KonaFilter image-container display-table float_left float_right"><div><div class="image on-image"><p class="source"><span><a href="http://www.gettyimages.com/license/617289772">Justin Merriman/Getty Images</a></span></p><p class="caption">Raoul Pal expects the dollar to strengthen.</p></div><p></p></div></div>It won't do it in a straight line but it has been correcting recently and I think the dollar strength trend will continue. And I think it will go much further than people expect. </span></p><p><strong>Wadhwa: </strong>What's your outlook for the <span style="font-weight: 400;">European banking system, particularly in Germany and Italy? Given the political climate and key upcoming elections, how do you see this playing out?</span></p><p><strong>Pal: </strong><span style="font-weight: 400;">Everybody expects something to happen in European elections. People expects Le Pen to win, people expect changes in Germany, so I'm not sure there are tradable events there. We also know that the European banking system is insolvent, we know the Italian system is insolvent, we know the Spanish system is relatively insolvent, we know Deutsche Bank is insolvent. All I know is that if we have a recession, then everything becomes unsustainable. If we don't have a recession, everything can just about pull its way through, slowly. </span></p><p><strong>Wadhwa:</strong><span style="font-weight: 400;"> What's your outlook for China?  Do you think a devaluation of the yuan will solve China's problems?</span></p><p><strong>Pal: </strong><span style="font-weight: 400;">This is something that most people are expecting, and something the Chinese themselves are expecting, so whether this devaluation comes quickly or slowly, it's not new news for the market. We've all been following this story for the last five years or so. All I do know is that it continues to add pressure for the US dollar to rise because the Chinese want to get their assets into US dollars and out of renminbi. </span></p><p><strong>Wadhwa:</strong><span style="font-weight: 400;"> What do you see as the biggest risk to the global economy in 2017?</span></p><p><strong><div class="KonaFilter image-container display-table float_left"><div><div class="image on-image"><p class="source"><span>Thomson Reuters</span></p><p class="caption">Hedge funds are betting on copper.</p></div><p></p></div></div>Pal: </strong><span style="font-weight: 400;">The biggest risk always to the global economy is recession. The biggest question is whether or not we get a recession in 2017. All I do know is that after a two term government has changed and a new government has come in, regardless of which side of the house they're from, there's a 100% chance of recession, dating back to 1910, within 12 months. That doesn't mean it's definitely going to happen, but there's a very high probability of there being a recession.</span></p><p><strong>Wadhwa:</strong><span style="font-weight: 400;"> Given that forecast, what risks should investors be taking and what they should avoid?</span></p><p><strong>Pal:</strong><span style="font-weight: 400;"> They should avoid group think. Don't do what everybody else is doing. If everybody else is <a href="http://www.businessinsider.com/hedge-funds-positioning-for-trump-2017-1">short bonds, long equities, long oil, long copper</a>, then don't do those things, is the simplest answer. Look for other sources of return so they're not so crowded as everybody else's because those are the ones where the maximum risk lies. It may just be a short-term reversal, but the reversal can be very painful if too many people are involved in a certain trade.</span></p><p><strong>Wadhwa: </strong><span style="font-weight: 400;">You've talked before about your frustration with the poor forecasting records by the Fed and Wall Street economists. What do you think they are doing wrong and how can they improve?</span></p><p><strong>Pal:</strong><span style="font-weight: 400;"> People within the industry are incredibly concerned about the Fed using economic models that don't work in the real world. Model based economics is proven not to work. It's one of the reasons we got in trouble with the financial crisis. </span></p><p><span style="font-weight: 400;"><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"><p class="source"><span>REUTERS/Gary Cameron</span></p><p class="caption">Federal Reserve Chair Janet Yellen.</p></div><p></p></div></div>It's one of the reasons we have this enormous balance sheet that the central bank has, one of the reasons why rates went negative, it's all theoretical model based economics. And the real solution I believe is with the advent of big data and the development of behavioral economics, we could be much better in truly understanding how economies actually work by looking at the data and not models. That's a big shift that needs to come. Aside from that, the other key thing the Federal Reserve forgets is that there is a business cycle. Economies do ebb and flow, and their models never forecast that which is why they are always wrong. </span></p><p><strong>Tina Wadhwa: </strong><span style="font-weight: 400;">Can you tell me more about this expansion of Real Vision TV into the publishing arena and what you are trying to achieve?</span></p><p><strong>Raoul Pal: </strong><span style="font-weight: 400;">When we started Real Vision TV, we realized that it was a great opportunity to disrupt financial television. Financial TV was going towards sound bytes and advertising, and they were losing the seriousness of the finance business in it. They treated finance as entertainment. And it wasn't fair to people to treat their own life savings as entertainment. We knew we could do something better and different, although we knew absolutely nothing about the media industry.</span></p><p><span style="font-weight: 400;">When we started that, we also realized how low quality much of the research publications were for the average guy. They were all getting spammed to death, given sensationalist headlines by numerous newsletter writers and they weren't get access to the best quality Wall Street research or the high-end research providers like myself. So we thought there was a real opportunity to do something better, to give people the quality of information. Just because they are the average investor, doesn't mean they should get average research. So that was the idea behind the publication, and we spent nine months developing it, building a platform out for it and finally launched it about a month ago.</span></p><p><strong><div class="KonaFilter image-container display-table float_left"><div><div class="image on-image"><p class="source"><span><a href="https://vimeo.com/118191235">Real Vision Television</a></span></p></div><p></p></div></div>Wadhwa: </strong><span style="font-weight: 400;">Who's your target audience?</span></p><p><strong>Pal: </strong><span style="font-weight: 400;">The target audience is basically anybody involved in financial markets. Professionals are generally well catered for already, but a lot of it is the bulk of the average investor, the RIA in America, the guy who invests from home, people who invest their life savings, the average guy from those 100 million brokerage accounts in America. They deserve better research. They deserve better trade ideas, they deserve to understand the world better. So that's why we started the publication. And we've gone about it in a really unique way. We're showcasing 30 of the world's best writers, and giving people examples of a fantastic array of people. Some charge up to $40,000 or $50,000 a year for their research, <em><strong>others charge maybe $300 a year per research</strong></em>. Combined, you're never going to get that depth or breadth of information in one place, and it's only $300 a year. Basically for someone to replace one of their existing newsletters, they can get 30 of the best people in the world for the same price. We think the value proposition is ludicrously good.</span></p><p><strong>Wadhwa:</strong><span style="font-weight: 400;"> How does it work exactly? What are you offering for the subscription price? </span></p><p><strong>Pal:</strong><span style="font-weight: 400;"> What happens is once you sign up, you can visit the site whenever you want. We release something like two pieces of research a week, plus some bonus editions. They are all on this beautiful engaging platform where you can take notes, you can comment on it, exchange views with others, rate the quality, and actively engage with the content.</span></p><p><strong>Wadhwa: </strong><span style="font-weight: 400;">You touched on this a little bit with the bias and sensationalism you see, but in your opinion, what's wrong with bank research and why?</span></p><p><strong>Pal:</strong><span style="font-weight: 400;"> Having come from that business myself and understanding what it's like, bank research is very cautious in how it is written. The inherent bias in bank research is that they don't really want to be negative because it doesn't play well to investment banking customers, where a lot of their revenue comes from. You can't really say things that you mean.  You have to be very cautious of the vested interests, particularly out of the M&amp;A business. So what you end up with is research that doesn't really play its purpose, which is to get the smartest people in the bank to tell you what's going on in the world.  It tends to get slightly watered down. And so there's an opportunity, which is why I have an independent research publication called Macro Investor.  I can speak differently in a different way and I can be free in my thoughts.</span></p><p><span style="font-weight: 400;"><em><strong>Real Vision publication is not really for the bank research business - it's for that newsletter business,</strong></em> which is huge, but below the radar screen.  It's virtually unregulated and you can make a 1000% return in a month. We think people deserve better. You need to treat people with respect and dignity, and I don't think it's being done right now. Those newsletters are the way the average guy gets his research, and they're not really good research services. The people who write them don't have a track record in the industry, they kind of come out of nowhere and start writing stuff. We think people deserve better than that.</span></p><p><span style="font-weight: 400;">It's been one of the most incredible launches we've ever had. 40% of the Real Vision client base for Real Vision television signed up to the publication in three weeks. It's like there was a desperate pent up demand for this type of thing, so it's been astonishingly well received.</span></p>     <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/tech-finance-coinbase-buy-sell-trade-bitcoin-app-coinbase-2017-1">Here's how to use one of the many apps to buy and trade bitcoin</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="8xa3Z1ODE6jmPca8bIn4JsdTak2saJbY" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

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