<p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Reuters/China Daily CDIC</span></p><p class="caption">A man dressed like an ancient Chinese emperor sits in a pool in between waitresses dressed like imperial palace maids at a bathhouse during its opening ceremony in Shangtang township, Henan province.</p></div><p></p></div></div></p><ul><li><strong>Notoriously bearish strategist Albert Edwards says markets are "bathing in complacency."</strong></li><li><strong>Investors are ignoring a major threat to global growth, which is "lurking just beneath the surface."</strong></li><li><strong>While the focus of the world is currently on Trump's trade war, a greater threat is materializing in China.</strong></li></ul><p>Financial market investors are "bathing in complacency" and are allowing themselves to be distracted from a huge issue that threatens global growth "lurking just beneath the surface," according to the notoriously bearish Societe Generale strategist Albert Edwards.</p><p>Writing in his weekly Global Strategy note to clients on Thursday, Edwards argues <a href="http://www.businessinsider.com/trade-war-europe-trump-eu-retaliation-auto-tariffs-2018-7">the growing trade conflict between the USA and China</a> - and to some extent the European Union - is pulling focus from other issues that could have a more marked impact on global growth.</p><p><a href="https://blogs.imf.org/2018/07/16/the-global-expansion-still-strong-but-less-even-more-fragile-under-threat/">Quoting a recent report from the International Monetary Fund</a> that said markets are currently "susceptible to sudden re-pricing if growth and expected corporate profits stall," Edwards identified a potential shock to markets in the near future - the very real prospect of growth in China slowing markedly.</p><p>Edwards, who has long warned clients to be particularly vigilant about economic developments in China, said that recent data coming out of the world's second-largest economy should be of much greater worry to the markets than it seems to be right now.</p><p>"As we have often stated, investors ignore economic and market developments in China at their peril," he said, noting that many investors are focused on China right now, but only because of fears about what the rising trade conflict could do to global growth.</p><p>Here's the key extract from the note (emphasis ours):</p><p style="padding-left: 30px;">"This [the trade war] just <strong>diverted investor attention from the worryingly weak slew of economic data</strong> China published over the past few months, but the sudden renewed weakness in the renminbi has now refocused investor attention where it ought to be. We are not alone in thinking slowing Chinese growth should be near the top of investors' key concerns."</p><p>Citing the work of his Societe Generale colleague Wei Yao, Edwards suggests that "real economic pain is beginning to surface." As evidence, he points to tightening credit conditions along with the fact that nominal GDP growth slowed to less than 10% year-on-year at the latest reading.</p><p><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Societe Generale</span></p></div><p></p></div></div></p><p>If that economic pain continues, Edwards argues, a real slowdown in China could begin to materialize, bringing with it a stall in global growth, and a major shock to financial markets.</p><p>Edwards comments come on the same day <a href="http://www.businessinsider.com/china-yuan-selloff-accelerating-no-sign-of-beijing-stepping-in-2018-7">the Chinese yuan hit its lowest level against the dollar in a year.</a> <span>The USD/CNY, or onshore traded yuan, currently sits at 6.7824, the highest level since July last year. The higher the dollar in this pairing, the weaker the yuan</span></p><p><a href="https://blogs.imf.org/2018/07/16/the-global-expansion-still-strong-but-less-even-more-fragile-under-threat/">Returning to the work of the IMF</a>, Edwards said that beyond the headline news that the fund had cut growth forecasts for Germany, France, Italy, Japan, and the UK, the more interesting part of it's economic outlook were its "warnings on complacency in financial markets."</p><p>Here's the key extract from the IMF (emphasis ours):</p><p style="padding-left: 30px;"><span>"Financial markets seem broadly complacent in the face of these contingencies, with e<strong>levated valuations and compressed spreads in many countries.</strong> At the same time, however, high levels of public and private debt create widespread vulnerability. Asset prices are no doubt buoyed, not only by easy financial conditions, but by the generally still satisfactory global growth picture. They therefore are s<strong>usceptible to sudden re-pricing if growth and expected corporate profits stall."</strong></span></p><p>That, Edwards says, is "the danger that lurks just beneath the surface."</p>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/hands-on-new-blackberry-key2-demo-review-2018-6">I tried the newest BlackBerry phone for a week</a></h3>        <div>                    </div>    </div>

ALBERT EDWARDS: Markets are 'bathing in complacency' and ignoring a massive threat 'lurking just beneath the surface'

<p>The Chinese central bank has finally granted Qualified Foreign Institutional Investors (QFII) access to its onshore interbank bond market.</p>
<p>The <keyword id="1334" type="COUNTRY" weightage="60" keywordseo="China">China</keyword> Securities Regulatory Commission (CSRC) first revised rules to allow QFIIs to invest in the interbank bond market nearly nine months ago. But the Chinese central bank is the main regulator of the market, and only just granted them access. Until now, QFII's could only invest in equities and exchange traded bonds. </p>
<p>Remember, bonds are traded in the interbank, exchange market, and over-the-counter (OTC) market in China, but the interbank bond market accounts for 95 percent of all onshore bonds, according to Bank of America's Ting Lu.</p>
<p>For China, developing the bond market has been a way of reducing the risks in the banking sector. For investors, they get to tap into China's bond market, which is the third-largest bond market in the world.</p>
<p>Between August 2012 and February 2013, foreigners' bond holdings have increased 110 percent, from 92 billion yuan to 192.8 billion yuan, according to Lu.</p>
<p><div class="image-container" style="width:584px"><div class="image"></div><p class="source">BAML</p></div><br /><br />So far, the biggest players here were foreign central banks, renminbi clearing banks, and Renminbi Qualified Foreign Institutional Investor (RQFII). Remember the <a href="http://www.bosera.com.hk/column/index-0001000100090001.html">RQFII is based in renminbi</a> and is geared towards retail investors, while the QFII is based in U.S. dollars and targets institutional investors.</p>
<p>What's more? When China announces reforms, many question whether it will actually follow through with them. This shows that China is serious about <a href="http://www.businessinsider.com/xi-jinping-will-reform-china-2012-12">loosening its capital controls</a>.</p>

Proof That China Is Serious About Financial Reform

<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

<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><em><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>Editor's note: Below is an interview with Stephen Green, head of greater China research at Standard Chartered. This Q&amp;A went out to subscribers of our "10 Things You Need To Know Before The Opening Bell" newsletter on Thursday morning. Sign up below to get the newsletter and more of these interviews in your inbox every day.</em></p>
<p><strong><span>BUSINESS INSIDER: China fears have resurfaced as a catalyst for risk aversion in global markets this week. Are those fears justified?</span></strong></p>
<p><span><strong>STEPHEN GREEN: </strong>Well, it depends on what <span class="il">you</span>'re scared about. More non-performing loans (NPLs) and some defaults on bonds and trust products? <span class="il">You</span> bet, they're coming. A systemic financial crisis and a hard landing for the economy? Unlikely, we think. There are a number of reasons but the main one is that for all the worry about "shadow banking" in China, the credit intermediation by non-banks is no more than 15% of GDP, and its unleveraged and unsecuritised. So, unlike in the U.S. system, a few bad loans do not have to generate a financial crisis. Now, of course, a large amount of NPLs within the banking and trust systems will be a problem, and there will likely <span class="il">need</span> to be a recap of the system in the next 2-3 years, but that can be accomplished without too much disruption for the broader economy we believe. Overall, the new administration has decided that to do the reforms that everyone has been asking them to do, they <span class="il">need</span> to run some risks. So for the bears to turn around and argue that the results of slower credit growth etc. for which they were calling will be the collapse they predicted is a bit cheeky, I think.</span></p>
<p><strong>BI: The People's Bank of China (PBoC) has been moving to shake investors out of carry trades designed to make money on a rising renminbi. Do <span class="il">you</span> think they will be successful in having a lasting effect, or will trades just get put on again when the renminbi resumes strengthening?</strong></p>
<p><strong>SG: </strong>As an economist, I think the problem is simple: still large current and capital account surpluses. In 2013, the PBoC bought at least $430 billion in intervention operations, and $70 billion in January alone. I don't think the PBoC has dissuaded the market of a medium-term CNY appreciation story, but it's clearly raised the costs, and potential costs, of betting on that expectation. As a central bank in the last few months, the PBoC has discovered the utility of behaving a little crazy - both in the interbank system and now in the FX market. It affects behaviour - domestic banks are more cautious about their liquidity management, and now speculators are more cautious about positioning on the CNY. To keep that up, I think the CNY continues to be moved around - and maybe even breaks 6.20 on the upside, while 6.30 would I think be pretty aggressive. More volatility on the way down to a 5.9 handle by the end of the year I think.</p>
<p><strong>BI: What do <span class="il">you</span> think the impact of the sell-off in the copper market this week has had on the state of affairs in China's shadow banking system?</strong></p>
<p><strong>SG: </strong>Limited. The sell-off has been partly triggered by local regulators guiding banks away from accepting copper as collateral on loans. Some firms have liquidity problems repaying loans since the funds they borrowed having been tied up in business, or in loans. To raise cash, they sell their copper, which has pushed prices down. It's generated a lot of noise, and it'll probably carry on for a while, but we think it will have limited impact. Most copper traders do not appear to be under financial pressure to unwind their positions. Fundamental physical demand for copper at present has weakened a bit - housing construction appears to have slowed, and onshore air conditioner manufacturers are holding quite a bit of inventory. That said, this year's grid build-out is expected to be strong, which could impact demand a lot.<br /><br /><strong>BI: More generally, the prospects of corporate defaults have many investors wondering what's next in China's onshore bond market. What should they expect?</strong></p>
<p><strong>SG: </strong>A few more defaults - which is what the central government wants (though local governments will often to their best to restructure and evergreen the debt). Credit conditions will remain tough this year - as loan growth slows. And this is the third year of relatively slow growth, and some parts of the corporate sector, especially heavy industry, are leveraged up. High leverage and weak cash flow means more trouble. If we are going to solve the issues of over-capacity in a few industries, and remove some of the moral hazard problems, this is needed. I think Beijing is ready to accept some bankruptcies. They also believe that the banks and other losses will be absorbed and written-off without systemic effects. In the U.S., which had a housing bubble and a financial crisis, much of the seriousness of that crisis was created by leverage in the financial sector and securitisation of assets. Neither of these <span class="il">things</span> - leverage or securitisation - exists to any meaningful scale in the Chinese financial system. So we'll likely be dealing with simpler and cleaner financial market problems - rising NPLs and the <span class="il">need</span> to recapitalise banks over the next few years. As long as nominal growth can remain around <span class="il">10</span>%, that growth will ultimately forgive many of those sins.</p>
<p><strong>BI: The Standard Chartered Renminbi Globalization Index has been surging, and the PBoC took historic action over the weekend in widening the daily trading band in which the yuan is allowed to fluctuate. When do <span class="il">you</span> expect them to abandon the daily reference rate and embrace a fully market-determined exchange rate?</strong></p>
<p><strong>SG: </strong>Well, let's be patient. They've got their hands full with the current ambition - to limit FX intervention and at the same time prevent excessive moves. Given the current account is in significance surplus, they <span class="il">need</span> a certain amount of capital account outflow to balance <span class="il">things</span> up. With the weaker CNY trading, they seem to have achieved that. For the moment. At the back of my head though I still think we are on an appreciation path, but with more volatility, which will mean some of the speculative money will leave. A lot of people say that the CNY has appreciated a lot; it is now near fair value. It's just PBoC bought at least $430 billion last year, and $70 billion in January. I don't see any fundamental change since then.</p>

Everything You Wanted To Know About All Of The Crazy Stuff Going On In China But Were Too Embarrassed To Ask

<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><span><div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"></div><p></p></div></div>In the beginning of "Star Wars: Episode IV&#xa0;-&#xa0;A New Hope," rebel leader Princess Leia (RIP the great Carrie Fisher) was captured by the evil Empire. The rebels had managed to steal the plans for the Empire's secret weapon, the Death Star, and so the Empire's agents were ruthlessly hunting for them all over the galaxy.</span></p><p><span>Leia told her captors&#xa0;that the planned Imperial crackdown on the rebels, using the Death Star to terrify planets into submission, wouldn't work.</span></p><p><span>"The more you tighten your grip,"<a href="https://www.youtube.com/watch?v=NNuaGQ6-KnY"> she said,</a> "the more star systems will slip through your fingers."</span></p><p>Replace the words "star systems" with the words "Chinese yuan" and you could use the phrase to talk about what's troubling Beijing right now.</p><p>Over the past week, the Chinese government has instituted even stricter capital controls to prevent citizens and corporations from taking money out of the country, according to a note circulated by Wells Fargo's Cameron McKnight and Robert J. Shore Friday morning.</p><p>Now regular citizens have to report transfers over $10,000 and banks have had their foreign transaction reporting limits cut by 75%. This is on top of three months of the government tightening its grip on where Chinese people and companies send their yuan.</p><h2>When it slips</h2><p>But it's not working. Money is still leaving the country, and that is pushing the value of the yuan lower against the dollar. On December 28, China's Central Bank was forced to deny media reports that the yuan fell to 7 yuan to $1. It insisted that yuan traded between its comfortable "band" of 6.9500 and 6.9666 per dollar.</p><p>"But some irresponsible media reported that the onshore rate of the yuan broke the psychological threshold of 7.0000," the central bank said, <a href="http://www.reuters.com/article/uk-china-economy-forex-idUSKBN14I02U">according to Reuters.</a></p><p>The futures market was not satisfied with that response, as indicated in this tweet from Bloomberg Chief Asia Economist Tom Orlik:</p><p>This is a deadly loop. The more controls the government puts on, the more desperate it seems. The more desperate it seems, the more people want to take their money out. Bloomberg estimates that China has suffered about<span> $1.7 trillion in</span> <a href="https://www.bloomberg.com/news/articles/2017-01-06/trader-who-bet-on-gradual-yuan-decline-now-sees-steeper-tumble">capital outflows since 2015.</a></p><p>And the longer this goes on the more investors are starting to think this loop&#xa0;will make a meaningful difference in the value of the yuan.</p><p><a href="https://www.bloomberg.com/news/articles/2017-01-06/trader-who-bet-on-gradual-yuan-decline-now-sees-steeper-tumble">From Bloomberg:</a></p><p style="padding-left: 30px;">"By repeatedly tightening capital controls, China risks eroding confidence in its currency, said [Benjamin] Fuchs, chief investment officer at BFAM Partners (Hong Kong). At the same time, the dollar's advance against the yen and other currencies is increasing competitive pressure on China to let the yuan depreciate, he said in an interview."</p><p>Last year, Fuchs correctly predicted that the yuan would not suffer a sudden devaluation, as many hedge fund managers - like Hayman Capital's Kyle Bass - argued through early 2016.</p><p></p><div class="KonaFilter image-container display-table click-to-enlarge"><div><div class="image on-image"><a title_source="Societe Generale" title_caption="" class="zoomin" href="https://static-ssl.businessinsider.com/image/586ff6bdee14b6aa5c8b68cb-960/screen%20shot%202017-01-06%20at%2025712%20pm.png"><span class="sprites click-to-enlarge-icon" title="Click to enlarge"></span></a><p class="source"><span>Societe Generale</span></p></div><p></p></div></div><p>This is not to say that the government doesn't have tools to stabilize the yuan as outflows persist. It just doesn't have many, and they're not that great. China has been using its foreign currency reserves to buy yuan to prop up the currency's&#xa0;value. But it can't do that&#xa0;forever, since it&#xa0;needs that money to pay foreign denominated debt.</p><p>Plus, China has&#xa0;already spent a ton of reserves on this. The exact number is fuzzy, but we do know China's Central Bank was holding $4 trillion at its highest point in 2014. Now official data shows that the number is <a href="http://www.reuters.com/article/us-china-economy-forex-reserves-analysis-idUSKBN14P0QV">hovering around $3 trillion.</a></p><p>China bears, like hedge fund manager Jim Chanos of Kynikos Associates think net reserves could be around $1.7 trillion.</p><p></p><div class="KonaFilter image-container display-table click-to-enlarge"><div><div class="image on-image"><a title_source="Business Insider; Data source: Kynikos Associates" title_caption="" class="zoomin" href="https://static-ssl.businessinsider.com/image/584857a2e02ba738018b7ed5-960/china-foreign-reserves1024.png"><span class="sprites click-to-enlarge-icon" title="Click to enlarge"></span></a><p class="source"><span>Business Insider; Data source: Kynikos Associates</span></p></div><p></p></div></div><p>Another interesting factor&#xa0;is that China has tried really hard to get people to stop looking at the yuan in comparison to the dollar. It announced that it would peg the yuan to a basket of currencies. The problem is&#xa0;that no one cares. It's still a dollar-yuan world, and in that world a yuan slide against the dollar breaking a psychological threshold, like 7 yuan to $1, has consequences.</p><p><a href="https://www.bloomberg.com/news/articles/2017-01-06/trader-who-bet-on-gradual-yuan-decline-now-sees-steeper-tumble">Peking University Professor Christopher Balding</a> wrote a great post about this earlier this week:</p><p style="padding-left: 30px;"><span>"Ultimately, of course, the only way to break free of the dollar is to accept a floating currency without capital controls. The government shows no appetite for the volatility this would entail, not least because in the short run, downward pressure on the yuan would prompt even larger outflows. But cosmetic changes to a basket of currencies - most of which don't even trade with the renminbi - are no substitute."</span></p><p>Until this is resolved, currency will continue to slip through the government's fingers, no matter how it tightens its grip.</p><div></div>    <div class="margin-top">        <h3>NOW WATCH: <a href="http://www.businessinsider.com/property-brothers-what-tricky-real-estate-code-words-really-mean-2016-12">The Property Brothers teach the actual meaning of tricky real estate 'code words'</a></h3>        <div>            <div>        <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="pwMHIzMzE6ScSRLxmN5b0zjEe3_Nvmgy" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div>        </div>        </div>            </div>

What's going on in China right now reminds us of a great Princess Leia quote from Star Wars

<p><strong><strong><div class="KonaFilter image-container display-table"><div><div class="image on-image"><a href="http://www.reuters.com/article/2014/03/12/us-markets-global-idUSBRE96S00E20140312"></a><p class="source"><span>REUTERS/Bill Ingalls/NASA/Handout via Reuters</span></p><p class="caption">A photographer and an operator document the suit worn by Astronaut Michael Hopkins from NASA after the landing of the Soyuz TMA-10M capsule in a remote area southeast of the town of Zhezkazgan in central Kazakhstan, March 11, 2014. An American astronaut and two Russians who carried a Sochi Olympic torch into open space landed safely and on time on Tuesday in Kazakhstan, defying bad weather and ending their 166-day mission aboard the International Space Station (ISS). Inside the capsule were former ISS commander Oleg Kotov and flight engineers Sergei Ryazansky and Michael Hopkins from NASA. The trio launched together into space on September 25.</p></div><p></p></div></div></strong></strong></p>
<p><strong><strong><a href="http://www.reuters.com/article/2014/03/12/us-markets-global-idUSBRE96S00E20140312">Copper continues its slide</a>.</strong><span> </span></strong>Copper futures fell another 5% in Shanghai overnight as the sell-off sparked by weak Chinese trade data and headlines about defaults in China's corporate bond market. "The decline in copper prices is understood largely as an indicator of the financial squeeze in China and the use of copper as collateral," says Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "Last week saw the first onshore corporate bond default in recent years, and this has been followed by increased attention to news that a utility company was delisted in China and that the Jilin Province Trust Co. has now missed its sixth interest payment. The product, like many in the wealth management space, was to finance mining projects. The decline in iron ore prices may be both cause and effect of the financial squeeze."</p>
<p><strong>Risk off.</strong> The predominant theme in global markets today is risk aversion. S&amp;P 500 futures are in the red, the Japanese yen is strengthening, and U.S. Treasury futures are getting a lift as rumbles from China emanate around the globe. European indices are lower across the board, with France's CAC 40 index leading the way lower, currently down 1.6%. The Japanese Nikkei 225 closed down 2.6%, the Hong Kong Hang Seng finished 1.7% lower, and the Shanghai Composite gave up 0.2%.</p>
<p><strong><a href="https://mninews.marketnews.com/index.php/japan-consumer-confidence-slump-clouds-biz-sentiment-pickup?q=content/japan-consumer-confidence-slump-clouds-biz-sentiment-pickup">Japanese consumer confidence falls</a>.</strong> Japan's consumer confidence index fell to 38.3 in February from January's 40.5 reading, marking the lowest level in two years. The consensus forecast of market economists predicted the index would decline, but only to 40. The Business Outlook Survey index for large Japanese firms, on the other hand, reached an all-time high of 12.7 in the first quarter of 2014, up from 8.3 in the fourth quarter of 2013.</p>
<p><strong><a href="http://www.reuters.com/article/2014/03/12/us-korea-economy-employment-idUSBREA2B01P20140312">South Korean unemployment surges</a>. </strong>South Korea's unemployment rate spiked to 3.9% in February from 3.2% in January as a wave of people - 308,800, to be exact - entered the labor force in search of work, marking the largest monthly increase in the labor force on record going back to 1999. At the same time, the employment-to-population ratio hit a 15-year high.</p>
<p><strong><a href="http://online.wsj.com/news/articles/SB10001424052702304914904579434651163345692">Euro zone industrial production contracts</a>.</strong> Industrial output across the euro zone fell 0.2% from the previous month in January on seasonally adjusted basis. The drop was smaller than December's 0.4% contraction, but missed consensus estimates for a 0.5% rise. Year over year, however, industrial output rose 2.1% in January on a work-day adjusted basis, accelerating from December's 1.2% year-over-year pace of expansion.</p>
<p><strong><a href="http://www.ft.com/intl/cms/s/0/59e3ee62-a8de-11e3-bf0c-00144feab7de.html">Thailand cuts rates</a>. </strong>The Bank of Thailand lowered its benchmark policy interest rate by 25 basis points to 2% in order to support the local economy in the wake of extended political turmoil and street protests. The move comes as many other central banks in the region are looking at rate hikes instead of cuts.</p>
<p><strong><a href="http://online.wsj.com/article/BT-CO-20140312-703551.html">Mortgage applications drop</a>. </strong>The Mortgage Bankers Association said mortgage applications fell 2.1% last week after posting an as-of-late rare gain the week before. MBA's refinance index fell 3%, and its purchase index fell 1%.</p>
<p><strong>10-year auction this afternoon. </strong>The U.S. Treasury will auction $21 billion of 10-year notes today at 1 PM ET. "<span>We don't see the 10-year stand out one way or another in terms of relative value on the curve, so the auction result may largely hinge on pre-auction price action," say Nomura interest rate strategists. "Net, we expect a small tail unless levels become much more attractive from here."</span></p>
<p><strong><a href="http://www.businessinsider.com/candy-crush-saga-maker-king-seeks-756-billion-valuation-from-ipo-2014-3">Candy Crush maker eyes big IPO</a>. </strong><span>King Digital Entertainment, the maker of the popular Candy Crush Saga game for mobile, <span>expects to price its U.S. initial public offering at between $21 and $24 per share, giving the company a $7.6 billion valuation.</span></span></p>
<p><strong><a href="http://online.wsj.com/news/articles/SB10001424052702304250204579433533118580224">Obama's approval rating hits all-time low</a>.</strong><span> U.S. President Barack Obama's approval rating hit the lowest level of his presidency, according to a new WSJ/NBC News poll. It fell to 41% in March from January's 43% rating amid frustration over the White House's economic and foreign policy efforts.</span></p>
<p><span>Below is a Q&amp;A with Sebastien Galy, a senior currency strategist at Société Générale.</span></p>
<p><strong>BUSINESS INSIDER: Is there a single most important exchange rate to be watching right now in terms of gauging the prospects for the global economy?</strong></p>
<p><strong>SEBASTIEN GALY: </strong>The Australian dollar is a good proxy for the Chinese slowdown as Australia provides much of China's base metals. It rose sharply with the rapid rise of Asia since 2002, and has since 2013 come under significant pressure as it adjusts to the new normal of weaker growth in Asia.</p>
<p><strong>BI: The PBoC has been moving to shake investors out of carry trades designed to make money on a rising renminbi. Are there any other key markets where the fate of the carry trade should be watched closely?</strong></p>
<p><strong>SG: </strong>Concerns that the internal carry trade may come undone and fears about the future may create some demand for God, especially given geopolitical stress - both in Asia and Eurasia.</p>
<p><strong>BI: The February nonfarm payrolls report revealed signs of acceleration in wage growth. Meanwhile, food prices are surging. Are markets properly priced, in your view, for rising inflation?</strong></p>
<p><strong>SG:</strong> The cyclical improvement in the U.S. matters far more than a seasonal effect on food. Tightness in the labour market will eventually start to surprise in 2015, while international competition and a stronger U.S. dollar versus emerging markets will constrain wage gains.</p>
<p><strong>BI: What is the most exciting trade out there right now, in your opinion?</strong></p>
<p><strong>SG: </strong>Any way to hedge against a rapid if temporary correction in equities. Currencies as usual offer a cheap way to hedge against such a correction. This can be done with a variety of currencies, from the Japanese yen to the Australian and Canadian dollars.</p>
<p><strong>BI: Which developments in global financial markets, if any, would you flag as most concerning for risk appetite?</strong></p>
<p><strong>SG:</strong> The steady deterioration of Pax Americana. As rebalancing of the global economy is happening so slowly, the pain of this adjustment is felt unevenly, and is leading to political consequences one or two years down the road.</p>

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