Are We Going to See a Chinese Forex Perfect Storm?

As expected the U.S. Federal Reserve raised rates and the dollar went up against all other currencies. Unfortunately for China there is more. Bloomberg notes that they will see a really bad week in China’s markets.

It’s turning out to be a really bad week for Chinese financial markets.

The benchmark stock index has tumbled 3.6 percent, poised for its worst week since April. The yuan depreciated to its lowest level against the dollar since June 2008, while government bonds plunged, with the 10-year yield surging by a record 22 basis points on Thursday.

While some of the losses can be attributed to the Federal Reserve’s prediction of three interest-rate hikes next year, China has its own sources of stress. Surging money-market rates sparked by government deleveraging efforts are curbing demand for everything from equities to debt at the same time as capital outflows accelerate. The selloff will probably deepen over the next month, CCB International Securities Ltd. says.

The convergence of several bad things at once is a perfect storm. Are we going to see a Chinese Forex perfect storm?

“There are a few problems occurring together,” said James Yip, a Hong Kong-based money manager at Shenwan Hongyuan Asset Management (Asia) Ltd. “The People’s Bank of China is tightening marginally, the market’s leverage has been very severe, inflation data is pointing to a reflationary story, the U.S. is raising rates and the currency is depreciating. Everything put together has driven sentiment to this stage.”

We have noted, repeatedly, that all is not well in the land of managed capitalism. At the root of China’s dilemma is the fact that their economy is cooling off. It could never have grown forever at the seemingly miraculous rate of 10% or better. There simply are not enough buyers for Chinese products throughout the world. That is especially the case when Chinese industry drove so many other industries out of business hurting economies and reducing the spending power of potential buyers of Chinese products. Will we really see a perfect storm with substantial damage to the Yuan as well as the Chinese economy?

How Bad Is It Now?

Mother Jones quotes The Wall Street Journal and then asks if China’s economy might be finally ready for a bust.

Chinese authorities halted trading in key bond futures for the first time on Thursday, as panicky investors sold the securities on concern that a long, credit-fueled bull market was coming to an end amid slowing growth, capital outflows and heightened government concern about asset bubbles. China’s 10-year and 5-year Treasury bond futures recorded their biggest ever drops in early trading, falling by 2% and 1.2%, respectively, prompting exchange authorities here to suspend the securities. Trading resumed only after China’s central bank injected around $22 billion into the short-term money market.

Just a reminder: when bond yields go up, it means bond prices are going down. They’re going down because everyone is selling. And everyone is selling because they want to put their money someplace else-preferably someplace non-Chinese.

This is a really bad time for the Chinese to have someone like Donald Trump talking about raising tariffs and starting a trade war!