CHINA IS ANOTHER MARKET that has rebounded with the help of the authorities. But, according to Anne Stevenson-Yang, it amounts to a “dead-panda bounce.”
The Chinese stock market and its currency, the renminbi or yuan, have firmed in tandem with the rosier hue taken on by markets around the globe. But in the case of China’s equity and property markets, she writes in a report to clients of J Capital Research, “the root of nearly every part of the ‘rebound’ story is cash stoking an asset bubble, and that will not last long. It does suggest a degree of political panic.”
For now, the authorities are attempting to portray confidence. Curbs on margin lending and short-selling, two big culprits in last year’s market debacle, are being eased. Moreover, the yuan has been guided subtly higher by the People’s Bank of China this year, albeit against a weaker dollar, following last August’s sudden decline.
There has been a robust bounce in property speculation that Stevenson-Yang says is being likened to that of the stock market at its frenetic peak last year. Behind it is a stunning surge in government-backed lending to smaller banks and nonbank financial institutions that, in the first two months of this year, equaled almost half of China’s reported GDP for 2015, or 36 trillion renminbi—more than $5 trillion. In the past four months, lending by those institutions has exceeded all of last year’s GDP by RMB20 trillion.
“Leverage is the only idea left in the Chinese government, and is reaching truly suicidal levels,” she contends.
The financial pumping supports the “unrelenting jawboning from the top about the strength of the economy,” Stevenson-Yang continues. While she concedes that her forecast of a further weakening of the yuan—to 6.80 to the dollar versus the current 6.51—has been off the mark, she says that delaying the needed adjustments will worsen their cost and potential severity. …
… The easiest way to sort out this conflict would be to let the yuan continue to fall. That has been the biggest bet by hedge funds this year, and it has been Beijing’s aim to make the hedgies lose that wager.
But, to reiterate, burning the fingers of the yuan short sellers runs counter to the authorities’ attempt to pump liquidity into the domestic market. Which means that the effect of the Chinese authorities’ efforts to manipulate their currency has been to boost it artificially, not to drive it lower, as a certain U.S. presidential candidate insists.