China's Economy

[sinner]

Re: XAO Technical Analysis

Fair enough, but what i have a hard time understanding is how the whole thing can just fix itself almost OVERNIGHT...

As McLovin said, an increase of 25% in LIBOR would be a catastrophic event sure to freeze up credit for weeks wouldn't it?

My guess is, that just like 1st world banks in 2008, the reason it fixed itself is not because interbank lending conditions got much much better, but simply that banks stopped using the instrument for credit, so the rate falls on no volume. It's not that they've lost access to credit completely, they are just getting it direct from the CB discount window now.

As for definitions of "fix itself" I would say things aren't fixed until the curve returns to a normal shape, it's not just about the overnight rate. If you go here you can see the curve is messy as hell http://www.shibor.org/shibor/web/html/ (in a normal curve overnight should yield the lowest and 1Y should yield the most with a systematic rise in the yield as duration increases)

 

[CanOz]

Re: XAO Technical Analysis

My guess is, that just like 1st world banks in 2008, the reason it fixed itself is not because interbank lending conditions got much much better, but simply that banks stopped using the instrument for credit, so the rate falls on no volume. It's not that they've lost access to credit completely, they are just getting it direct from the CB discount window now.

As for definitions of "fix itself" I would say things aren't fixed until the curve returns to a normal shape, it's not just about the overnight rate. If you go here you can see the curve is messy as hell http://www.shibor.org/shibor/web/html/ (in a normal curve overnight should yield the lowest and 1Y should yield the most with a systematic rise in the yield as duration increases)

So the discount window is the injection of liquidity that they mentioned yesterday?

 

[sinner]

Re: XAO Technical Analysis

So the discount window is the injection of liquidity that they mentioned yesterday?

Got link? All I saw yest was this:


PBOC OFFICIAL SAYS FINANCIAL MARKET STABLE THIS YEAR
PBOC OFFICIAL SAYS MONEY MARKET FLUCTUATIONS TEMPORARY
PBOC OFFICIAL SAYS SEASONAL FACTORS TO GRADUALLY DISAPPEAR
PBOC OFFICIAL SAYS TO CLOSELY WATCH LIQUIDITY CONDITIONS
PBOC OFFICIAL SAYS TO STEP UP COMMUNICATION TO GUIDE RATES
PBOC OFFICIAL SAYS LIQUIDITY AMPLE

(i.e implicitly no new injection)

 

[Trembling Hand]

Re: XAO Technical Analysis

My guess is, that just like 1st world banks in 2008, the reason it fixed itself is not because interbank lending conditions got much much better, but simply that banks stopped using the instrument for credit, so the rate falls on no volume. It's not that they've lost access to credit completely, they are just getting it direct from the CB discount window now.

Yeah I think you are right there. Everyone firstly rushes in and with the extra vol and reduced supply the rate sky-rockets. Once everyone realises the cupboards are empty no one shops there any more.

Squeeze is still on. traders just playing the bounce.

 

[sinner]

Re: XAO Technical Analysis

An important thing to keep in mind as well is CDS. CDS are kind of like the bond traders (more efficient) put option. If you're a legit holder of debt then you can make a lot of extra money trading in and out of the CDS.

China 5Y CDS is quite high, like 2008 and 2011 high. So this is a pretty good indication of legit hedging demand, and at the same time, that perception of things being "fixed" in the interbank rate market is because risk has been hedged out to CDS.

 

[McLovin]

Re: XAO Technical Analysis

My guess is, that just like 1st world banks in 2008, the reason it fixed itself is not because interbank lending conditions got much much better, but simply that banks stopped using the instrument for credit, so the rate falls on no volume. It's not that they've lost access to credit completely, they are just getting it direct from the CB discount window now.

So there was some sort of mistiming by the PBOC initially that allowed the rate to climb that high, presumably if they had flooded the market with cash SHIBOR would have fallen? Or were they sending a message to banks about their lending?

 

[Trembling Hand]

Re: XAO Technical Analysis

Or were they sending a message to banks about their lending?

No mistake. Thats what they were trying to do. I bet though they didn't expect/want the massive smack down in the markets.

 

[CanOz]

This is all very interesting, thanks for the explanation Sinner.

So the cost to insure is also rising, so we're sure there is higher isk perceived there now, at least by those who can afford insurance.

What are the key things to look for next? Will the market key in on these things, i.e. the index futs?

CanOz

- - - Updated - - -

No mistake. Thats what they were trying to do. I bet though they didn't expect/want the massive smack down in the markets.

This should be a good thing though right? That the markets react to this info? I just don't know how much weight to put behind the Shanghai futures movements...say compared to the HSI. These developed markets should be pretty good at pricing risk, compared to less mature markets like Shanghai?

 

[McLovin]

Re: XAO Technical Analysis

No mistake. Thats what they were trying to do. I bet though they didn't expect/want the massive smack down in the markets.

Interesting. The Chinese certainly don't take Western sensibilities about market stability too seriously.

 

[sinner]

So there was some sort of mistiming by the PBOC initially that allowed the rate to climb that high, presumably if they had flooded the market with cash SHIBOR would have fallen? Or were they sending a message to banks about their lending?

Yeah like TH said, they are definitely trying to signal the opposite of other CBs in the sense of

a) Tightening in response to rises in asset classes (real estate especially)
b) Killing off shadow funding market (Copper Funding CCFD stuff)
c) Reigning in dodgy lending

If you have not been reading Michael Pettis blog "China Financial Markets" you are missing out, the guy lives in China and teaches Central Bankers-to-be at Peking University: http://www.mpettis.com/

This is all very interesting, thanks for the explanation Sinner.

So the cost to insure is also rising, so we're sure there is higher isk perceived there now, at least by those who can afford insurance.

What are the key things to look for next? Will the market key in on these things, i.e. the index futs?

CanOz

- - - Updated - - -
This should be a good thing though right? That the markets react to this info? I just don't know how much weight to put behind the Shanghai futures movements...say compared to the HSI. These developed markets should be pretty good at pricing risk, compared to less mature markets like Shanghai?

To me it's been obvious the SHCOMP has been marking down pretty much non stop since 2010? Very similar pattern to EURJPY prior to the BoJ interventions. In fact I would say it's one of the very few indices that actually look fairly priced on a fundamental basis.

Key things to look out for:
* reinversion of the interbank curve or the 2Y-10Y China spread (might have to replicate synthetically).
* Bid/Ask spreads on options and CDS (when they're very wide hedging becomes impractical and expensive)
* Volatility in the timeseries (index, SHIBOR, whatever)
* Spreads which should never break, breaking (e.g. in 2008 I saw ETF spreads like SPY:VV widen out to massive size, which should never ever happen)

 

[Trembling Hand]

Re: XAO Technical Analysis

Interesting. The Chinese certainly don't take Western sensibilities about market stability too seriously.

Yeah but I think they are have been given a self directed lesson!

 

[McLovin]

Yeah like TH said, they are definitely trying to signal the opposite of other CBs in the sense of

a) Tightening in response to rises in asset classes (real estate especially)
b) Killing off shadow funding market (Copper Funding CCFD stuff)
c) Reigning in dodgy lending

If you have not been reading Michael Pettis blog "China Financial Markets" you are missing out, the guy lives in China and teaches Central Bankers-to-be at Peking University: http://www.mpettis.com/

Thanks, Sinner. I had Pettis blog on my reader then Google got rid of Reader. I'll have to go and have a read again.

 

[CanOz]

Yuan loan to deposit ratio at approx 60%, below the 75% required level - Chinese press- UPDATE - Source TradeTheNews.com

This is the leverage that they're employing right? So, this isn't good that its getting higher is it?

 

[sinner]

This is the leverage that they're employing right? So, this isn't good that its getting higher is it?

There is huge amounts of unofficial and ugly leverage in the Chinese financial system CanOz, official stuff like loan/deposits doesn't mean too much in a centrally planned economy.

Check out the Copper Financing Deals.

http://www.mpettis.com/2011/05/25/looking-for-debt/

That's where the leverage is really coming from.

 

[CanOz]

There is huge amounts of unofficial and ugly leverage in the Chinese financial system CanOz, official stuff like loan/deposits doesn't mean too much in a centrally planned economy.

Check out the Copper Financing Deals.

http://www.mpettis.com/2011/05/25/looking-for-debt/

That's where the leverage is really coming from.

Good grief....here i was thinking these people were not creative...

 

[sinner]

Good grief....here i was thinking these people were not creative...

So that was 2011, back when Michael Pettis started telling people about it.

Now look last month, before all this SHIBOR stuff started:

http://www.zerohedge.com/news/2013-...ives-end-copper-financing-chinas-lehman-event

China's State Administration on Foreign Exchange (SAFE) on May 5 finally passed new regulations which will effectively end such financing deals.

GS --
...

Our view is that the bulk of copper stored in bonded warehouses in China – at least 510,000t at present, as well as some inbound copper shipments into China – is being used to unlock the CNY-USD interest rate differential. This material has not been entirely unavailable to the market (deals can be broken if costs rise, such as a tightening of LME spreads), but the inventory has been effectively financed by factors exogenous to the copper market for some time.

We find that a complete unwind of CCFDs would be bearish for copper prices as the copper used to unlock the differential would shift from being a positive return/carry asset to a negative carry asset for those who currently hold it. As such this inventory will likely become more ‘available’ to the global market. Initially stocks would likely move into the Chinese domestic market to ease the current tightness, until the current SHFE price premium to LME closes.

...

 

[CanOz]

So that was 2011, back when Michael Pettis started telling people about it.

Now look last month, before all this SHIBOR stuff started:

http://www.zerohedge.com/news/2013-...ives-end-copper-financing-chinas-lehman-event

Yeah, that is the bottom line here really is that the shadow market will stay ahead of regulations enough to get the place in the crap big time....

You know i used to think that the Chinese didn't like debt, they liked to pay cash...so much has changed since I've been here and they're addicted to credit now. They seem oblivious to the fact that it needs to be paid back too, they just figure they'll roll it over...

That's why i'm nervous...I've seen all this behavior in my new extended family and we don't like it...all i can think of is multiplying that behavior by a few 100 million and you have a big problem...:1zhelp:

CanOz

 

[CanOz]

Wish you told me sooner Sinner

The Copper ETF...lets look for rally's to sell then shall we?

 

[sinner]

Wish you told me sooner Sinner

The Copper ETF...lets look for rally's to sell then shall we?

Those who've been paying attention been watching Copper since Jan 2011

http://www.zerohedge.com/article/fo...near-term-plunging-forgotten-levels-1500-2016

Specialist copper analyst Simon Hunt looks to copper peaking in Q1 but fading badly thereafter, then a parabolic rise in 2012 followed by a drastic collapse 2013-2016.

...

Bottom line: there is somewhere between 3MT and 4MT of cathode warehoused outside the reporting system in China.

Simon Hunt is a very highly respected (by me at least) copper analyst.

 

[CanOz]

Unreal, the things you learn in a day...

There must be a dozen different ways to play China, long and short.

I'm trying to find fundamental plays with ETFs and then use technical s to enter a swing or postion...not just for China plays but all kinds...

I just don't know where to start....

CanOz