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China-US monetary policy divergence – Implications for Asia

Diverging macroeconomic policies in China and the US have created market volatility recently amid concerns that China’s growth slowdown could spill over into Asia and a less generous US central bank could mean tighter US dollar liquidity for the region…



Diverging macroeconomic policies in China and the US have created market volatility recently amid concerns that China’s growth slowdown could spill over into Asia and a less generous US central bank could mean tighter US dollar liquidity for the region.

How do policies diverge?

China’s growth momentum has been falling since early 2021 amid a flurry of regulatory tightening. Shifting to a policy easing bias, the People’s Bank of China cut banks’ reserve requirement ratio (RRR) in July 2021 by 50bp, marking the first cut since April 2020. This released an estimated RMB 1 trillion into the Chinese system.

China’s monetary policy matters for Asia as it affects China’s growth which, in turn, has an impact on Asia through the trade and supply-chain channels. It also affects the commodity market via China’s investment demand.

Meanwhile, the US Federal Reserve went in the opposition direction in July with its ‘dot plot’ of policymaker expectations pointing to interest rate increases sooner than thought and by extension to the Fed tapering its pandemic-era aid for the economy in the run-up to a rate rise.

The Fed’s policy matters for Asia as it impacts US growth, which in turn curbs Asian exports. It also has an influence on global liquidity conditions and, thus, Asia’s sources of external funding.

There are reasons to believe that this divergence in policy between the US and China may not be bearish for Asia. The Peoples’ Bank of China (PBoC) is expected to continue easing liquidity selectively. This should mitigate the downside risk of a growth slowdown in China and, hence, Asia.

Meanwhile, Asia may benefit from a gradual policy normalisation by the US Fed since this would reflect stronger US growth, even if US interest rates were to rise.

China’s policy impact

Despite market worries that China’s regulatory tightening might have gone too far and may result in policy overkill that would crush GDP growth, there is evidence that China has great policy flexibility to manage macroeconomic risks and balance its policy goals.

When Covid-19 hit at the end of 2019, Beijing shelved all deleveraging and structural reform initiatives and switched to a prudent expansionary policy to protect GDP growth.

However, it did not enter into large-scale quantitative easing (QE) as many developed market central banks did. It shifted to a tighter policy bias in late 2020 after the economy recovered from the Covid shock and refocused on deleveraging and regulatory reforms.

However, as headwinds to growth have intensified again since 2Q21 on the back of Covid flare-ups and the regulatory tightening effects, policy has returned to an easing bias.

Against almost all analysts’ expectations (except ours) of a tiered (or selective) cut in the RRR in July, the central bank delivered a blanket cut, signalling a clear policy shift. As growth momentum slows and regulatory tightening intensifies, there will likely be more moves to ease liquidity. This should help stabilise economic growth.

Measures may include an acceleration in government bond issuance and the PBoC injecting more liquidity via the RRR, its open market operations and its lending facilities.

There may not be any cuts in official interest rates since that could be too strong a policy signal. It would go against Beijing’s debt reduction and structural reform initiatives.

With an increasing share going to China, exports have led Asia’s post-Covid growth recovery. Granted, some exports concern components destined for third markets via China, but other exports cater for domestic demand.

Slower, though sustained, growth in China should help support external demand in Asia. More infrastructure investment in China, funded by increased local government bond issuance, should also benefit Asia and the commodity market in general in 2H21 since capital spending typically involves more imports than consumer spending.

The fed’s policy impact

The potential for Fed policy to disrupt markets will depend on the pace and magnitude of the rise in US real (inflation-adjusted) rates. There are reasons to believe that the pace will be slower and the magnitude smaller this time.

Learning from the 2013 experience, when US real rates rose by 150bp in four months, the Fed now appears to prefer a longer lead time between communicating its tapering intentions and the actual tapering, and between the actual tapering and policy rate rises. The Fed’s new inflation targeting framework is also more dovish than before.

Asia’s macroeconomic fundamentals are also crucial for determining whether regional economies would be hurt by rising US rates or benefit from the stronger US growth that would prompt the rate rises. For example, Asian growth benefited from strong US demand between 2003 and 2006 without being hurt by rising US rates and without being forced into a disruptive rate rise cycle itself.

However, in the 2013 ‘taper tantrum’, Asian growth suffered due to weak macroeconomic fundamentals. These included high inflation and large external deficits. This put downward pressure on regional currencies and forced some Asian central banks to tighten monetary policy.

This time, Asia’s macroeconomic fundamentals look mostly better: inflation is lower, current account deficits are smaller and currency reserves are grown.

The risks

Of course, if Beijing’s policy shift crushes China’s GDP growth unexpectedly or US inflation turns out to be higher and more persistent than expected, Asia would suffer a double whammy from the world’s two largest economies through both trade and global liquidity linkages.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Chi Lo. The post China-US monetary policy divergence – Implications for Asia appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management, the sustainable investor for a changing world.

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Fed Urged To Fire Officials Over “Pandemic Profiteering”

Fed Urged To Fire Officials Over "Pandemic Profiteering"

Two weeks ago, Fed Presidents Robert Kaplan and Eric Rosengren (and to a lesser, though still notable extent, Fed Chair Powell himself) were ‘outed’ for their multi-million-dollar stock



Fed Urged To Fire Officials Over "Pandemic Profiteering"

Two weeks ago, Fed Presidents Robert Kaplan and Eric Rosengren (and to a lesser, though still notable extent, Fed Chair Powell himself) were 'outed' for their multi-million-dollar stock and bond trades, sparking widespread outrage, bolstering claims that not only is the market rigged and manipulated by the Fed but that it is rigged directly for the benefit of Fed members like Kaplan and Rosengren who - whether they intended or not - benefited monetarily from their own decisions and their inside information that nobody else was privy to..

While none of the transactions appears to violate the Fed's code of conduct, CNBC reported, municipal bonds are an asset class that are far more niche that stocks or ETFs. 

Officials “should be careful to avoid any dealings or other conduct that might convey even an appearance of conflict between their personal interests, the interests of the system, and the public interest," the Fed's code of conduct says.

It was such 'bad optics' that less than two days after the widespread public fury at this grotesque discovery, the presidents of the Federal Reserve banks of Boston and Dallas said they would sell their individual stock holdings by Sept. 30 amid "ethics concerns", and invest the proceeds in diversified index funds or hold them in cash.

While we are sure the Fed officials hoped this would satisfy the ignorant masses... it has not. And as The Wall Street Journal reports, two advocacy groups and a former Fed adviser have said that The Fed should fire at least one (and perhaps both) of the Fed officials over their "pandemic profiteering trading conduct."

Better Markets, a group that pushes for tighter financial regulation; the left-leaning Center for Popular Democracy’s Fed Up campaign; and Andrew Levin, a former top Federal Reserve staff member and now a professor at Dartmouth College, are calling for the Fed to take action against Messrs. Kaplan and Rosengren.

“It’s time for the Fed to do what leaders are supposed to do:  Lead by example,” Better Markets president and chief executive officer Dennis Kelleher wrote in a letter sent to Fed Chairman Jerome Powell Tuesday.

Messrs. Kaplan and Rosengren, both should resign or be fired “for having lost the confidence and trust of the American people and, one would think, the Chairman of the U.S. central bank,” Mr. Kelleher said.

As The Fed is about to shift policy regimes into a taper of its unprecedented fre-money-gasm-machines, Mr. Kelleher added:

“This is no time for the American people to lose confidence and trust in the Fed, which must be above reproach, not set the lowest bar for ethical and legal conduct,”

Some Fed watchers say the trading raises questions about who policy was designed to help.

“There are a lot of reasons that working people are right to wonder if the Fed has their best interests in mind,” said Benjamin Dulchin, campaign director for Fed Up.

“These trades are only the most obvious reason, but it makes it harder for the Fed to do its job,” Mr. Dulchin said, adding if he were Mr. Kaplan or Mr. Rosengren, “I would resign.”

There is, however, one man supportive of Kaplan - his predecessor at the Dallas Fed, Rich Fisher, who shrugged off the million-dollar trades as nothing, noting that in fact, Kaplan was "talking against his own book..."

But, 'Dick', actions speak louder than words eh? And now that he has been shamed into cutting all market exposure, who cares whether he is hawkish or dovish - he's made his!

Source: NorthmanTrader
Tyler Durden Wed, 09/22/2021 - 08:25

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Nomura Fears ‘Hawkish Surprise’ In Dot-Plot As ‘Vol Expansion’ Window Closes

Nomura Fears ‘Hawkish Surprise’ In Dot-Plot As ‘Vol Expansion’ Window Closes

Is history going to repeat itself today?

The last time the US equity market ‘hiccupped’ was following the FOMC meeting in September 2020…

As Bloomberg notes,..



Nomura Fears 'Hawkish Surprise' In Dot-Plot As 'Vol Expansion' Window Closes

Is history going to repeat itself today?

The last time the US equity market 'hiccupped' was following the FOMC meeting in September 2020...

As Bloomberg notes, the environment looks similar in several ways to today’s:

  • In September 2020, the Fed noted the limits of monetary policy in dealing with the economic shock caused by the pandemic. Now, the Fed is hamstrung by high inflation and will likely have to start pulling back on accommodation.

  • Back then, House Speaker Nancy Pelosi was pushing out a stopgap funding plan without Republican support in an effort to avoid a government shutdown. Now, she is brokering a truce within her own party to push through a multi-trillion dollar spending bill while averting a government shutdown and a Treasury default.

  • Concerns over the Covid-19 virus heading into autumn were also a worry then as they are now. This headline from Sept. 18, 2020, “Wall Street’s Return-to-Office Push Finds Virus Won’t Cooperate” could easily be swapped onto stories over the past month.

And while the market is rebounding on Evergrande headlines (which, if one scratches below the surface of the headline alone, do not offer much hope for the majority of bondholders... especially dollar bondholders), and the usual pre-FOMC 'drift', Nomura's econ team is far less sanguine and sees a number of hawkish risks across the statement, updated forecasts and press conference:

  • While we do not expect a formal tapering announcement this meeting, the Committee is likely to finalize the tapering plan ahead of a November announcement. Chair Powell may provide an update on tapering parameters that have gained a consensus, potentially including the size and frequency of adjustments.

  • Data have softened and the pandemic outlook has become more uncertain but, if anything, the FOMC appears to be increasingly concerned that the primary impact of subsequent COVID disruptions will be prolonged upward pressure on inflation as opposed to depressed demand.

  • We see upside risk to the September “dot plot.” While we think the median 2022 policy rate forecast will stay at the effective lower bound (ELB), the bar for a half or full hike is low. We think 2023 will continue to show two rate hikes, while 2024 – a new addition in September – will show an additional two hikes. Concerns over inflation could result in more than four forecasted cumulative hikes by end-2024.

  • The FOMC’s updated economic projections are likely to show a flatter growth path – with downward revisions to 2021 but stronger numbers in 2022-23 – along with notably higher near-term inflation forecasts as supply chain disruptions prove more persistent than the Committee expected just a few months ago.

  • The post-meeting FOMC statement will likely include new language to signal an imminent tapering announcement, and we believe the Committee may nuance the language describing inflation as rising “largely reflecting transitory factors.”

Tying this FOMC today back into the recent US Equities spasm, Nomura's Charlie McElligott points out that it is becoming clear to me that the “window for volatility expansion” will soon be closing again thanks to “clearing” of Op-Ex- and Fed meeting- event risks, which will only further drive resumption of “reflexive vol / gamma selling” as well as hedge monetization flows that will then see spot rally (VIX ETN Net Vega has now DECREASED by 7.2mm over the past 1w into the Vol squeeze)…

UNLESS we can again realize larger daily changes (i.e. 1.5% type moves) on Index-level again in order to justify UX1 at 23 / 24 which would be prompted by a 'hawkish surprise'...

Because, have no doubt, there is still “energy” there to overshoot in either direction with some very real accelerant flows remaining on account of Dealer options positioning: currently we see SPX / SPY Dealers short ~$9.2B of $Gamma (6.6%ile, flips positive above 4411) while $Delta remains negative at -$139.1B (11.2%ile, flips positive above 4400); similar for QQQ, with REALLY negative $Gamma at -$709.6mm (1.3%ile, flips up at 375.02) and negative $Delta at -$16.5B (2.7%ile, flips positive above $373.85)

But overall, SpotGamma notes that the key to the last several days has been this: we have not see any data to suggest material put buying, despite market weakness.

If puts were bought then that would add market pressure because dealers have to short futures to hedge.  If traders come out of the FOMC needed to buy downside put hedges then that adds additional selling.

The bottom line is that we expect some large swings today, and for the market to “stage” at either 4430 or 4300 into the close today, which could set the direction for a large move into Friday.

Tyler Durden Wed, 09/22/2021 - 09:30

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China Syndrome? Is Evergrande A Symptom Of Deeper Malaise

China Syndrome? Is Evergrande A Symptom Of Deeper Malaise

Authored by Bill Blain via,

“If that’s true, we are very close to the China Syndrome ”

Evergrande’s imminent default is rocking markets – but few believe…



China Syndrome? Is Evergrande A Symptom Of Deeper Malaise

Authored by Bill Blain via,

“If that’s true, we are very close to the China Syndrome ”

Evergrande’s imminent default is rocking markets – but few believe the collapse of a Chinese property developer could trigger a global financial crisis. What if Evergrande is just a symptom of a deeper malaise within the Chinese economy and its political/business structures? Maybe there is more at stake than we realise? What if Emperor Xi decides he needs a distraction?

Amid this week's market turbulence, and the overnight headlines, Evergrande dominates thinking this morning. The early headlines say the risk is “easing”. Don’t be fooled. S&P are on the wires saying it’s on the brink of default and is unlikely to get govt support. It’s Asia’s largest junk-bond issuer. Anyone for the last few choc-ices then?

The market view on the coming Evergrande “event” is mixed. Some analysts are dismissing it as an internal “China event”, others reckon there may be some systemic risk but one Government can easily address. There is some speculation about “lessons” to be learnt… There are even China supporters who reckon its proof of robust China capitalism – the right to fail is a positive!

I’ve got a darker perspective.

The massive shifts we’ve seen in China’s political/business public persona over the past few years have been variously ascribed: a reaction to Trump’s protectionism, China taking its place as a leading nation, Xi flexing his military muscle, and now a clampdown on divisive wealthy businesses to promote common prosperity.

What if Evergrande is just a symptom of something much deeper?

That that last 30-years of runaway Chinese growth has resulted in a deepening internal crisis, one that we barely perceive in the west? What if the excesses that have spawned Evergrande and the illusion every Chinese can afford luxury flats and a western standard of living is about to implode? Crashing oriental minor chords!

The looming Chinese property debacle will be fascinating, but it many respects will be similar and yet very different to the multiple market unwinds we’ve seen in the west. How it plays out will have all kinds of implications for growth, speculation and how global investors perceive China in the future. Folk are variously describing it as China’s Lehman Brothers, or the next “Minsky Moment” when speculation ends with a sharp jab of reality to the kidneys.

I’m thinking back to a story I read a few years ago about the Shanghai Auto-fair pre-pandemic. Evergrande New Electric Vehicles had the largest stand and was showing off 11 different EVs. Not one of these were actually available to buy – they were all models of as-yet unproduced cars. The company was valued at billions and yet never sold a single vehicle. This morning, it’s just another worthless business Evergrande is trying to flog. (See this story on Bloomberg TV: China’s Zombie EV Makers.)

The market is asking itself a host of questions about Evergrande’s collapse: How bad will its tsunami of Chinese contagion deluge global markets? When it’s going to happen? What knock-on effects will cascade through markets?

Perhaps the most important question is: Who will be exposed “swimming naked” when the Evergrande tide goes out? Who will be left with the biggest losses? As the company is definitely bust, these losses rather depend on just how China’s authorities respond.

Step back and think about it a moment – try putting these in context:

  • Fundamentally all business is about identifying a consumer need and filling it.

  • Fundamentally, greedy businessmen tend to get carried away because the political-financial system enables them.

  • Fundamentally, it’s just another burst bubble and who cleans up the mess.

  • In Evergrande’s case a thousand flowers of capitalism with Chinese characteristics grew into an unsustainable business – fundamentally no different from debt-fuelled sub-prime mortgages, or CDOs cubed, in the West.

The big difference this time is its China! China has done things… differently. The path China pursued in its recovery and growth since 1980 has not been without… consequences.

Thus far we’ve praised China for its spectacular growth and the creation of valuable companies under the red banner of Chinese capitalism. It is going to be “interesting” to see how the subsequent mess is cleared out. Questions about Moral Hazard are going to be shockingly simple – Government has made it abundantly clear that any wrongdoing by company executives will be punished in the harshest possible way.

More importantly, Chinese politics and business works on a very different playing field to the west. Forget the rule of law or the T&C’s of Evergrande bonds. It easy to dismiss and characterise the way Chinese business works as institutionalised systemic corruption – but it’s a system Ancient Roman Emperors would recognise as a patron/client relationship. Emperor Xi’s clients and his princelings will continue to benefit from his patronage in return for their support at his court, and will be protected in a meltdown. The system Xi presides over will have little motivation to intervene to protect western investors who find themselves caught in the Evergrande fiasco.

Where Xi will have to take notice is outside the rich, wealthy princeling cadre which increasingly owns and runs China. There will be massive implications for wealth/inequality among the Chinese people from a property collapse. With a third of Chinese GDP dependent on the property sector, (and about 4 million jobs at Evergrande), the collapse of one of the biggest players, and the likelihood others will follow is much more than just a systemic risk.

Property is a key metric in the aspirations to wealth of the rising Chinese middle classes. The same smaller Chinese investors and savers will likely prove the largest losers from the property investment schemes they were sucked into. These real losses will rise if hidden bank exposures trigger a domestic banking crisis – which apparently isn’t likely (meaning it is..). There are reports of investor protests in key China cities – putting pressure on the govt to act to mitigate personal losses.

Xi’s clampdown on big tech is painted as the Party’s programme to engineer a more socially-equal economy. He has pinned the blame for rising inequality on “corrupt” business practices and has his cadre’s waving books on Xi thought, mouthing slogans about “common prosperity” and “frugality”. These are going to look increasingly hollow if the middle classes bear the coming Evergrande pain, and the Party Princelings continue to prosper.

The really big risk in China is not that Evergrande is going to default – it’s much bigger. If the Party is seen to fail in its promise to deliver wealth, jobs and prosperity for the masses – then that is very serious. China’s host of failed EV companies, an economy still reliant on exporting other nations tech, and a massively overvalued property sector (that the masses still equate with prosperity) all suggest a much less solid economy than the Party promotes.

If the illusion of a strong economy is unravelling – who knows what happens next, but in Ancient Rome the answer would be simple… Blame someone else, and invade..

This could get very “interesting…” and not in a good way.

Tyler Durden Wed, 09/22/2021 - 08:45

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