China remains a cloud, but storm may come next year - AmpGFX

According to Greg Gibbs, Director of Amplifying Global FX Capital, while confidence in emerging markets is relatively high, it remains tenuous in China. 

Key Quotes

“Especially after it completes its 19th Chinese Government Congress that happens every 5 years. The broad consensus is that China is delaying dealing with excesses in its financial system and maintaining steady and solid economic growth in the lead-up to this event in November. But afterwards, the market will be more nervous about the prospect of more financial sector stress and weaker Chinese economic growth.”

“Weaker Chinese markets could unwind confidence in EM and commodity markets, and generate a recovery in the USD against related currencies. It could generate speculative positions squaring more broadly, and spill over to a weaker EUR (since the speculative community is now significantly long EUR, according to CFTC data).”

“If China does choose to step up efforts to unwind financial excesses, it might not do it immediately after the November Congress, but wait through the turn of the year, including beyond Chinese New Year. Perhaps from March into Q2 would be the more sensible timing.”

“However, there is already evidence that China is squeezing a little harder on the shadow-banking system. It has announced a number of regulatory measures this year designed to force banks to report more of their off-balance sheet asset management products.”

“One indicator of stress is up since last year. Chinese short term Negotiable Certificates of Deposit (NCD) rates have increased significantly. These are typically used by smaller banks to help fund their investments in asset management products. Higher NCD rates point to higher funding costs and some tightening in conditions. Similarly, interbank rates for one-year terms have risen more significantly than for shorter maturities, further pointing to some cautiousness in lending between banks for longer terms.”