Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always perform their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.
Joined Jun 23, 2015
86 Blog Posts

I Yuan in (China-IMF/SDR), I Yuan out (1% – World)

A pivotal week in the world financial markets lies ahead. We kick off today with the IMF’s decision on giving the Chinese Yuan the “Fisher Price” (safe to play with) stamp of approval on inclusion as a component in the Special Drawing Rights (SDR) basket (aka reserve currency status). The delta is high on a yes result, given previous carping by Legarde et al, with the most likely weighting being 14% (USD is 41.9%). On the trade importance metric, China get a large check mark, with 12% of global trade. The qualification metric of being “freely usable” has been cut with an unknown substance to read “widely traded in the principal exchange market”. It appears China will get a participation trophy reflecting its’ size (2nd largest economy at US$ 10.4 tln. equiv. vs. $17.4 tln for the USA) and economic reforms made to date (i.e. partial elimination of capital controls).

While this pivotal decision could attract upwards of US$1 tln to the Renminbi (people’s currency) over time, China macro is a tad cray cray at present, leading some leading houses to estimate near term inflows as low as +US$40bln on a yes vote.

Even the CNY (onshore Yuan) bulls thinks it depreciates by 3-6% vs. USD over the coming year. The bears see CNY off by 17% from current levels by the end of 2016 (7.50 vs. 6.3944 as at 30/11/15). Plenty of information on the interweb about CNH (offshore Yuan), but suffice it to say CNH is on its’ back foot for the foreseeable future.  It trades 570 pips back of CNY at 6.4515 and is presently looked at as the canary in the coal mine wrt further PBoC easing measures when it trades >450 pips cheap to CNY. CNH was a popular carry + appreciation trade for several years running but those days are over. The Dim Sum bond market stands at US$500bln equiv. remains small in relation to the onshore bond market in China (120% of GDP). Rates in China are at 4% with inflation running at 2%, hence the scope for further easing is world leading (assuming negative rates in Europe lose steam at -0.65%).

Less than 5% of Chinese nationals hold a passport, versus 40% in the US. 15-20mm more Chinese passports are issued every year. The stories of global real estate being Dysoned up by Chinese investors will likely continue unabated  (NYC, London, Paris, Vancouver, Sydney & Christchurch). UHNW Chinese want lower beta investment strategies in currencies other than CNY. The impetus is likely not purely on an asset allocation metric, based on return profiles, but rather on the near term risk of wealth confiscation. The on-going anti-corruption, anti-graft investigations are far reaching.

A betting man would wager that, at least in the near term, the “I Yuan out” camp wins out. JCG

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  1. bebopgun

    WSJ had a nice one today on the Chinese in US real estate. “Can’t get the money out fast enough” was a quote.

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  2. firehorsecaper

    China is in, with a 10.92% SDR weighting. Re: New York, the shine is off the apple in part due to FATCA. This extraterritorial witch hunt has upwards of 30k Chinese relinquishing their Green Cards (on the heels of 120k per annum requesting one). Like us all, the Chinese love a sale. The latest reported numbers for West Vancouver pegged Chinese buyers at 60% of total sales for the quarter. Like the rest of the “Alternative Dollar” universe, i.e. CAD, ZAR, AUD, NZD the Canadian peso is off approx. 20% from levels of only a year ago. The Canadian market has traditionally been dominated by Hong Kong Chinese as they were hedged with a Canadian passport and Richmond, B.C. postal code when HK was handed back to China circa 97′.

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