Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

China: Liquidity Continues To Evaporate

By IGMarket OverviewAug 18, 2015 03:57AM ET
www.investing.com/analysis/equity-opening-calls-262007
China: Liquidity Continues To Evaporate
By IG   |  Aug 18, 2015 03:57AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

China: liquidity continues to evaporate

With today’s unsurprising CNY fixing, volatility in the CNY appears to have been put back in its box. However, the internal dynamics of China’s economy continue to flash warnings that this calm will not last.

Calls for China to cut reserve requirement ratios (RRR) are picking up again. Last week’s CNY devaluation, and the prospects for its further decline, have given a strong impetus for capital to flee the country seeking out non-CNY assets. Even before the devaluation, it is estimated that capital outflow was CNY 800 billion in August and July. This is further tightening liquidity in China’s banking system.

The offshore renminbi one-year interest rate swap, a good indicator of domestic liquidity tightness, has been steadily rising since Wednesday last week. It has climbed from a close on Wednesday of CNH 2.82 to a current level of 3.30.

CNY Chart
CNY Chart

The one-week Shanghai interbank rate has also continued to rise steadily since its recent low of 2.45% on 6 August, reaching 2.53% today. Hence, it was no surprise that the People’s Bank of China (PBoC) decided to inject CNY 120 billion of funds into the market today via reverse repos. However, this is likely to only be sufficient as a short-term measure, with further RRR cuts clearly required.

It’s worth mentioning that China’s current RRR of 18.5% is still far higher than its 20-year average of 12%. It is quite likely that RRR will be steadily cut down to this level over the next few years, with some analysts even calling for it to reach 10%. And hand-in-hand with those cuts will come further devaluations in the CNY. This year, so far, we have seen 150 basis points in cuts to the RRR and a 3% depreciation in the CNY in the space of almost six months. Given China has a preponderance for carrying out major reforms in small increments over a long period of time, one wonders if the balancing of its external accounts will continue in such a direction every six months from here out. Although the vicissitudes of the global foreign currency markets leading up to a Fed and Bank of England (BoE) rate rise may well force them to act with more regularity than the PBoC would like.

Despite prospects for further liquidity injections and rumours that the State-owned Assets Supervision and Administration Commission (SASAC) will be selling all of its SOE holdings to asset managers who could consolidate the different SOE sectors, the CSI 300 has had a poor day – down 1%. Declines have been led by the utilities and industrials sector, with China Shipbuilding and China Shenhua Energy being two of the biggest drags on the index.

The NBS 70-city house price index declined 3.7% year-on-year, an improvement from the 4.9% decline seen the previous month, but it continued the eleventh month of contraction for the series. Increased liquidity injections and the removal of housing purchase restrictions have been boosting housing sales in recent months, staving off a crisis, but they are unlikely to bring a return to the heady days of old for China’s property market.

The Nikkei 225 has seen a slight decrease, sliding 0.2%. Most Japanese investors appear to be waiting for the Federal Open Market Committee (FOMC) minutes and US inflation data out on Wednesday. If expectations for a September rate hike continue to firm after those releases, we may see a rally in the Nikkei.

The RBA minutes provided no major new information to the market since the Statement of Monetary Policy and a number of speeches have already come out since the last board meeting. The RBA continues to be relatively positive on recent data, further cementing the idea that they are likely to keep rates on hold for a protracted period of time.

ASX: another big day of earnings

It has been a big day of reporting with 16 companies releasing earnings today, as well as ASX:ANZ announcing their 3Q performance. After worrying leads from resources stocks in European and US markets, the sector has been relatively flat today, down 0.1%.

Iluka Resources (ASX:ILU), one of the world’s biggest producers of mineral sands, released its half-year results largely meeting expectations, seeing the stock rise 0.68%. They are expecting cash flow and output to beat FY14 in the second half of the year. Mineral sands prices seem to have bottomed, with Iluka forecasting sales in China to be much the same as in 2014. However, volume is beginning to recover in India and Southeast Asia. Iluka also confirmed that it’s close to securing the purchase of Kenmare Resources (LONDON:JEV) and its primary asset of the Moma Titanium Minerals Mine in Mozambique. With the purchase, Iluka will have an even larger share of the mineral sands market, positioning it well for price increases in the future.

Dick Smith (ASX:DSH) shares took a massive plunge today, declining 14.75%. It was at slightly under consensus forecasts for net profit at $37.9 million, declining 10% on the same period last year due costs associated with job cuts. While its Australian stores performed well, declining consumer sentiment in New Zealand impacted growth in the land of the long white cloud. But markets were particularly riled by the massive undershoot of estimates for same store sales growth at only 1%, well below expectations and much lower than JB Hi-Fi's (ASX:JBH) 2.9% growth. Dick Smith also missed out on benefitting from the government’s small business stimulus package because its commercial business was too small. It is increasingly looking the weakest against competitors JB Hi-Fi and Harvey Norman (ASX:HVN).

Monadelphous (ASX:MND) saw their earnings come in largely in-line with expectations. The stock has seen significant short interest, as its declines increased markedly in the lead-up to its earnings report. The rally of 3% in the stock today largely looks to be short covering, as well as an endorsement of its cost-cutting policies.

Asciano (ASX:AIO), the port and rail operator, had a strong beat of earnings expectations. They also announced a generous buyout offer from a group led by Canadian firm Brookfield Infrastructure Partners (TO:BIP_u). This saw their stock rally 7%.

Fortescue’s (ASX:FMG) share price saw a strong rally of 7.7% on reports that a Chinese group were looking to purchase its assets.

China: Liquidity Continues To Evaporate
 

Related Articles

China: Liquidity Continues To Evaporate

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email