China: Financial and economic risks rising - AmpGFX

Analysts at Amplifying Global FX Capital points out that internal market dynamics in China continue to reveal risks for the region and commodity currencies; in particular, the AUD continues to trade a Chinese financial risk barometer.

Key Quotes

“While 1 to 10-year Chinese swap rates have been falling in the last month, shorter term interbank money market rates have been creeping higher, suggesting there is some funding stress developing.  This may reflect regulatory efforts forcing banks to report at the end of each quarter balance sheet metrics that now include their holdings of off-balance-sheet wealth management products (WMPs) that invest in a wide range of often undisclosed financial assets, including other WMPs.”

“Chinese Negotiable Certificates of Deposit (NCD) rates are higher.  These are commonly used by smaller banks to finance holdings of WMPs.”

“Chinese equities have joined the global rally, however, mainland-listed equities have lagged those listed offshore, and broader equity indices that include smaller company shares have under-performed the main CSI 300 index.”

“As we move into the final month of the half-year, and another reporting period for Chinese financial institutions, it will be interesting to see if shadow-banking sectors continue to be squeezed. And whether the authorities can maintain the delicate balance of injecting enough liquidity and moral suasion to keep investor confidence afloat.”

“The AUD has been one of the few currencies not to rise against the USD in recent months.  Instead, it has been on a choppy downtrend.  This may reflect, in part, evidence of tightening financial conditions in China.”

“Australian economic activity indicators in the last week suggest that the domestic economy is not as bad as some feared.  Retail sales began to recover in April from a weak Q1, Private Capex is showing signs of bottoming, and job ads growth remains solid.  However, the early evidence that house prices may have peaked had a bigger impact in dampening sentiment, seen as a major risk factor for financial and economic stability in Australia.”

“The AUD remains threatened by evidence on some slowing in demand and tightening credit conditions in China, and signs that the Australian housing market is peaking.”