China Premier Li Says No Basis for Yuan’s Continued Depreciation

31 Aug 2015 | Author: | No comments yet »

Focus turns to U.S. data as China slowdown looms.

NEW YORK – After a dizzying two weeks that saw a rapid plunge and rebound in equity prices, investors are looking forward to a week of economic data that may provide clarity on the likelihood of a near-term U.S. interest rate hike and help tamp down the market’s recent wild swings.Global stock markets surged Thursday on renewed confidence in the US recovery after days of wild swings, but some observers warned of more turbulence to come over the slowing Chinese economy.There is sometimes a feeling that “the markets” are a kind of all-knowing beast, with trading based on forensic analysis of the latest economic and business signals. Buyers streamed back to markets after Shanghai, the epicenter of the volatility, snapped a five-day losing streak, and a surprisingly strong new estimate of US economic growth in the second quarter — 3.7 percent — gave more support as the day passed.

Car sales, construction spending, the Federal Reserve’s “beige book” and jobs growth may show the economy is strong enough to withstand the first rate hike in nearly a decade from the Federal Reserve, despite worries about a hard landing for China’s economy. That — and a production stoppage by Shell in Nigeria — sent oil prices zooming up 10 percent, their biggest single-day jump since the 2009 global economic crisis. “The US economy continues to perform on a consistent basis… (showing) that its economic recovery is sustainable… The United States is leading the global economy as it has been since late last year,” said FXTM chief market analyst Jameel Ahmad. That is the only way to explain the extraordinary ups and downs, with reporters on the trading floor in New York saying they had experienced some of the strangest days they had seen in decades. Global stock markets were stung by severe swings in recent weeks, stoked by concerns that a slowdown in China’s economy may be more harsh than anticipated.

These dramatic falls, which followed a more gradual but still stomach-churning 11.5pc decline in Chinese stocks the week before, ripped through global markets. But after confirming a move into correction territory, the S&P 500 rebounded to score its best two-day percentage gain in over six years last week, as comments from Fed officials led some investors to believe the market turmoil and global growth concerns had diminished the possibility of a rate increase at the central bank’s September meeting. America’s Dow Jones Industrial Average share index plummeted an unprecedented 1,000 points, before closing 588 down – its biggest decline for four years.

The moves by the Chinese government are “not as effective as they used to be,” said Yale University finance professor Chen Zhiwu on a conference call with the Council on Foreign Relations. Fed Vice President Stanley Fischer told CNBC during the Fed’s annual conference in Jackson Hole, Wyo., that the committee was “heading in the direction” of higher rates.

The turnaround in Chinese shares, which ended with a 5.34 percent gain, came in the last hour of trade Wednesday, sparking speculation of state-engineered buying and talk of more possible support measures from the government. “There were external funds flowing in, but it’s uncertain if it was the national team,” Shenwan Hongyuan analyst Gui Haoming said, referring to entities which trade on behalf of the government. For the moment this looks unlikely, with the Chinese economy more likely to slow to a growth rate of about 5 per cent this year than suffer some kind of collapse. Traders in futures markets that bet on rate increases then boosted September’s odds. “There is a narrative out there that Yellen’s Fed is looking for a reason to delay the rate hike; I don’t think that is necessarily the case,” said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Mass. Such market gyrations have, more than at any time since the Lehman Brothers collapse in September 2008, raised fears of a renewed financial crisis, with all the related economic, political – and human – fall-out. While cutting interest rates for the fifth time in nine months, Beijing also tightened rules on short-selling, banned large shareholders from offloading stakes and forced local pension funds into domestic stocks.

We just have to play them right.” Fed Chair Janet Yellen is not attending, but her deputy, Stanley Fischer, will make keynote remarks on Saturday that could point to whether the central bank believes the global turmoil is severe enough to hold off on a long-expected hike in interest rates. On Wednesday New York Federal Reserve head William Dudley, seen as close to Yellen and Fischer in his thinking, said that the Chinese turmoil had made the arguments for a rate rise in September “less compelling.” But Michael Taylor, head of British investment adviser Coldwater Economics, said that the global fall in prices, especially of key commodities like oil, will turn into a pickup in global demand over the next half year. “I think just the uncertainty will keep the Fed on hold, even though monetary conditions are turning up, and you should expect global demand to pick up with it over the coming six months,” he said. The reversal on Western markets, meanwhile, was largely driven by a senior Federal Reserve official hinting that an interest rate rise, previously signalled for September, is now “less compelling” given renewed financial volatility. A similar sentiment has spread to the UK, with investors betting the Bank of England won’t raise rates until October 2016 – six months later than expected just a few weeks ago.

There is also now rampant speculation, which the Fed isn’t discouraging, that America will soon engage in yet another round of quantitative easing – so-called QE4. Emerging market hit: The fallout from China’s slowdown has hit other so-called emerging markets – developing economies generally in Latin America, Asia and Africa – in a number of ways. Most obviously the falling demand from China for commodities such as iron and other minerals has hit the big exporters of these products – everywhere from Brazil and Mexico to Malaysia and even Australia. The Western world is similarly engaging in gross market distortion, albeit of a different kind – by keeping real interest rates firmly in negative territory and, once again, desperately stoking shares with the promise of further hundreds of billions of dollars of virtually printed money.

The final complication is the risk that rising US interest rates pull investment out of these countries and back to the US, where the return will slowly increase. Having grown 9.8pc a year since the late-1970s, the economy of the People’s Republic now outstrips that of America on a purchasing power parity basis (adjusted for living standards). In recent months, growth has slowed – with official forecasts pointing to a 6pc to 7pc expansion in 2015 and some analysts questioning the veracity of government statistics. The stock market remains some 40pc down since June – and China’s banks have a swath of non-performing loans smouldering on their balance sheets, after years of over-investment in projects driven by political rather than economic logic. Having said that, China’s property market, which drives economic sentiment to a greater extent than equities and underpins the banking sector, remains buoyant.

If only those pesky emerging markets could run themselves properly, goes the Western narrative, then we would not have to endure the market volatility caused by their bad decisions. In 1998, an emerging markets crisis, starting in Thailand and then spreading across Asia to Russia, was indeed the catalyst for a significant downturn on global markets. The collapse derived from chronic private and public sector indebtedness across such countries, many of which were in the throes of emerging from years of economic isolation. If we are on the brink of another “Lehman moment”, then it is the West’s response to the sub-prime crisis – above all, our continued reliance on growing debt and monetary stimulus – that must take a large share of the blame.

Then there is the dark shadow that has long been cast over global markets by the potential unravelling of the grossly incoherent grand project that is Europe’s single currency. In part, to demonstrate to the International Monetary Fund enough flexibility that Washington might deign to allow the yuan to be included in the official reserve currency basket.

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