Capital flight from China rising

Chinese banks were net sellers of US$597mn of forex in July, suggesting that exporters aren’t converting their US$’s into Yuan. No great surprise to me as China has indicated that it wants to stop, indeed, if they can get away with it, reduce the value of the Yuan. The Yuan has declined by around 1.0% against the US$ this year, the 1st decline for the last 2 1/2 years. Capital flight is increasing – prices for luxury flats in Hong Kong are rising, for example and Chinese buyers are evident in Australia, Singapore, UK, US etc. When the boys start taking their money out, well……..(Source WSJ);

Reports circulate that the PBoC might buy bonds in the secondary market to supply cash to the markets ie to introduce a QE programme. Chinese policy makers are in a total dither – at some stage, the policy of keeping housing prices down, well lets say it is likely to become a secondary issue to growth and employment;

Zheng Xinli, vice chairman of China Centre for International Economic Exchanges (CCIEE) – yep, I have never heard of this organisation either, states that China must ramp up investment, preferably by spending on rail, to stop economic growth declining, presumably below the target of 7.5% for the current year. Interestingly the Brazilian mining company Vale suggest that the golden days are done;

A number of high net worth individuals are moving out of Switzerland and to Singapore. A number of these individuals have left Switzerland following leaks in respect of their holdings in Swiss banks. Without secrecy and, allegedly tax evasion schemes, the private banking sector in Switzerland, roughly a 1/3 of the economy, will come under pressure;

Net borrowing by Spanish banks, from the ECB, soared in July, the 10th straight monthly increase. Spanish banks borrowed a record E375.6bn from the ECB in July;

UK July jobless claims were 6k lower, better than the increase of 6k expected. Temporary employment related to the Olympics was the likely reason. The UK unemployment rate was marginally lower at 8.0%, compared with 8.1% in June. Official UK economic data by the Office of National Statistics (ONS) has been downbeat, but other data sets (industry, businesses etc) has been (much?) better. Personally, I believe that the ONS data paints a far bleaker picture than is the case in reality, a view that the Bank of England expresses continually. Sterling firmed on the news;

BOE minutes released today suggest that UK Q3 GDP will pick up, though still decline by -0.1%. The BoE’s forecasts have been more optimistic that official data, though I suspect that some of the miss is due to more pessimistic reporting by the ONS, than reality;

The NY banking regulator has fined StanChart US$340mn (the largest ever fine collected by a single regulator in respect of money laundering charges, though less than half initial estimates) to settle civil charges relating to allegations of money laundering on behalf of Iran etc. Talks between the bank and Federal regulators continue. However, recriminations between the UK and the US continue, which is not helpful. Comments in the UK suggest that the alleged US$250bn of transactions on behalf of Iran, alleged by the New York regulator, is grossly misleading. This issue will go on and on, which unfortunately, will impact coordination between UK and US regulators, a material concern given the size of each country’s banking industry. There is a risk that UK regulators will become overly zealous in respect of US banking operations, based in the UK, which I believe is far fetched. I trust that common sense will prevail. However, I do believe that fines imposed in the UK and EU will rise to US levels, especially as the difference is significant, at present. StanChart shares have rallied by over 4.0% today;


Asian markets closed mainly lower and European markets are weaker . Interestingly EZ peripheral bond yields are declining, with German yields rising. I have been bearish on 10 year German bunds – yields declined to around 1.17% recently, though are around 1.50% at present. To lend 10 year money at 1.5%, to even Germany, seems crazy to me, though my increasing concerns about the EZ (including, in respect of the German Constitutional Court impending decision) has made me cautious. As expected, the Euro is off it’s recent highs (trading below US$1.23) and Brent is sharply lower – currently around US$112 – still far too high.

Investor expectations of Central Bank action (especially by the ECB), which is the major reason for the recent market performance, have risen to levels than make me uncomfortable, especially as economic and financial data are clearly suggesting a continued downturn. The FED and the BoE have been transparent and the prospect of QE3 by the FED (to be hinted at at Jackson hole) continue. However, yesterday’s US retail sales data was much better than expected – Zerohedge however, suggests that the significant improvement was due to “adjustments” !!!. The BoE is on hold until October/November, though an increase in QE is certainly possible at that time – will it be effective if the BoE continues to buy just Gilts, rather than MBS’s for example?.

Whilst I do not believe that the ECB will disappoint (if they are allowed to act), political/policy risks are rising. Then there is the infamous German Constitutional Court. I get the feeling that the German political leadership is getting a little more worried – not a good sign.

I continue to be cautious of the higher beta stocks, in particular. Essentially becoming far more defensive.

US CPI and industrial production data, to be announced later today, will be important.

Kiron Sarkar

15th August 2012

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