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Currency ETFs Break Historical Uptrends
Beijing swells dollar reserves through stealth
Last Updated: 3:24pm BST 26/08/2008
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Rule changes for commercial banks are acting as cover for exchange rate intervention, writes Ambrose Evans-Pritchard
China has resorted to stealth intervention in the currency markets to amass US dollars, using indirect means to hold down the yuan and ease the pain for its struggling exporters as the global slowdown engulfs the economy.
A study by HSBC's currency team in Asia has concluded that China's central bank is in effect forcing commercial banks to build up large dollar reserves, using them as arms-length proxies in a renewed campaign of exchange rate intervention.
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Beijing has raised the reserve requirement for banks five times since March, quickening the pace with two half-point rises in late June.
This is having major spill-over effects into the currency markets because banks in China have been required over the last year to hold extra reserves in dollars rather than yuan. The latest moves have lifted the mandatory deposit from 15pc to 17.5pc of total lending since March.
"China has used the pretext of reserve requirement hikes to help slow yuan appreciation. We estimate that the PBOC [central bank] intervened by about $49.6bn in June," said Daniel Hui, the bank's Asia strategist.
Beijing has also slashed the amount of foreign debt banks operating in China can hold. The effect is to oblige the banks to become net buyers of dollars, halting the flow of foreign "hot money".
# Nobel economists warn we are not out of the woods
# Dollar surge is not all good news for America
Given the sheer scale of China's foreign reserves - now $1,800bn (£970bn) - any shift in its exchange policy now ripples around the globe. The covert buying may help to explain at least part of the explosive dollar rebound over recent weeks.
There is little doubt that the key driver behind the wild currency ructions this summer has been the blizzard of dire data from Britain, Europe, Japan and Australasia. The mounting danger of a full-fledged recession across the club of rich OECD nations appears to have caught the markets off guard.
The closely watched Dollar Index reached an all-time low in March. It crept up gradually in the early summer before smashing through resistance in July.
The world's currency system is swivelling on its axis. Central banks in Asia and Europe have stopped raising rates, and some have begun to cut aggressively. The Federal Reserve is no longer nakedly exposed. Indeed, investors are already starting to look ahead to the next round of Fed tightening.
The 18pc slide in oil prices from a peak of $147 a barrel in July has added juice to the dollar rally. Russia and the Middle East petro-powers tend to recycle a high proportion of their vast earnings from oil into the eurozone, either by purchasing European bonds or expensive imports.
A Bundesbank study found 40 cents of every dollar spent by eurozone countries on oil imports comes back again one way or another. The figure for the US is just 10 cents. This trade bias has given oil a new character as a sort of anti-dollar driving the currency markets.
Even so, the China effect is a key ingredient in the dollar comeback. Beijing's Politburo is clearly disturbed by the sudden downward turn in the economy as export markets freeze, and surging wage inflation in the country's manufacturing hubs eats away at profit margins.
# More Ambrose Evans-Pritchard
# More economics
"They are now more worried about growth than overheating, and you are seeing that play out in the currency markets. There has been a remarkable change of view," said Simon Derrick, exchange rate chief at the Bank of New York Mellon.
China's PMI purchasing managers index fell below 50 for the first time in July, signalling an outright contraction in manufacturing output. Hong Kong's economy contracted 1.4pc in the second quarter. The Politburo has rushed through special rebates for textile producers now caught in a ferocious downturn.
Much of the clothing, footwear and furniture industry has been hit, leading to mass plant closures in the Pearl River Delta.
"During the first half of this year, about 67,000 small and medium-sized companies went bankrupt throughout China, leaving more than 20m people out of work," said the National Development and Reform Commission. "Bankruptcies of textile and spinning companies have numbered more than 10,000. Two thirds are on the brink of bankruptcy."
Last week's rebound on the Shanghai stock market stalled on fading hopes of a fiscal stimulus package. "It is unrealistic to expect the government to rescue the market," said Li Ka-shing, chairman of Hutchison. "Speculators should be very cautious now. The worst is not over in the global credit crisis."
Lehman Brothers warns of a risk that a housing slump and the 55pc equity crash since October could combine with a global downturn to set off a "vicious cycle". House prices have already fallen 18pc in Guangzhou and 9pc in Beijing. Prices are now falling in cities that make up over half China's population.
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As Building Slowdown Goes Commercial, Ultrashort Real Estate Should Speed Up
Specifically focusing on the affects of SRS to this market. Yes, the macro view of Fed intervention and Congressional/Executiv... overzealousness will play a key role as to whether the credit markets will continue to cease operation, or the Fed changes the rules to the game and starts being a player -- instead of a cheerleader.
From the SRS standpoint -- if you look at what REIT's makeup the DJUSRE index there are more than 80+ REIT's that are unequally weighted. Out of 80+ REIT's only 11 comprise 2% or more of the index.
1. VNO
2. VTR
3. SPG
4. PSA
5. PLD
6. PCL
7. KIM
8. HST
9. HCP
10. GGP
11. EQR
When I have some more free time I'd like to put together a dossier of these 11 REIT's and their exposure to the credit markets as well as their sensitivity to the potential increase in vacancy due to the recession.
I was able to pull this from DJ's website explaining how they create the weights for each REIT that is included in the DJUSRE
Weighting Float-adjusted market capitalization -- Component Number Variable
Review Frequency Quarterly -- in March, June, September and December
Calculation/Distributi... Every 15 seconds during U.S. trading hours
Base Value/Base Date 100 as of December 31, 1991
History Back-tested history. Available daily back to December 31, 1991
Date Introduced February 2000
As Building Slowdown Goes Commercial, Ultrashort Real Estate Should Speed Up
I don't think Paulson's plan to regulate the investments and securities industry will gain much traction, and the Fed is losing ground with every instance of lowering the fed funds rate. I presume that in the next six months we will see an increase in vacancy rates thus requiring REIT's to lower their lease rates, driving down their NOI, depending on their inherent leverage they could have to seek operating capital from the markets/shareholders. I know there are a lot of assumptions in this -- do you feel that they are realistic?