China: banking liquidity continues to tighten

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.

Source: Bloomberg

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.

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 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 (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 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 (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 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.

Monadelphous (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 (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. This saw their stock rally 7%.

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

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