Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

<ul>
<li>Rates in Asia have sold off as rates globally have risen due to increasing inflationary pressures. However, rates in Asia have risen by less in comparison with the US.</li>
<li>The main reason behind the better performance of rates in Asia is the outperformance of Indonesia and China with both countries benefiting from high real rates.</li>
<li>Looking ahead, a continued rise in rates in the US makes Indonesian local bonds vulnerable to a correction, but rates in China may continue to outperform in my view.</li>
</ul>


Rates in Asia have sold off as rates globally have risen due to increasing inflationary pressures. However, rates in Asia have risen by less in comparison with the US.
The main reason behind the better performance of rates in Asia is the outperformance of Indonesia and China with both countries benefiting from high real rates.
Looking ahead, a continued rise in rates in the US makes Indonesian local bonds vulnerable to a correction, but rates in China may continue to outperform in my view.


How Are Rates in Asia Reacting to the Rise in US Yields?

Chief Economist

Diana Choyleva

Enodo Economics

Enodo Economics is an independent macroeconomic forecasting company that untangles complexity, challenges the consensus, and makes sense of the future. Our focus is on China – one of the most misunderstood economies in the world, but one of the most important to figure out.  Enodo’s chief economist, Diana Choyleva, has been analysing China for almost 20 years, while Enodo’s team boasts a combined 140 years’ experience covering China’s economy, politics and markets. 

Macroeconomics

<h2>China News That Matters</h2><ul>
<li>Beijing releases carbon emissions action plan</li>
<li>Lipstick bro pockets $2bn in Singles’ Day sales</li>
<li>Taxing times</li>
<li>US to China: You’ve got our attention now</li>
<li>Beijing warns US on Taiwan support</li>
</ul><p></p><div class="content-remarks"><p>In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.</p></div>

China News That Matters
Beijing releases carbon emissions action plan
Lipstick bro pockets $2bn in Singles’ Day sales
Taxing times
US to China: You’ve got our attention now
Beijing warns US on Taiwan support
In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.

Cross-Asset Liquidity Strategist, CrossBorder Capital

Michael J. Howell

Cross-Asset Liquidity Strategist

Implementing Research Using Alt Data & AI

CrossBorder Capital

CrossBorder Capital is a London-based independent investment advisory firm. Founded in 1996, it exploits a gap in the investment arena by focusing on Central bank liquidity. 

It specialises in the monitoring and analysis of global liquidity flows - an important determinant of asset prices, from currencies through to bonds, equities and real estate.

CrossBorder Capital implements its investment strategy and currently manages over US$ 350m.


Cross Asset Strategy

<ul>
<li>Daily economic surprise indexes warn of sharp Chinese economic slowdown</li>
<li>This aligns with falling rates across Chinese yield structure</li>
<li>Moves unrelated to accommodative PBoC monetary policy</li>
<li>Chinese yields could fall another 50-100bp which is bullish for US Treasuries</li>
</ul>


Daily economic surprise indexes warn of sharp Chinese economic slowdown
This aligns with falling rates across Chinese yield structure
Moves unrelated to accommodative PBoC monetary policy
Chinese yields could fall another 50-100bp which is bullish for US Treasuries


Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

<p>China has been the biggest beneficiary of the global glut of central bank liquidity created since the Global Financial Crisis of Sept 2008 -- which was multiplied further in 2020 with renewed central bank aggression amid the Covid pandemic. In 2007, China already had massive industrial over-capacity. But China rode the tide of global liquidity since 4Q 2008, with China's M2 money supply expanding from US$6.56 trillion in August 2008 to US$34.96 trillion in April 2021 (more than a 5-fold increase in 13 years) -- while US M2 expanded from US$7.75 trillion to US$20.11 trillion over the same period (a 2.5-fold increase).  </p><p>Now, with US core CPI inflation at 3% and the core PCE deflator up 3.1% YoY in April 2021, it will be impossible for the Fed to keep adding US$120 billion of assets to its balance sheet monthly. Global liquidity conditions are bound to tighten. China will find it difficult to export its overcapacity, as the world has become more wary of allowing China to dump (i.e., export production below cost), especially as production ramps up in the rest of the world amid the full reopening from the pandemic. We recommend staying cautious on the China market, avoiding its tech titans particularly, as they run into political challenges from Xi Jinping. </p>

China has been the biggest beneficiary of the global glut of central bank liquidity created since the Global Financial Crisis of Sept 2008 -- which was multiplied further in 2020 with renewed central bank aggression amid the Covid pandemic. In 2007, China already had massive industrial over-capacity. But China rode the tide of global liquidity since 4Q 2008, with China's M2 money supply expanding from US$6.56 trillion in August 2008 to US$34.96 trillion in April 2021 (more than a 5-fold increase in 13 years) -- while US M2 expanded from US$7.75 trillion to US$20.11 trillion over the same period (a 2.5-fold increase).  Now, with US core CPI inflation at 3% and the core PCE deflator up 3.1% YoY in April 2021, it will be impossible for the Fed to keep adding US$120 billion of assets to its balance sheet monthly. Global liquidity conditions are bound to tighten. China will find it difficult to export its overcapacity, as the world has become more wary of allowing China to dump (i.e., export production below cost), especially as production ramps up in the rest of the world amid the full reopening from the pandemic. We recommend staying cautious on the China market, avoiding its tech titans particularly, as they run into political challenges from Xi Jinping. 

China Has Been the Global Winner from the Liquidity Glut of 2008-21; Now Comes Pain

<p>China has had a spectacular 1Q 2021, with exports and industrial output soaring relative to the low base in Jan-Feb 2020 (the one quarter in which China's economy shrank last year), but also growing at a good clip relative to 2019 (+33% for exports and +1.9% for industrial output); imports were up 17.3% in Jan-Feb 2021 relative to 2 years ago. This suggests that real GDP should grow about 12% YoY in 1Q 2021, or expand 4.7% relative to 1Q 2019.   </p><p>While the current account surplus widened to 1.8% of GDP in 2020 (the largest in dollar terms globally at US$301 billion), and the surplus for April-December 2020 was US$335 billion, foreign reserves only increased by US$156 billion during that 9 month period. So net capital outflows were substantial, at US$179 billion in April-December 2020, at a time when the RMB was appreciating, and China should normally have attracted net capital inflows. Chinese residents continue to find ways of taking capital out of China. During Jan-Feb 2021, net services and capital outflows were US$115 billion (with foreign reserves down US$12billion). </p><p>Despite massive overcapacity across most industrial sectors, China did not shed its addiction to fixed asset investment (FAI), which increased by 2.9% in 2020, even as the rest of the world was in recession. In Jan-Feb 2021, FAI surged by a further 35.1% YoY -- thus expanding 16.9% relative to its level in Jan-Feb 2019. The surge in FAI is adding more capacity to industries already burdened by overcapacity, at a time when external demand is set to weaken as the rest of the world's economies gradually reopen, reducing demand for China's exports. With external and domestic demand likely to slow (the latter weakened by capital flight), the rest of 2021 will be increasingly difficult for China's economy. </p>

China has had a spectacular 1Q 2021, with exports and industrial output soaring relative to the low base in Jan-Feb 2020 (the one quarter in which China's economy shrank last year), but also growing at a good clip relative to 2019 (+33% for exports and +1.9% for industrial output); imports were up 17.3% in Jan-Feb 2021 relative to 2 years ago. This suggests that real GDP should grow about 12% YoY in 1Q 2021, or expand 4.7% relative to 1Q 2019.   While the current account surplus widened to 1.8% of GDP in 2020 (the largest in dollar terms globally at US$301 billion), and the surplus for April-December 2020 was US$335 billion, foreign reserves only increased by US$156 billion during that 9 month period. So net capital outflows were substantial, at US$179 billion in April-December 2020, at a time when the RMB was appreciating, and China should normally have attracted net capital inflows. Chinese residents continue to find ways of taking capital out of China. During Jan-Feb 2021, net services and capital outflows were US$115 billion (with foreign reserves down US$12billion). Despite massive overcapacity across most industrial sectors, China did not shed its addiction to fixed asset investment (FAI), which increased by 2.9% in 2020, even as the rest of the world was in recession. In Jan-Feb 2021, FAI surged by a further 35.1% YoY -- thus expanding 16.9% relative to its level in Jan-Feb 2019. The surge in FAI is adding more capacity to industries already burdened by overcapacity, at a time when external demand is set to weaken as the rest of the world's economies gradually reopen, reducing demand for China's exports. With external and domestic demand likely to slow (the latter weakened by capital flight), the rest of 2021 will be increasingly difficult for China's economy. 

China: Large Net Capital Outflows Presage Trouble as Excess Capacity Begins to Bite

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China Treasury (CHINA GOVT)

How Are Rates in Asia Reacting to the Rise in US Yields?

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Gautam Jain, PhD, CFA

COP26/ E-Commerce/ Tax/ Weapons/ Taiwan

In my weekly digest, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and...

Diana Choyleva

China's Economy: Chips Or Cracks?

Daily economic surprise indexes show sharply lower Chinese economic momentum in early June. This should lead to 50-100bp cuts in rates along the...

Michael J. Howell

China Has Been the Global Winner from the Liquidity Glut of 2008-21; Now Comes Pain

China rode the global liquidity wave since 4Q 2008. Now that the tide is turning (amid soaring US core inflation), industrial overcapacity and anti...

Prasenjit K. Basu

China: Large Net Capital Outflows Presage Trouble as Excess Capacity Begins to Bite

Net capital outflows were US$179bn in Apr-Dec 2020 despite the rising RMB; in Jan-Feb 2021, outflows were $115bn. The surge in FAI is creating...

Prasenjit K. Basu

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