MNI CHINA MONEY WEEK: China Assets; Correlations And Scenarios

By Stuart Allsopp

     SINGAPORE (MNI) - The strong positive correlations between China stocks,

rates, and the yuan have reversed in recent weeks, with yields rising and stocks

resuming their decline. The yuan appears to be caught between the two, having

remained range bound in recent weeks. 

     There are a variety of scenarios for stocks and rates over the coming weeks

and in order of probability, each is assessed as to what they could mean for

China's economy and yuan.

-Rising Rates, Rising Stocks, Currency Strength

     A combined rally in rates and stocks would suggest stability is returning

to the China's economy and the trade outlook in particular. Some kind of

breakthrough in China-U.S. trade negotiations could be a trigger for this. This

scenario would support a recovery in the yuan.

-Falling Rates, Rising Stocks, Currency Weakness

     This scenario would imply continued weakness in the economy, sufficient

enough to cause the People's Bank of China to ease, which would in turn

undermine the yuan. Rising stocks would suggest that a deflationary financial

crisis was becoming less likely. The weaker currency would provide support to

exporting sectors in the mainland stock indices

-Falling Rates, Falling Stocks, Currency Weakness

     A return to the trend seen in the first half of the year would suggest a

deterioration in U.S.-China trade relations and/or further evidence of credit

stresses in the domestic economy. This would be deflationary in nature

preventing lower rates from benefitting stocks, while falling rates would

undermine the yuan.

-Rising Rates, Falling Stocks, Yuan Stability

     This would mark a continuation of the recent trend and would imply that

Beijing is looking to wean the economy off of cheap money in order to safeguard

financial stability and the yuan. It would also imply that tighter monetary

policy is pressuring stocks lower, thus preventing higher rates from causing the

yuan to appreciate.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,M$$FI$,MN$FI$,MN$FX$]