MNI China Money Week: Markets Bounce Back As Yuan Steadies

--After Sell-Off, Is The Great Fall Of China Over?

By Stuart Allsopp

     SINGAPORE (MNI) - Market focus has finally shifted away from the collapse

in Chinese assets, with the Turkish lira now moving squarely into focus. The

'great fall of China' may be coming to an end, as the negative news regarding

U.S.-China trade relations may have been largely priced in and investors look to

target the EMs with weaker balance sheets.

     The most positive development we have seen in Chinese assets is the

recovery in stocks. The failure of the Shanghai Composite and HSCEI to hit new

lows on Monday, even as the CSI 300 and the Hang Seng did so, was a positive

technical signal, and the subsequent recovery, while far from concrete, has been

noteworthy as it came amid general global equity weakness.

     Another positive sign has been the recovery in Chinese interest rate swaps.

While 2-year interest rate swaps have fallen back from their daily highs of

2.92% to trade at 2.86%, they remain up on the day, and the rise does not seem

to be driven by higher CDS spreads as is the case across much of the EM

universe. 

     This is supportive for the yuan given upside pressure on EM CDS spreads and

downside pressure on DM bond yields. The collapse in China-U.S. swap spreads

appears to have come to an end, with Chinese 2-year yields now trading back

outside those of the US.

     --AWASH WITH LIQUIDITY

     Pessimism is also rising regarding China's economy, which could be a

contrarian signal. According to the latest survey by MNI (see 'MNI LIQUIDITY

SURVEY: PBOC Floodgates Open; Econ Pessimism Up', 01:54 EDT / Aug 10) most

participants are pessimistic about the economy and expect further easing, with

78.9% traders saying the economy is deteriorating, the highest percentage since

September 2014, and up from 57.9% last month. 

     Out of the 19 respondents, 16 believed 10-year China government bond yields

will trend lower or remain at the current level over the next three months.

     While there are still large fundamental headwinds facing the economy in the

form of debt deleveraging and the impact of US tariffs, and the yuan is far from

cheap, the declines we have seen in rates and stocks over the past six months

are at least showing some tentative signs of ending. Should rates and stocks

begin to pick up, this would support a stabilization, and potentially a rally,

in the yuan.

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

[TOPICS: M$A$$$,M$Q$$$,MI$$$$,MX$$$$,M$$FI$,MBQ$$$]