MNI China Money Week: National Team Rescues Stocks, CNY Risk

--Easing Measures To Keep Upside Pressure On USDCNH

By Stuart Allsopp

     SINGAPORE (MNI) - China's 'National Team' has stabilized equity markets

following this week's crash, which has provided some support to the yuan as

correlations among Chinese assets has surged. However, any meaningful measures

to support the stock market are likely to come at the expense of the yuan over

the medium term as the authorities prioritize short-term financial and economic

stability, essentially kicking reform and deleveraging efforts down the road.

     --CRASH PREVENTION

     Statements were made by the heads of China's central bank, securities

watchdog and banking and insurance regulator earlier today promising measures to

help ease financial pressures on companies amid concerns over forced selling by

investors who have pledged shares as collateral for loans. 

     The measures also come amid weaker than expected real GDP growth figures,

published Friday, and escalating trade tensions with the U.S.

     Chinese equities have responded well to the efforts and look to end the

week on a strong note. Given how oversold and undervalued stocks have become,

there is potential for the bounce to continue if investors feel the authorities

have their backs. However, the positive knee-jerk reaction in rates and the yuan

looks less sustainable.

     --YUAN AT RISK

     Beijing is increasingly favouring short-term financial market and economic

stability over reform and deleveraging, despite its insistence on neutral and

prudent monetary policy. Two-year interest rate swaps have recovered their early

losses Friday as the 'National Team's' measures help to reduce fears of a

debt-deflation spiral, and this has provided some support to the yuan. 

     Ultimately, though, the PBOC's increasingly dovish stance will keep

downside pressure on real yields, making a yuan recovery increasingly difficult

in the absence of a major reversal by the U.S. Fed.

     The U.S.-China 2-year interest rate swap spread continues to widen,

currently at 24.7bps, despite the recent downside pressure on US inflation and

the rise in Chinese headline CPI. This is putting further upside pressure on

real yield spreads, suggesting any downside in USDCNH should be corrective.

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

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