It is the 24th of February 2020

Don't Blame China For Market Insanity... Says China

When it comes to geopolitics, all anyone wants to talk about is Syria. And understandably so.

When it comes to financial markets, all anyone wants to talk about is China - an equally understandable fixation.

To be sure, China was already a big driver of risk on/ risk off sentiment going into August of 2015. The “is it a hard landing or is it not” question very often dominated global macro discussions among those who enjoy debating such things.

But when Beijing moved to a new FX regime on August 11, China was thrust into the spotlight. The “surprise” devaluation of the yuan plunged global markets into chaos, triggering “Black Monday” on August 24th and precipitating a massive drawdown of the country’s FX reserves which accelerated the global trend towards “quantitative tightening” (to quote Deutsche Bank).

In the new year, developments in China are unquestionably driving markets. A comically absurd attempt to implement a stock market circuit breaker triggered a series of harrowing declines early last month that set the tone for what turned out to be one of the worst Januarys in market history.

Meanwhile, nearly everyone suspects that a much larger yuan devaluation is in the cards. Kyle Bass, for instance, sees the RMB depreciating by 30-40% as Beijing struggles to recap a banking sector that's soon to find itseld beset with NPLs. 

George Soros shares this view. At Davos, the aging billionaire said his money is on a Chinese hard landing and as such, he's betting against Asian currencies.

That declaration set off a wave of hilariously absurd Op-Ed's from the captive Chinese media which the Politburo uses to deflect criticism and lambast foreign "speculators."

On Sunday, we got the latest "opinion" piece out of China, this time from Xinhua which wants you to know that when it comes to finding a scapegoat for market turmoil, you shouldn't look east.

Also, about Beijing's FX reserves - which are of course the single most important number for markets and are a proxy for how much money is fleeing the country- "capital flight" is not the preferred nomenclature. "Outflows" please.

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From Xinhua

The global financial markets have suffered sharp declines lately, with stocks plunging across Europe, Japan and the United States last week.

Some players once again tried to link the global rout with China. However, such claims are unwarranted and playing the blame game in the face of challenges is useless.

U.S. Fed Chair Janet Yellen said Wednesday that uncertainties from China, such as the economic growth slowdown and the yuan depreciation, have "led to increased volatility in global financial markets and ... exacerbated concerns about the outlook for global growth."

But as the Chinese equity market was closed for a week during the Chinese New Year, there has been no fresh news from China. Neither did China release any economic data or announce new policies that could move the markets during this period.

Some of the media outlets in the United States carried reports this week on what they described as a "capital flight" from China, despite that the yuan has stabilized against the U.S. dollar recently.

"Once again, financial markets are painting an oversimplified picture of a very complex story," said Stephen Roach, senior fellow at Yale University's Jackson Institute of Global Affairs.

Experts have attributed recent market jitters to factors such as the futility of the negative interest rates adopted by Japan, crude oil prices hitting 12-year lows, concerns over the financial strength of European banks and uncertainties over the U.S. Federal Reserve's monetary policy.

Since the Fed decided to raise interest rates for the first time in nearly a decade last December, worries have been mounting about whether global economic growth has been sound enough to withstand the impact of the initiation of a cycle of monetary tightening.

"Central banks are starting to wean markets from the artificial support of years of unprecedented quantitative easing ... that could prove far more problematic than another China scare," Roach said.

After years of massive monetary easing, some adjustments are inevitable, so "everyone seems to want to find someone else to put the blame on," China's central bank governor Zhou Xiaochuan said in a recent interview with Chinese magazine Caixin.

Zhou said that there is no basis for the continual depreciation of the yuan and that "China would not let the market sentiment be dominated by these speculative forces."

Meanwhile, it is important to differentiate between capital outflow and capital flight. The capital outflow may not be capital flight.

The market has had unrealistic expectation for the stability of the yuan as a result of its being "too stable over the years," Zhou said.

In terms of the economy, China has been a vital stabilizing power, too. In 2008, when the financial crisis spread from the United States and Europe to the emerging economies, China not only kept its currency from depreciating, but also announced a 4-trillion-yuan stimulus package.

After decades of double-digit growth, China has embarked on a new stage with a relatively slower growth rate of around 7 percent. Experts believe this is a reflection of the structural shift in China from export- and investment-driven growth to more balanced consumption-driven growth.

Such reforms are set to benefit the world once they are completed. China has been an important source of global economic growth, contributing more than a quarter of global economic growth last year.

Difficult external factors have added to the challenges facing China as it tries to push through structural reforms.

Central banks and market regulators of all major economies, especially the developed economies, should focus on boosting investor confidence and supporting growth. They should also be more prudent in introducing major monetary policy changes with potential spillover effects.

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"It really tied the room together"...

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