Talking Points:
- Commodity-backed loans and bypassing capital control could include gold as well as copper.
- USD/CNH movements could be quick in any broad based liquidation of risk assets.
- Reference rate out of China for the USDollar to Yuan (CNH) continues to move higher.
In March we touched on the fact that China (consuming half of copper trade per annum) was using 80% of their imports as pure loan collateral and/or to get around capital controls. When the People’s Central Bank of China began to widen the Yuan band in the face of slowing growth and as to target some shadow financing vehicles, we saw heavy selling of copper as some highly leveraged commodity backed loans were unwound. The recent run-up in gold prices combined with the highest USD/CNY fixing rates in months may have forced the unwinding of some extremely overleveraged positions. Although the systems of financing are often complex as we saw with copper, gold has been used for some even more complex and lucrative structures surrounding the skirting of capital controls. Yesterday, USD/CNH hit its highest level since February of 2012.
In regards to the depreciating Yuan, political pressure continues to build with Treasury officials warning the Chinese not to weaken the Yuan for their economic benefit. Meanwhile, the daily reference rates out of the PBoC continue to move higher toward the ominous 6.25 mark. That is said to be the level where a large concentration of leveraged financial vehicles may experience some serious stresses. A run towards and through that mark could be quick and does provide trading opportunities for those who keep tabs on Chinese credit markets during these volatile and uncertain times.
Note: USD/CNH vs. USD/CNY
“CNH is an offshore version of the RMB introduced by the Hong Kong Monetary Authority and People's Bank of China which allows investors outside of mainland China to gain exposure to the RMB.”
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