Emerging Economies: Beware your forex reserves are but to wage losing wars ....

According to Bloomberg ( Behind Chinese Yuan's Tiny Drop, Indications of True Crisis Lurk,  Ye Xie, Bonnie Cao)  China has struggled to keep the yuan stable: 
 "In propping up the exchange rate, the People’s Bank of China also burnt through more than half a trillion of dollars in foreign reserves in the past 12 months, cutting them to $3.3 trillion. The draw-down was almost equivalent to the entire stockpile of Switzerland, the world’s fourth largest holder. Regulators also went to great lengths to tighten capital controls, cracking down on illegal money transfers and restricting lenders from conducting some cross-border transactions."

This blog holds the view that emerging currencies are likely to see volatility of a serious kind....Coming events cast their shadow before...

This blog recommends no investment....views expressed here are without any risk or responsibility. 

Humpty Dumpty China?

China's central bank cut interest rates on 23 October 2015  for the sixth time in less than a year, and it again lowered the amount of cash that banks must hold as reserves .   The PBOC said on its website that it was lowering the one-year benchmark bank lending rate by 25 basis points to 4.35 per cent, effective from October 24. The one-year benchmark deposit rate was lowered by 25 basis points to 1.50 per cent.

The reserve requirement ratio (RRR) was also cut by 50 basis points for all banks, taking the ratio to 17.5 per cent for the biggest lenders, while banks that lend to agricultural firms and small companies received another 50-basis-point reduction to their RRR.

Action  by PBOC

Nov. 21, 2014 –PBOC cuts rates by 40 basis points.

Nov. 30, 2014 –PBOC publishes draft rules on deposit insurance.

Dec. 28, 2014 –PBOC changes rules on loan deposit requirements to ease liquidity pressure.

Jan. 22, 2015 –PBOC reintroduced reverse repos to meet cash demand ahead of Chinese New Year.

Feb. 4, 2015 – PBOC cuts reserve requirement ratio by 50 basis points.

Feb. 28, 2015 – The PBOC cuts rates by 25 basis points.

Apr. 19, 2015 - PBOC cuts the reserve requirement ratio by 100 basis points.

May 10, 2015 –PBOC cuts rates by 25 basis points.

Jun. 24, 2015 –PBOC scraps the loan deposit ratio cap.

Jun. 27, 2015 –PBOC cuts rates by 25 basis points and the RRR by 50 basis points for select banks.

Jul. 5, 2015 – IPOs are suspended, major brokers launch a market stabilization fund and the PBOC announces liquidity support for margin finance.

PBOC provides liquidity to China Securities Finance Corp. (CSFC), an organization that makes loans to qualified securities firms for margin on-lending to stabilize the market

Aug. 11 2015 - PBOC devalues the yuan. Mid August  PBOC conducts biggest open-market weekly liquidity additions since February

Aug. 25 2015 The People's Bank of China cut its benchmark one-year lending rate by 25bps to 4.6 percent  decided to lower reserve requirements for banks The PBOC had thus  cut benchmark lending and saving rates for the fifth time since November 2014 and lowered banks’ required reserve ratio by half a percentage point after the stock market recorded the steepest falls since 1996.

Humpty Dumpty sat on a wall,

Humpty Dumpty had a great fall;

All the king's horses and all the king's men

Couldn't put Humpty together again.

The China rate cut and India.....

Yuan fell after the Chinese cut interest rates again. China is staring at possible  fears of  Japanese style competitive price cuts by vendors. Equity stocks responded positively  as rate cuts mean reduced costs. It just is also a signal that the Chinese currency will be cheaper and that is quite a portent of competitive depreciation. Dollar policy makers may  not like that bit although one might just about like a good growth figure from China from a global perspective.

There is an attempt by India to showcase that it has exceeded the Chinese growth rate and earn brownie points on being the fastest growing economy in the World. IMF comments are being  quoted in support. This seems unwarranted jingoism- Ghana once had 9% growth rate!.

India's revised GDP figures put the growth rate at 7.4 %  after recent changes the way GDP is computed. The Chinese though aware that India is nowhere close in regard to its economic size, but is nevertheless, keen  repetitively reassert to ensure that it is the market leader in Asia.

India would have to cover quite a lot of ground to catch up, : this author feels that India might be a decade behind China - although currently the Chinese manufacturing has been slowing and India has just launched a Make In India campaign.  What India must do is soul search to bring investment in to its dilapidated infrastructure and similar issues.

With the Reserve Bank of India holding a Bundesbank type attitude on inflation, costs of the Indian corporate sector may come down slowly , particularly now since oil prices seems rising. The budget has seeds of inflation; fuel prices have already moved up. That makes it even more difficult for the RBI to move rates down.

India really needs to ask itself where its imperious bureaucracy is stalling projects. Investors like Warren Buffet who are sitting on tons of liquidity avoid India. That is perhaps of the oligarchic hold of the local  industry who kill entry through its stranglehold on matters. (Remember Vodafone? Look at the state of inefficiency of BSNL the major service provider and one will know why big players avoid India. ) The cronyism between large industrial houses and the the bureaucracy is best exemplified in the recent case of industrial espionage. India needs to really restructure itself  not just symbolically.

Sending up the stock markets without concomitant moves up  in the fundamentals is untenable for any economy. There is nothing to be proud of in an appreciating currency in today's world where competitive depreciation is taking place.

There is quite a bit of currency and strategic games at play in Asia too.


Without risk or responsibility.