China Slows & Yuan Calm Before the Storm?

Yesterday we reported the massive jump in Chinese investment gold consumption in the first quarter of this year.  Apart from the Chinese being canny buyers of a dip they also have some domestic issues that are a likely explanation for a rush to their favourite safe haven.

We wrote last week of some of the troubles facing China’s economy, the world’s second biggest.  Subsequent to that we’ve seen hard data in the form of trade figures paint a challenging picture to the China recovery story.  April imports growth nearly halved to 11.9% (and well below 18% expectations) and exports growth more than halved to 8% (and again well below expectations of 11.3%), cementing a trend of declines since the end of last year and reinforcing the signals from the soft data of various economic surveys.  The chart below also reinforces this trend showing commodities at 4 month lows, shares at 7 month lows, and bonds falling with yields at 22 month highs.

The aforementioned article last week highlighted the tightening in the Chinese credit market as a clear warning signal.  We’ve since learned that the collapse in bond issuance escalated in April as the cost of debt increased amongst this tightening.  April saw 154 bond issues aborted, up from 94 in March and early 30’s in February and January.  As The Financial Times reported from PIMCO’s global strategist:

“The collapse in domestic bond issuance is a clear consequence of efforts to rein in shadow banking generally and wealth management products specifically….This adds to an already sizeable credit tightening impulse baked into the cake for the second half of this year….The question now is not if China’s economy will slow, but rather how fast,” 

However in terms of the Yuan trade, things are eerily quiet against this backdrop and that of a strengthening USD.  If you cast your mind back to August 2015 we had seen a similar disconnect play out and then…. THAT shock devaluation that sent shockwaves around the world and the first sizeable sell off of shares since the GFC.  Now check out the graph below and ask yourself if that looks just a little similar (and some)?

Keep in mind too that China are probably the singularly biggest factor behind our Aussie dollar.  If the world sees China falling they would likely exit the Aussie dollar in droves, seeing it drop to the 60’s many are predicting and seeing Aussie gold and silver surge accordingly.