The size of the global carry trade (once again)
The Bank of Japan's recent rate hike doesn't seem to have dented the world's appetite for carry trades. If anything, the BoJ's signal that it won't changes rates too quickly seems to have added to the financial world's already strong desire to borrow yen to buy other currencies.
That brings up a question that we discussed extensively two weeks ago — just how big is the yen carry trade?
Detecting carry trades can be a bit like detecting planets orbiting a distant star. Because many carry trades are done off-balance sheet – and even the data for on-balance sheet carry trades has its limits (long lags) – sometimes the presence of large trades needs to be inferred from the wobbles that appear in various financial markets. Just as the presence of a planet is often detected by the way its gravitational pull leads to wobbles in the light from their star …
Right now, I see lots of indirect evidence of the popularity of carry trades. Large Glacier bond issues and large — perhaps record large – foreign positions in the Icelandic Krona. A strong kiwi. Strong reserve growth (implying rapid capital inflows) in high carry emerging economies like Brazil, India and Turkey. The FT's concerns about slow Brazilian growth don't seem to be shared by the markets: Brazil could add close to $10b to its reserves in February alone trying to fight carry trade inflows. A weak yen and Swiss franc.
The case that there are big yen-financed carry trades out there doesn’t hinge entirely on the large speculative short position that shows up in the data from the futures exchange.
Measuring the size of the global carry trade is fraught with difficulties, not the least methodological. Are central banks that hold pound reserves but not yen reserves engaged in a carry trade? Are Japanese retail investors who buy – without borrowing any money – New Zealand bonds engaged in a carry trade? What of Japanese pension funds who buy US agency bonds for the yield pickup?
Or are we really just interested in the size of the leveraged carry trade, that is the amount of yen that have been borrowed by various financial market actors – be they New York or London hedge funds or Japanese day traders – to buy higher yielding currencies?
Personally, I suspect both the “real” money carry trade and the leveraged carry trade matter. If the real money invested in the carry trade ever decided that they needed to hedge or just lost interest in adding to their “high carry” holdings, it would have a large market impact.
But a fall off in real money outflows is a bit different than a global margin call that require a very rapid unwinding of leveraged carry trade positions. And, for that matter, different from the risk that those investors who have sold out of the money calls that insure some big carry traders from really big moves in the yen hedge their own position (Tett and Garnham hint that such insurance is common). Hedging, here, I think, implies buying yen to protect against further rises in the yen. Such yen purchases, in turn, would add to the pressure on the yen …
That is a long build-up. I want to turn the floor over to Tim Lee of Pi Economics – the source of the widely quoted $1 trillion estimate for the size of the yen carry trade. In response to an earlier thread on the yen carry trade, he wrote:
“The $1 trillion estimate comes originally from a piece of work I did, and I thought it only fair to contribute my explanation for anyone interested.
In the work I accept that guesstimates for the size of the carry trade that can be derived from balance of payments and banking statistics fall in the range US$100-350 billion. However, as has been noted here, it is not necessarily the case that carry trades will show up in these statistics. Carry trade transactions could be on the other side, for instance, of hedging by Japanese exporters in the forward currency market, which would not show up in bank balance sheet statistics.
The one trillion number is less a genuine 'estimate' than an indication of what I believe to be the order of magnitude. My guess is that the outstanding carry trade is probably even larger than this. There are a number of connected reasons for believing this, which I will try to summarise briefly;
1) The big adverse development in the Japanese balance of payments data (IMF data) that occurred subsequent to the massive intervention up to March 2004 was the deterioration in 'monetary capital' (i.e. increase in Japanese banks' net foreign assets). This suggests that it is carry trades that have weakened the yen, not Japanese institutional or retail funds going into foreign securities, and it suggests that the moral hazard created by the intervention was the original cause.
2) Indications of the carry trade such as Japanese banks' gross foreign assets, cumulative short-term net foreign lending from the Japanese bop, the spec net short position on the Chicago IMM correlate quite well with each other and also with the yen rate. I think these indicators do not tell us the size of the carry trade but they do tell us the direction. Again, these suggest that it is the carry trade that has been responsible for yen weakness.
3) Carry trade currency relationships are now enormously out of line with fair values. I have the yen about 30% undervalued against the dollar. The Turkish lira I have 130% overvalued against the yen, which is extraordinary. Turkish inflation is 10%, but the lira simply will not go down (bar the episode last spring).
4) The Japanese MOF/BOJ had to acquire roughly US$500 billion to prevent the yen appreciating up to March 2004. The yen is now much lower in real terms. Logically the amount of intervention next time round is going to have to be much greater - my estimate is roughly US$2 trillion. The idea that the carry trade is, say, only US$200 billion is inconsistent with this in my view.
5)There seems to be a relationship between the yen and the enormous credit bubble which now completely dominates global financial markets and the economy. In my work I had a chart (mainly for fun) showing the very close relationship between Goldman Sachs share price in dollars and the S&P 500 in terms of yen. There are plenty of other similar relationships I think you could show.
When you add all this together, it is simply not plausible, in my view, that the carry trade could be as small as most observers are saying. The observed impact that the carry trade is having on the currency and other markets is too great. As to why hedge funds, investment banks and others have not been frightened out of it, I think they have 'learned' that it 'always works' in the end, much as technology growth stock investors 'learned' in the second half of the 1990s. They do not see how it could possibly go badly wrong until Japanese rates have been raised significantly, and they see no prospect of that. “
On the last point, at least, the market consensus certainly seems to be that Japanese rates aren't going to rise far or fast enough to put a real dent in the carry trade. At least not this year. Or maybe just not right now. With both the G-7 and the BoJ rate hike in the rear-view mirror, it seems like a number of people decided to add to their existing bets. I am interested in what Macro-man has to say on this …
UPDATE. Macro-man's specific reaction can be found here. If any one can help me better understand the BIS data on yen swaps, please do email me — there is a raging debate on whether the positions reported by the BIS are indicative of the markets' true short-yen position or not …
UPDATE 2: The FX page at bloomberg provides more evidence of ongoing carry trades. The Swiss franc hit a record low v. the euro. The Brazilian real headed up, again, in the face of ongoing intervention (I assume). It is heading back to levels last seen before the emerging market sell-off last may. And buying insurance against a big move in the yen/dollar remains cheap — record cheap. Which means, I think, that it is easy to borrows borrow yen to buy real or Turkish lira and then hedge that position by buying protection against a big move in the yen/ dollar. That hedge is cheap — someone is willing to sell a lot of protection. And the returns on Turkish lira and Brazilian real carry trades are large.
I tuned into CNBC, Bloomberg TV, various finance blogs and news site and all I hear about is the Yen carry trade and how it will reverse badly because everyone is doing it.
The irony is markets don’t reverse when there is so much skeptism out there. When no one talks about the Yen carry trade and when everyone is convinced that the Dollar Yen is a one way bet, that may be the time to watch out.
In the mean time let’s see if Dollar Yen can break 122. If it can do so then the long term target for the next 3 years is 135.
To be honest, I find $/ yen a much less compelling carry trade than TRY/ yen or BRL/ yen or ISK/ yen. Brazil = no current account deficit, and better yields. And in turkey and iceland you at least get paid (a lot) for financing a big and possibly still growing current account deficit.
I am not sure all the talk of how it will end badly is a sure guarantee it won’t end badly. but it doesn’t seem to jibe with what folks actually are doing, best I can tell (i.e. adding to their existing carry trades).
PC said:
“markets don’t reverse when there is so much skeptism out there.”
Look at the subprime mortgage market. It has been warned about for two years and it has finally reversed. When the optimists are earning massive positive carry (4% pa on yen carry and subprime) the skeptics tend to be vocal but reluctant to suffer the ongoing cost of shorting the market. When the turning point finally arrives, the skeptics finally start talking with their money and the market moves are dramatic.
Once again, if I may, I repeat that the size of the yen carry trade is best indicated by the yen swaps market.
According to BIS data from 6/2006, there were $3.85 trillion outstanding in yen forward swaps and another $2 trillion in yen currency swaps (a swapping of loan payments in different currencies), for a total of almost $6 trillion. For comparison, on 6/2001 they totalled $3.3 trillion.
These are real money transactions (i.e. not notional), are corrected for double counting and are carried off balance sheet.
Given the nature of those swap transactions (they are ready-made carry trades) the $1 trillion figure from Pi Economics likely understates the size of the carry trade.
Furthermore, market conditions since June 2006 indicate that the above amounts are probably higher today.
Data can be found at:
http://www.bis.org/statistics/derdetailed.htm
Brad–A few comments on the yen carry tarde;
1)As Tim Lee noted, yen carry traders may have “learned” that “it always works” in the end. This reminds me an anecdote quoted by Bertrand Russel; a goose, fed well every day, has reached a conclusion that she would continue to be so, only finding one morning that is not the case. This is a pitfall of induction based on repetition.
2)I now understand the background of $1 trillion estimate of the yen carry trade. I must say that the estimate is more like a cryptic oracle than a serious estimate.
3)I agree wiht you that the “real” money carry trade and the leveraged carry trade are defferent, though I personally think that the former is not really a carry trade.
Analogy of planet detection in distant galaxies describes the hard work to unearth the mechanism of carry trades.
In Turkey 8-9% CA deficits seem to be sustainable until eternity. The result is 100’s of new shopping malls but not a single chip plant, low savings and excessive credit for consumption.
Carry trades are distorting allocation of capital and creating a giant global Ponzi scheme.
Do folks at Goldman or Japanese mandarins care about the future unemployed Turks, Brazilians etc?
The real question is unwinding process. In perfect competition equilibrium framework as soon as trllions of short JPY positions become common knowledge everybody simultaneosly go long and market clears.
But we live in a imperfectly competitive heterogenous environment where markets grope for equilibrium in convoluted process.
The fact Turkish currency is insanely overvalued for her own good and Japanese currency just the opposite does not prompt me to short TRL because act only others act to avoid negative carry cost. The situation is a game theory example.
Given big players can keep the music playing for an extended period of time markets fail to reach equilibrium.
Thus capitalism is prevented from allocating resources efficiently and history shows us you cannot fool capitalism for a very long time.
Excuse my additional post, but after reading the piece from Morgan Stanley’s Stephen Jen linked above (”not the least methodological”), some things must be clarified:
1. Jen claims that yen swap amounts are not known (Type 6 in his piece). As explained above, the Bank for Int’l Settlements accurately provides such data every 6 mos.
2. Jen asks “who’s taking the other side” of the carry trade, i.e. who is providing yen against dollars? I’m surprised he even asks: the carry trade exists because of the enormous total US debt load and the excess of savings in Japan (and China). So, bottom line, the Japanese(and Chinese) savers are taking the other side, by accepting artificially low interest rates for their yen (yuan), since their central banks/governments are suppressing interest rates for mercantilist reasons (aka low-cost vendor financing).
No wonder Mr. Paulsen’s position at the G7 was “hands off the yen”. The moment the yen strengthens he will have to face “real” interest rates to finance dollar debt.
Just look at the rate at which Japan and China are adding USD assets to their reserves and you can get a (partial) picture of the carry trade flows.
Regards
here we go again. as was mentioned previously by mr. rozanov, those yen short positions can be easily and rather inexpensively hedge via options. one-month dollar/yen implied vols are now at 6.5% vs a decade low of 5.8% in december — that is, cheap. it’s cheap to hedge against the downside. and why? because the yen’s descent has been far from volatile (which the G7 dislikes), but water-drip torture like. and where does the yen-call hedging play out among big banks? by selling yen on rises, muting any rise. and the japanese trade surpluses? yep, the exporters are sellers too. and relatively high oil prices? well the japanese importers are buyers on the drops, especially since many it seems had knock-out options at 120 to make their hedges cheaper. which have since disappeared, and now they are relatively eager to buy on dips. the 1998 paranoia propogated by the FT and others is a bit ridiulous and overdone. nevermind the japanese willingness to put money abroad. it is structural. i haven’t checked yet what it was like in 98 but shall, and i seriously doubt it is anything like what’s happening now. which provides cover to carry traders. anyway, yes with vols so so so low you can have the best of both worlds with the carry trade. insurance is cheap, and the implication and result is obvious.
“A decade ago, a weak Yen would have wreaked havoc for industrial production around the world (companies in Germany, the US, Sweden…) would have found it hard to compete with Japan. But today, the weak Yen seems to be having a muted impact (is it because its impact is cushioned by a stronger RMB and KRW?). Yesterday, US January leading indicator came in at +0.1%, the first back-to-back gain in a year, while Canadian December retail sales came in at a very solid +2.3% MoM (expected +1.0% MoM), the biggest gain in nine years… with real estate prices finally rebounding, maybe the domestic investors can be convinced to keep their money at home? … given the weak Yen, Japanese investors now get much less for their money abroad than they used to…” - GaveKal Daily Report, February 22, 2007
“…the level of interest rates in Japan has created a massive source of liquidity. Let’s not forget the importance of liquidity in investments like gold. Perhaps when you’re trying to get to the bottom of yesterday’s monster rally in the price of the shiny yellow metal, one needs look no further than the yen.”
http://www.blackswantrading.com/files/997891bfc242ce4/bsccc022207.pdf
Let’s assume that carry trade is flooding into Brazil, for example, and supporting a strong Riyal. Central Bank tries to halt rise in Riyal by buying like Treasury bonds. Question: Can Brazil be successful if the liquidity available from Japan is virtually unlimited?
If carry trade were feeding capital into India with an almost unlimited labor supply now starting to come on stream, which labor was “economically invisible” before, then would not extra cash simply be re-balancing economic factors of production? Increase labor, increase capital, keep same ratio?
I’m trying to puzzle through whether there is a real economic upside to the carry trade, other than lining speculators pockets.
Is GaveKal seriously arguing that a weak yen has been cushioned by a strong RMB? In what sense, might I ask, is the RMB strong? Its small appreciation v. the $ hasn’t offset inflation and productivity differentials, it depreciated v the euro last year and on a broad real basis, is flat. Chinese exports are growing at around 30% y/y and China’s trade surplus is balooning. I know people pay big bucks for GaveKAl, but the notion that the global impact of yen weakness is being offset by RMB strength is, well, to be very policy, quite a stretch. both China and Japan have weak currencies. if anything net exports are contributing more to china’s growth than to Japan’s growth. Sorry.
the KRW is, by contrast, strong - and the Koreans have an industrial structure that overlaps more with Japan than say the US, so they are up in arms about yen weakness and are quite keen to fight further won appreciation.
and I rather doubt you could convince auto workers in detroit that yen weakness has no impact on the uS … as I have noted, the US production to US sales ratio of Toyota has slipped … wonder why. US manufacturing is close to a recession.
the broader reason for the muted impact of yen weakness is that the US has a rather small manufacturing sector and a very large securitize consumer loans and sell them to the world sector ….
Germany by contrast does have a large manufacturing sector, and both BMW and Mercedes are very worried by the euro/ yen (especially for US sales). But Germany broadly is doing well in export markets b/c it has improved its competitiveness by holding down wages while increasing productivity and b/c there has been a huge surge in demand for capital goods globally.
tmcghee –
could you spell out a bit more how yen call hedging leads to yen sales on yen rises?
I get the buy ($/ kiwi) and sell yen on dips (in the $/ kiwi price in yen, since juicy US$ and NZ$ coupons are kind of like a luxury good that you want to stock up on whenever they seem to be one sale) argument, even if it strikes me as something that could change .. i.e. if some people ever took real losses, the mentality could shift.
but i don’t quite see the hedging argument. I would think that those doing the carry trade want options that protect against a big rise in the yen — i.e. a move to 110 or 100 v. the $ (and I assume that those selling yen for BRL/ TRY/ ISK tend to hedge in the yen/$ market).
But that just shifts the short yen position to the option seller, doesn’t it? And why wouldn’t the seller of insurance v. a big rise in the yen need to buy yen to hedge if the yen started to rise?
I am not quite seeing why there would be option related yen selling on rises if, as suggested, those borrowing yen to buy higher yielding currencies are buying options that protect v. a rise of the yen — and in effect shifting the short yen position to the options market. in the event the yen started to move up in a way that scared people, that would seem to me to create demand for yen to close out the short yen option positions.
What am I a missing (I realize I don’t have a great command of options/ markets driven by bets on volatility)?
In reality, the Bush Administration welcomes the inflow of funds into the US capital account surplus via the “yen carry” trade. Treasury Secretary Paulson representing the Wall Street special interest lobby pointedly declined to comment on the exploding “yen carry” trade while fingering most of the blame for the mounting global economic imbalances exclusively on the Chinese Central Bank. The Chinese certainly will not be pleased with the double standards political approach by the Bush Administration and the Federal Reserve. While Wall Street Hedge Funds enormously profit from the yen carry trade, major financial losses have been incurred by the increasingly aging Japanese population of savers that receives miniscule interest rates on their hard earned money. A huge segment of the Japanese population is heading toward retirement creating the urgency to save even more of their incomes and further depressing consumption. Clearly, despite the claims of Paulson and Bernanke, this dysfunctional economic relationship between the US and Japan cannot continue for too much longer than a decade.
Dear tmcgee (and Brad pls. see ending note on Brazil),
Indeed, here we go again: because the extreme low interest rates of the yen is one of the pumps creating the liquidity (i.e. more and more debt) that is driving asset prices higher world-wide.
I will focus only on the spurious argument that you can hedge against a rise in the yen by buying “cheap” options. The following are real numbers from a major bank’s dealing room.
Right now the one year USD/JPY forward swap yields 4.80% - this is the net carry, if you put on such a trade.
The one year at the money dollar/yen put (i.e. sell USD/buy JPY) costs 5.25%, i.e. not only is there no hedge if you do such a thing but you lose 45bp. Obviously there is no free lunch.
A one year out of the money put at 117.50 strike (spot now at 121.30) costs 3.16% - hardly cheap considering your maximum gain is 4.80% (with forward at 155.50).
Another interesting fact to note - the same bank told me: “there are tons of yen/brazilian real carry products currently making the rounds, plus any other yen carry products you can think of”.
When I asked what they thought the size of the carry trade was they answered: “Immense and practically unlimited, clearly in the trillions”.
Regards
…oops that should be 115.50 forward, sorry.
FWIW, I have post a few further thoughts (more of a psuedo-rejoinder than a rejoinder), viewable at the last link of the main text.
To say that the outstanding size of yen forwards/swaps in BIS data is indicative of the size of the yen carry trade is incorrect. That is a gross, rather than net amount, whereas it is the net amount that indicates directional exposure.
From Reuters, No end in sight for yen carry craze.
http://www.reuters.com/article/reutersEdge/idUSL218404520070221
” Policymakers have warned one-way bets in carry trades can be dangerous and that risks are under-priced. But analysts say markets have grown more robust, in part thanks to central banks. ”
“Some of the Central Banks are now telling the world what they are going to do. That’s predictability. That reduced volatility in interest rates, which in turn has supported carry trades.”
Dear macroman,
What do you mean “net” amount, please? By definition all swaps net out between counterparties.
Regards
hey brad — the key thing is that a yen call means you’re selling dlr/yen. so for the dealers intermediating yen calls/dollar shorts via options, to hedge themselves by necessity they must sell dlr/yen (of if it’s euro/yen or another cross/yen pair). when it comes to BRL/JPY or ISK/JPY (nevermind that the ISK fear factor last year had barely a ripple across markets), those crosses are simply too illiquid for direct trading. so it would happen on two legs: USD/JPY and BRL/USD. but if you hedge the yen short, that still means a yen call/dlr short. and with implied volatility so low (mainly because realized volatility is so low), if you take an out-of-the-money option it’s pretty cheap insurance against a yen-short position. the key is that dealers/investment banks hedge themselves by making the same transaction (via options or spot trading. so in this case, yen calls (long yen positions) or buying yen in the spot market. in either case, it works against a yen fall.
hellasious — i don’t think 1-yr vol is the best example. that’s pretty long-term. and percentage-wise what you pay on 1-yr is a lot different from 1-mth and 3-mth. especially when the vol curve is flat. nevermind the employ of leverage on the cash transaction vs the multiples possible on the option via higher vol. as for the trillions remark, i’ve long since learned to take what someone from an investment bank tells you with a pretty hefty grain of salt.
I buy $100 million forward with Goldman. I sell $100 million forward with Credit Suisse. My net exposure is zero, but my gross outstanding is $200 million. It is the latter number that the BIS data captures.
Brad–I always argue that obsession with the yen carry trade went too far. Exchange rates frequently overshoot and stay out of the range which can be justified by economic fundamentals. So, the issue is not whether the yen carry trade or any other financial market situation has made the yen undervalued. The issue is whether that warrants specific actions by the authorities.
From the viewpoint of the Japanese economy, there is no reason to complain. After a long stagnation, the economy has just recovered and is still in a deflationary situation; currency depreciation is only welcome. Of course, other countries like Korea and the EU are unhappy, but then, they can intervene in the currency market and/or loosen monetary policy.
The US economy recovered from a long stagnation not only by corporate restructuring and innovation, but also by significant depreciation in the late 80s and early 90s. The Korean economy recovered from the aftermath of the financial crisis of 97 and 98 not only because of strenuous restructuring and reform, but also because of substantial depreciation.
Anyway, these arguements are somewhat academic. The yen is likely to appreciate in coming months. More worrying is that premature monetary tightening and yen strengthening may choke off Japan’s economic recovery and make the deflationary situation worse; that would be bad for the global economy.
Dear tmcgee,
I used the one year to keep things simple. The results will be pretty similar for any period from T/N and out, since the yield curves are pretty flat for both USD and JPY. As for leverage, it makes no difference in the return - except of course as a multiplier in the ultimate gain or loss in your P&L.
The people I referred to are pros in dealing rooms at several very large banks (not juniors either). Salt is not required - we have been pickled by decades of raw experience. They simply confirm the BIS data from their day to day perspective.
Regards
Hellasious -
155 forward! Those would be some expensive options!
Does anyone know much about Taiwan politically? What happens to the RMB, yen, won and dollar if China makes a military move on the island sometime before the end of the year?
Dear macroman,
You are looking at things from the individual exposure perspective. Just because you laid off YOUR exposure to someone else doesn’t mean the overall exposure does not exist i.e. those $6 trillion BIS numbers are coming from somewhere.
Naturally this does not mean there are $6 trillion worth of yen, net naked short out there - for every short, there is a long. Question is, WHO IS WHO? The explosive rise of hedge funds, private equity funds and structured finance products, all lusting for extra yield gives you a darn good idea where the ducks are lined up.
Look up the UDS/JPY chart back in May 2006 and compare with equity markets. See the correlation?
Regards
Gamma,
The Chinese PLA won’t make any move against Taiwan unless the red line in the sand is crossed. The red line in the sand is a formal declaration of independence, a move to develop nuclear weapons, or the stationing of the US military forces on Taiwan. Everyone in Beijing, Washington, and Taipei is aware of the line in the sand. If any of the conditions are broken, the Chinese PLA already has been given formal authorization by the Chinese People’s Congress to immediately attack and invade Taiwan. The balance of military power has long since shifted to China; Taiwan probably would surrender within two weeks after a coordinated military assault by the Chinese PLA without the assistance of the US military.
Regards,
Yes I am aware of USD/JPY and equity correlation in May 2006. The market started losing money on its short USD/JPY position and its long equity position at exactly the same time. And make no mistake…..currency markets were short USD/JPY last spring.
Right, but how hardline is the current President? It is my understanding that he is from the party that favors formal independence. What is are the chances he calls China’s bluff before he leaves office at the end of the year and right before the Olympics. China has been waiting a long time for the Games to come so that they could remold their image. Invading Taiwan right before the games will negate what image building they had hoped to achieve. What do you think the chances are of him doing that?
I like this idea, EVEN if it is remote, because nobody is looking there and it would roil every risk premium that is out of whack.
Gamma,
It’s no bluff. A formal declaration of Independence by Taiwan means war. So what the Olympics, it’s just a game for Coke and Pepsi advertisements. So what, the US and England can boycott the Beijing Olympics if they want. So what the US government already prohibits most high-tech exports to China. But No Chinese leader will accept going down on the history books as the individual who lost Taiwan. Moreover, every Chinese on the streets of Beijing or Shanghai will tell you that a formally independent nation of Taiwan is completely unacceptable.
Regards,
Chiang,
If China’s economy ground to a HALT tomorrow, what would be the political fallout on the Communist Party? Would they have a revolution on their hands from the millions of poor people in the rural areas who have been promised a better life?
A few years ago there was an article that talked about Japanese retirees investing in US bonds (with advise from their brokers, of course) because returns were low in Japan and, even with Yen appreciation, returns would always exceed those available in Japan. They even had sensitivity cases to show that the Yen would have to drop to some ridiculously low rate like 67 before Japanese investors would be worse off. Those brokers must look like geniuses today. Should this be considered part of the carry trade? Maybe a “long term” carry trade?
Political risk? Who brought that up? It may be the element that, through its notable absence (Al-Qaida’s pretensions nothwithstanding), has unleashed the current financial spectacle, but who’s going to let an unlikely and symbolic gesture like Taiwan declaring “independence” upset the apple cart? I suggest that that may be for a far more distant future.
CB
“Comparisons between Rio’s death toll and that of official war zones are common…” http://observer.guardian.co.uk/world/story/0,,2010459,00.html
on little taiwan–population 20 million with a land mass the size of NJ- one should ask why is china so heated? Answer– it taiwan goes there goes Xin Jiang, Tibet, and eventually china.. China in many ways is a house of cards. I dont so much worry about china.
re: “GaveKal seriously arguing that a weak yen has been cushioned by a strong RMB?”
appears to be presented as a question, but your points taken - thanks. Further to that though, and looking at other comments, one more observation from GaveKal:
“…real rates in China are currently negative, the temptation is just too strong to borrow and invest. And the temptation is all the stronger if one can borrow in a foreign currency, especially the HK$. Indeed, as we write:
A) Borrowing HK$ is about one percent cheaper than US$; and
B) The RMB is rising, while the HKMA guarantees that the HK$ will remain pegged to the US$.
In essence, we have a new “carry-trade” rapidly gathering steam here in HK: borrow HK$ to buy RMB assets. This new carry trade, which really started to really take off when the RMB passed the HK$ in mid-January, helps to explain why the HK$ has dropped -0.5% so far this year against the US$, and why it is currently hovering at its lowest level since 1991… HK banks are well capitalised and happy to lend out money, especially toward Chinese real estate projects… we are only at the beginning of what could well end up being one of the greatest bubbles of our time.” - GaveKal Daily Report, February 21, 2007
Guest,
The Chinese themselves wish that the Washington Consensus would pay much less attention to them. Paulson’s and Bernanke’s recent visit to Beijing wasn’t very well received. Now Paulson’s headed back to Beijing next month for more of the same; perhaps he just doesn’t get the hint that his self-serving advice by the Wall Street special interest lobby isn’t wanted by the Chinese. And if the US government is really serious about reducing the trade deficit, then remove the various legal restrictions prohibiting most civilian high-tech exports to the Chinese market. Please inform Hank Paulson that Chinese monetary and fiscal policy is none of his damn business.
Regards,
“I often get attacked on Chinese forums for having a more global perspective. If China wants its educated people back, it needs to allow critical thinking… instead of treating its people like machines…” http://news.bbc.co.uk/2/hi/asia-pacific/6374301.stm
Will persistent inflationary credit growth derail the train (market-driven or otherwise), or will an economic train-wreck (market-driven or otherwise) derail inflationary credit growth?
right now, borrowing HK$ to buy RMB makes sense — mostly as a currency play. The challenge is moving the funds into China. How is that done in GAveKal’s little carry trade? Chinese has capital controls precisely to make this hard.
Indeed, i tought one reason why HK$ int. rates were low was that the Chinese banks have a lot of the funds raised in their IPOs parked there, and thus have to find someone to lend them out to … if it was easy to shift from HK$ to RMB, i would think rates in HK would rise toward US rates.
buy chinese property with a HK loan
Cassandra
My vote is for the latter, insofar it will probably take an economic train wreck to lower the price of oil and the demand for Asian goods and FDI sufficiently to reduce the demand for Asian/oil exporting currencies. This in turn would would reduce the growth of reserves, which itself ultimately leads to strong credit growth by lowering the supply curve for credit.
Should Voldemort et. al unilaterally decide to quit accruing reserves (and, by extension, lending at rates that the private sector would shun) then perhaps credit growth slows, bonds sell off, and the process works in reverse.
I suspect the more likely of the two scenarios is the former, however.
Guest,
If you are looking for critical thinking, don’t read the US mainstream media which among other issues was the primary cheerleader behind the Bush Administration’s fiasco in Iraq. Believe it or not, Europeans polled have a significantly higher friendly view of the Chinese than does the American public. Why is that? The biased Corporate-government US newsmedia shapes perceptions among the American people that the US is facing a “yellow peril” threat from the Chinese. On numerous occasions, the New York based US newsmedia utilizes the tactics of political and ethnic smear. For instance, NBC Sports anchor Bob Costas in the past Olympics would repeatly criticize China whenever a Chinese athlete was competing with an US athlete. During the opening Olympic ceremony, Bob Costas led with a tirade of criticism as the Chinese athletes walked into the stadium. Despite protests by the Chinese and international community, NBC has refused to apologize and retire Bob Costas. So the next time, the US newsmedia predicts the imminent crash of the Chinese economy, take it with a grain of salt. Businessweek magazine, the Wall Street Journal, and the New York Times have been predicting a Chinese crash for the past two decades.
Regards,
MM
’tis difficult to choose decisively! all so inclined should thank one’s local supreme deity for the munificience and omni-presence of the writers’ of Yen calls! And, in any event, counterparty risk is on the nuclear tail…no?
Oh one more mention, why doesn’t the biased US Corporate newsmedia ever show the coffins of returning 3,300 dead US Soldiers from Iraq, or ever show the 25,000 seriously wounded US Soldiers without arms or legs, and suffering brain damage. Instead the US Corporate media is rooting to expand the holy war into Iran and Syria.
Guest - my understanding of China’s capital controls is that you cannot take out a loan in HK to buy property in china — you borrow HK$, but need to convert the HK$ to RMB to make payments (a capital account inflow) and that is not allowed. Otherwise, I would say move $ to HK, and then lend my HK$ to say a Chinese bank to speculate on RMB appreciation.
I realize there are ways around the controls, but i don’t think you can convert HK$ into RMB to buy Chinese property freely. GAveKal is based in HK, so no doubt they no there way around the controls. but it isn’t obvious to me.
if the really big crash is to happen in China, and it appears to be a good candidate, whether other nations - like India - may soften the blow to the rest of the world. India also has big problems no doubt, but it is enjoying the return of its educated elite and if they can assist in fastforwarding through its problems, there would seem to be lots of capacity for (real) investment.
“Some hope India will prove less susceptible than China to a slowdown in the developed world. The numbers say they may be right. India’s total trade - imports plus exports - averaged 37 per cent of gross domestic product (GDP) between 2003 and 2005, according to World Trade Organization data. China’s trade-to-GDP ratio was 65 per cent…The country’s business press this week trumpeted a deal between Citigroup Inc., Blackstone Group and two local companies to start a $5-billion infrastructure fund. But that represents a mere 1.5 per cent of the $320-billion the government estimates it will need to fix roads, ports and other infrastructure…” http://www.globeinvestor.com/servlet/story/RTGAM.20070217.wrcover17/GIStory/
Well, among the writers of yen calls are Japanese importers, to help finance their RKO $ calls that oft go awry
Many gaijin trustfunds have been built with the crumbs from zaitech gone awry
DC, Gamma, Guest:
Eh, can we get back on topic? All this talk about China/Taiwan is interesting but probably belong in another forum. FWIW, if China crashes or goes to war with Taiwan, we would all be fighting for worms to survive. That’s why I pay attention to topics brought up by Brad because we might avoid all that.
Wrong Guest,
The biggest speculative bubble in world history ready to burst is not in China but in the US Housing market. The subprime market is overloaded with bad loans based on rampant fraud. Forty percent of the subprime market (about $400 - $500 billion of loans), is made up of these “stated income” loans, but many people inside the housing industry call it something else: a “liar loan”. With all these liar loans, coupled with adjustable-rate mortgages that are scheduled to adjust upward within the next 12 to 18 months, there will be well over a trillion dollars in mortgage loan defaults. The US Banking system will be crippled for years, similar to the aftermath of the Japanese bubble experience.
http://www.nytimes.com/2007/01/06/business/worldbusiness/06yuans.html?ex=1325739600&en=60340fa2d3c8d0af&ei=5088&partner=rssnyt&emc=rss
I dont think it hard to obtain RMB for HK dollars or vice versa and I suspect a businessman in china would be more than happy to accept HK dollars in lieu of RMB for his real estate.
“Mainland tourists offering Chinese currency here were charged extra or even turned away and told to come back with Hong Kong dollars
“At the same time, many shopkeepers across the border in China have stopped taking Hong Kong dollars or have begun asking a slightly greater number of dollars than the number of yuan on price tags would suggest.”
re: India - responding in part to Old Vet’s post further up. thought it was worth discussing.
and its my impression that the purpose of many of these discussions is to determine how, not if, we can end up reasonably well whether or not China self destructs.
Dave Chiang, your saying that yen carry is used for US inflows ? It’s nuts
Hi Brad,
concerning the purchase of property with a HK loan, you might want to try to understand China Motion:
http://www.china-motion.com/eng/invest/pdf/2005_cir/00989cir-050421.pdf
It is a telecom company listed in HK, but recently sold a few HK parking lots through a subsidiary in Bermuda. It also does business in mainland China with a company owned by one of the directors, and incurs huge uncollected receivables. It recently entered into a joint venture to offer online karaoke in mainland China with an apparently government linked entity in Beijing, again through a company in the Caribbean. With such “mini global empires” it is hard to think of a transaction that would not be possible.
Certainly it is hard to measure the real size of the carry trade as many contracts are made between private parties and not traded in organized exchange houses. From my point of view if you consider that the fiscal deficit in japan is too high (5% I guess) despite goverment debt acrrues 2% (peanuts)and that the ratio of debt to GDP is about 160% I do not foresee high rates in Japan for many many years. But what could unwind the carry trade is that the japanese banking system is still fragile and a bust could put them in a bad credit position again (indirectly they are financing speculative trasanctions)or maybe that the BOJ imposed a penalty to financial transactions.
“…the attitude of private equity closely mimics that of the Chinese communist party. Both conceive of companies as networks of contracts between capital and labour that generate revenue streams to be manipulated by whoever has central control for personal or political advantage…” http://business.guardian.co.uk/comment/story/0,,2019474,00.html
“…Six-month flows into the Swiss franc and Japanese yen… stand in the fifth percentile and sixth percentile respectively. The last time positioning in these two currencies were so extreme was June 1999. Six months later the yen had appreciated 17 percent against the dollar…” http://www.hedgeweek.com/articles/detail.jsp?content_id=50457
Yen Carry Trade: Another Look - http://wachovia.com/ws/econ/view/0,,3629,00.pdf
“Founded in 1889, [The Bank of Bermuda] grew to span 17 of the world’s key financial and offshore centers including Bahrain, Cayman Islands, Cook Islands, Dublin, Guernsey, Hong Kong, Isle of Man, Japan, Jersey, London, Luxembourg, New York, New Zealand, Singapore, South Africa and Switzerland prior to joining the HSBC Group’s network in February 2004…” http://www.hsbc.com/hsbc/about_hsbc/international-networks/americas/bermuda
“Bermuda’s largest and second-oldest bank… established the beginnings of a second major banking house… by taking over the 3-year old branch in Bermuda of the Merchants’ Bank of Halifax, Nova Scotia which split off in 1886 from its original agency-holder, N. T. Butterfield & Son Ltd. They called their new bank the Bank of Bermuda Ltd… and is now the largest bank in Bermuda by a considerable margin…
Bermuda’s oldest and second-largest bank… As N. T. Butterfield & Son, it held from the early 1860s until 1886 - when it was acquired by the new Bank of Bermuda Ltd - the Bermuda branch of the Merchants’ Bank of Halifax, Nova Scotia…” http://bermuda-online.org/banking.htm
Gamma: Right, but how hardline is the current President? It is my understanding that he is from the party that favors formal independence. What is are the chances he calls China’s bluff before he leaves office at the end of the year and right before the Olympics.
1) It’s not a bluff
2) Near zero. Chen Shui-Bian is a lame duck with 20% approval at this point. By himself, CSB doesn’t have the constitutional power to do anything. The only thing that he could possibly do is to call a referendum, but there are a lot of counter moves against that.
DC: With all these liar loans, coupled with adjustable-rate mortgages that are scheduled to adjust upward within the next 12 to 18 months, there will be well over a trillion dollars in mortgage loan defaults.
You are making the same mistake that people make when they argue that Chinese banks are in trouble. Even if you assume that every single subprime mortgage in the United States goes bad, you are still talking about one trillion dollars in a $12 trillion dollar market. If you assume that one third of the subprime mortgages go bad, then you are talking about a 3% hit in the total mortgage market which is not enough to sink the economy.
Also, if the US mortgage market goes a huge number of defaults, it will hit the Chinese economy hard since their foreign reserves is put into these mortgages.
Gamma: Does anyone know much about Taiwan politically?
I know something about it.
Gamma: What happens to the RMB, yen, won and dollar if China makes a military move on the island sometime before the end of the year?
If war breaks out in the Taiwan straits, the only safe investments will be guns and gold.
The economies of the US and China are so interlinked at this point that if anything bad happens to one, they other is doomed. (Which is why if the housing bubble bursts and causes a rash of defaults, China loses big since it is its money that disappears).