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More important to many China watchers than what is said or government numbers is that on Friday, the People's Bank of China (PBoC) set the central parity rate at 6.7558 hitting a six-year low. They claim depreciation of the yuan is natural in light of the recent strengthening of the U.S. dollar, noting that the dollar index, which is the trade-weighted value of the dollar against a basket of major currencies, rose by 2.99 percent since the beginning of the month. The dollar has strengthened mainly due to the rising expectation of an interest rate hike by the United States Federal Reserve by year's end.
All in all the events unfolding are directly responsible and feeding into several trends. One noticeable trend is that Chinese companies are expanding investment in overseas acquisitions, this is a way to move money out of the country while not upsetting the apple-cart. Also, China has embarked on an unprecedented spending spree, rebuilding the infrastructure both in China and across the world. Another area where money continues to flow is into housing. New home prices in 63 out of 70 cities that the National Bureau of Statistics monitors gained in September. This has raised enough concern to caused the central bank, the China Banking Regulatory Commission and other bodies to draft new rules barring developers, peer-to-peer networks, and other non-banks from offering down-payment loans to people buying houses.
By the end of September, financial institutions in China had lent 25.33 trillion yuan ($3.74 trillion) to the property sector, up 25.2 percent year on year, according to a report from the People's Bank of China. It is important to note housing prices are again on the rise in China as if they were not high enough. Indications that China’s hundreds of P2P lenders allowing home buyers to seek down-payment loans online are a sign of shadow-banking leverage creeping into China’s housing market and similar to what drove the margin financing that fueled last year’s stock market bubble. Concerns of a damaging housing crisis like the 2008 subprime mortgage crisis in the U.S. are very real.
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The Bank for International Settlements says much of the capital outflow from China has been to pay down dollar debt and is largely benign and indicated foreign reserve depletion has subsided. Still, a debate rages on as to whether the Chinese economy really bottomed in mid-2015 and has been slowly recovering. It remains clear even with the banks already holding a lot of bad debt we are again seeing credit growing at unhealthy double-digit rates. The Communist Party may have put off the day of reckoning by pulling the levers of stimulus but when that moment comes it will be even harder to deal with as trade tensions continue to grow.
Footnote; As always comments are welcomed and please feel free to scan the archives for other article that may interest you. Above I mentioned an earlier post that explored the rather strange customs and how houses are sold in China, the link to that post can be found below.