China Manufacturing: Bubbles don’t burst when you expect them to

China Manufacturing: Bubbles don’t burst when you expect them to

By Sayan Guha.

Good morning and welcome to today’s foreign exchange market commentary on Friday, the 22th of June.

Yesterday’s Chinese output data came in as a shock as manufacturing shrank for the seventh month. The question of the Chinese economy making a hard landing hence started making the rounds again. When investment bubbles burst, people ask why nobody saw it coming. The truth is though many saw it coming; nobody was quite sure about it. Many investors fretted before the dot-com bust, but that didn’t stop them from piling up obscenely overvalued tech-stocks. Ditto for the housing bubble burst; despite knowing that real-estate prices have become unrealistic, many people were queuing up for buy-to-let loans and 125 percent mortgages.

Unfortunately bubbles don’t burst when you expect them to. Two years back people were asking about a China hard landing. A year back they were wondering if Beijing has managed a soft-landing. The same questions are being asked today as the clock keeps ticking.

In 2008, the Chinese embarked on a major infrastructure building spree, thus saving the world in 2008. It poured billions in ghost cities, empty shopping malls and roads to nowhere, consuming 50 percent of world’s tin, copper and nickel.

However, the unsustainable levels had to come down. There’s a scary shadow banking system after a residential property bubble burst and the country is witnessing a strengthening currency, stick inflation rising wages and disillusioned middle-class. However, China has an important backstop; large reserves of wealth and foreign currency reserves.

Every Chinese economic indicator over the past two months has disappointed. Money supply, bank lending and property market have slowed down whereas more real economic data like rail freight and industrial production have suffered reversals.

However, no body can be sure of a meltdown just as in any boom. The People’s Bank of China has already responded by cutting lending and deposit rates for the first time since 2008. The Chinese hard-landing may never come, or may hit the markets when nobody really expected it.


GBP/EURO – 1.2436
GBP/US$ – 1.5596
GBP/CHF – 1.4941
GBP/CAN$ – 1.6041
GBP/AUS$ – 1.5554
GBP/ZAR – 13.0567
GBP/JPY – 125.34
GBP/HKD – 12.103
GBP/NZD – 1.9828
GBP/SEK –  10.9446

EUR: The single currency was well supported in early trade on Thursday as France and Spain witnessed relatively strong demand in morning auctions though the economic data from the eurozone came out mixed with French flash PMI number beating expectations while the German reading fell short of expectations, raising concerns that Europe’s largest economy may witness a Q2 contraction. The US economy data failed to cheer the markets as most economic indicators came in weaker than expected. Furthermore, the downgrade of 15 of the largest global banks by Moody’s weakened risk sentiments further. The cable however, performed well against the euro with the GBP/EUR pair crossing the 1.2400 level on better than anticipated CBI factory orders and UK retail sales. The Pound’s gains were limited nevertheless on the spectre of further QE from the BoE. The economic calendar in Europe is light today and focus will remain on the meeting between Merkel, Monti and Hollande in Rome over purchasing peripheral bonds from the secondary markets.

USD: The GBP started off the day strong with the cable hitting a high of 1.5733 after the CBI factory orders reading came in better than anticipated and retail sales for May made a sharp rebound. The cable lost ground against the greenback yesterday over speculations of an imminent downgrade of UK banks while investors pared their exposure in the UK currency in anticipation of further assets purchase announcement by the Bank of England in their July policy meeting. The mood however changed with the theme clearly being “risk off” after the US economic data proved disappointing with the Phil Fed manufacturing index dropping to its lowest level in a year and the initial unemployment-benefits claims rising, pushing the cable below the 1.5600 level. Risk sentiments soured after Moody’s announced downgrading of 15 global banks including HSBC, Barclays, RBS and Lloyds. The tier 1 economic data calendar in light on the ground from both sides of the pond and the GBP/USD pair is expected take remain weak today. The GBP/USD pair opens at 1.5603 this morning.



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