Week In FX Asia - China's WMP Count Down

Includes: FXY, NKY, UDN, UUP
by: Dean Popplewell

Problems are mounting and becoming more visible -- from China's perspective, that's a big deal. Data this week shows that private debt/GDP ratio has managed to soar by +50 percentage points in just four years. This has markedly outstripped other emerging economies. In fact, it's bigger than the U.S. and European region combined in the six years prior to the start of sub-prime debt problems. From an economic perspective, a rapid rise in a country's private debt/GDP ratio tends to be followed by economic weakness and balance sheet vulnerabilities among their banks. It's no wonder that the antipodean currencies have lost 10% in the past month. China is their largest trading partner!

The current market focus is on China's wealth management products. Observers are wondering if we are about to hear echoes of a Lehmann collapse. Back then, the market lost confidence in sub-prime mortgages being used as collateral. Why only keep that stateside? There's supposedly CNY1.5t of these WMP's maturing by the end of the month. The market concerns of China's money markets being shut is that financial institutions will have issues in repaying them. Any payment problems will only lead to a loss of faith and investors shying away from products, and the WMP matrix will collapse. The PBoC could provide liquidity -- however, their intention is to punish financial institutions with shoddy lending practices. There is a fine line -- when you lose market confidence, everything will spiral out of control. The scale could be multiples of the bad stuff that has already transpired this week.