Are we really about to enter the currency crisis phase of the rolling seraglio formerly known as the GFC? If you are buying gold, oil and a raft of commodity classes at current levels, you probably subscribe to the theory that the globe’s reserve currency has already passed its expiry date.
While it’s not beyond the realms the possibility – or more correctly perhaps it’s a material probability – it’ll take a mighty tectonic shift to knock the institution down. For mine, I can’t see where the pressure is building for a sudden, bloody break lower.
Everywhere we look, the same trade is being placed. We don’t even have the usual custodians of the status quo as a foil. Rather the Fed Reserve is cheerleader for a lower USD. Soros at least had the Bank of England as his Sancho Panza (or is that Sue Sylvester?). More likely, with the supply of dollars likely to diminish as QE2 winds down, and with tighter liquidity in China and Europe, the current price action has the feel of speculative excess.
So with that missive in mind, let’s return to the question that we posed on Friday, how is the weak USD impacting Chinese equities?
The structure of the Chinese equities market
By way of background, here is a quick summary of the Chinese equities market – in acquiescence to all those that are calling for the end of days for the USD, all currency amounts are in RMB 100 Million (maybe life is easier in USD after all?):
A reference to the Shanghai Stock Exchange Composite (SSEC) index is to those securities listed as either A-shares or B-shares (A-Shares are listed in RMB, while B-shares are denominated in USD). From the monthly market report by Shanghai Stock Exchange, we get the following breakdown by industry sector:
So we can conclude that the sectors that determine the direction of the market are, in no particular order – finance, manufacturing and metals and mining. Now one other order of business before we move on – note that the largest listed companies by market capitalisation are principally drawn from the finance and mining sectors – manufacturing is notable for the diversity of its issuer base:
Performance of the main industry sectors in the SSEC
The following chart maps the relative return of the primal movers of the Chinese market since the start of 2009 – note that is based on total return indices:
Without labouring the analysis, it’s pretty clear that the period since the Jackson Hole speech (21Aug10) has been particularly plentiful for the materials sector, and marginally less beneficial for energy. Note that the recent price strength has been in the face of tightening by Chinese authorities – if prices were going up, it wasn’t cause monetary conditions were getting looser at home – this is perhaps consistent with the sideways action in financials and industrials.
Hmm – how is the weak USD feeding through to Chinese equities? The same way it’s being expressed from London to Jo’burg – it’s the ‘buy commodities’ trade that has been embraced with ever quickening enthusiasm.