The News Out Of China Isn't As Spooky As The Markets Think

Overnight, we got two key reports from
China that are believed to have roiledmarkets. The Shanghai Composite fell 1.25%, the Nikkei was down 2%, and US markets opened lower.

First was news that China’s biggest banks wrote off bad loans in the amount of 22.1 billion yuan in the first half of the year. That’s a jump up from 7.65 billion yuan a year ago.

The second was the surge in money market rates, which jumped the most since July.

But the reports aren’t as spooky as markets seem to think.

Marc Chandler, head of currency strategy at Brown Brothers Harriman, thinks there’s more driving the markets than just news out of China.

While there is “some speculation that this is a precursor to a wave of defaults,” he thinks writing off bad loans is important for China. “Provisioning for bad loans and then drawing on those provisions part and parcel of a modern banking system,” he writes in Marc to Market.

“… Indeed, not writing off bad loans, we would argue, was part of the problem. Writing off bad loans is part of the solution. For the record, the yuan itself rose to a new 20-year high against the dollar.”

He doesn’t think the rise in money market rates signals a rate hike either, and that the market’s moves are less about China and more a “normal technical move.”

“The rise in money markets is not a prelude to a rate hike or a snugging of monetary policy. That is in fact, the point, there is no policy implication, except to reinforce the perception of the PBOC’s difficulty in managing liquidity.

“… The rise in money market rates may be a key spur to the largest decline of small company share prices in a year and a half. The ChiNext index of small companies fell 2.9% today, more than twice the decline of Shanghai Composite. In comparison, Japan’s JASDAQ fell 0.8%, while the Nikkei lost almost 2%.

“It strikes us that many observers seized upon the story to explain the price action throughout the capital markets. We suspect that if the markets were advancing, many would cite Chinese developments too. Instead, we suggest there have been some large moves in recent days, and the new positions were in weak hands. That is to say, the dollar and yen’s bounce and the pullback in shares is more a function of market positioning than Chinese banks finally writing down bad loans four months ago, for which provisions were already made.

“The dollar had fallen to new two year lows against the euro and Swiss franc. The euro had firmed to four month highs against the yen. The Dow Jones Stoxx 600 was on its longest winning streak (nine sessions) almost 3.5 years. ”

So, while the news developing in China is important, it would appear that there’s more driving the markets.

Read the entire piece at Marc To Market »

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