The Shanghai Composite ripped higher by 60% from the end of 2014 through early June of this year. But the buyers disappeared as shares of Chinese companies traded “onshore” in Shanghai reached ludicrous valuations and margin debt helped tip the market over. Fears of a collapse in the broader Chinese economy have blasted across headlines around the world, but since the selling reached a crescendo in August, the Chinese equity markets have been mentioned much less by the media and market prognosticators, just in time to build a tentative base and gain over 10% in a month.
Chinese margin debt as a share of market cap has continued to decline from “absurd” to now simply “aggressive” levels. Market cap has stopped falling, and indeed the pace of margin debt liquidation has also moved much slower over the past few weeks. It even rose moderately for the week ending last Friday!
While Chinese equity markets have been stabilizing, the Chinese yuan is also looking much more stable. Above we show the sudden “devaluation” in August; in practice, this wasn’t a forced decline in the value of the Chinese currency, but instead permission from the government in China for the currency to swing lower versus USD. Many felt that the initial move of a few percentage points was just the sign of things to come. Since then, though, CNY has rallied versus the dollar, retracing a significant amount of its move lower. Below we show USDCNY over the last five years. While CNY has seen upward pressure since it reached its peak versus USD near the end of 2013, it still remains dramatically stronger over the last five years. And when reviewing the performance of the currency versus all of its trading partners, rather than just the USD, the surging (and yes, we feel comfortable saying surging) yuan has returned 30% in five years. Most of this is because the cross versus the USD moves very little, and the USD has appreciated a lot while the CNY has declined versus the greenback.
To sum up: there’s been a lot of negative attention on China. But for all of it, Chinese stocks are basically flat YTD, and the Chinese currency has rallied over the past six weeks rather than collapsing in an uncontrolled devaluation.