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Renminbi Series: Next phase in China crisis about to begin

The biggest threat to the global economy is China, the situation where could worsen with the return of inflation in the United States and other parts of the world. According to Morgan Stanley, the debt level in China rose to 279 percent of GDP in the third quarter of this year. We have been arguing for the past year or so that there could be two outcomes,

  • First of all, the exchange rate against the dollar would go down as the forex reserves decline but that is unlikely to be very painful for the economy.
  • The other one would be an increase in the interest rates, which is slowly taking place in the bond market. Since 16th of this month, Chinese 10-year debt yield has increased by 34 basis points. The 10-year yield has jumped most in 10 months and is currently at the highest level since the summer. As the US Federal Reserve, prepares to hike interest rates in the upcoming meeting, over the next two weeks, China’s 14-day repo rate exploded to 20-month high at 6 percent. Chinese banks are ready to pay 6 percent, compared to just 2.5 percent a day before to ensure liquidity over the next two weeks.

While China’s share of the dollar denominated debt is low, its $28 trillion worth of debt can’t tolerate higher domestic interest rates. We suspect that the next phase of the crisis is set to begin with higher interest rates as the cost of global funding increases.

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November 20 20:00 UTC Released

BRCAGED Net Payroll Jobs*

Actual

77 k

Forecast

Previous

77 k

November 20 13:00 UTC Released

RURetail Sales YY

Actual

3.0 %

Forecast

3.9 %

Previous

3.1 %

November 21 13:55 UTC 333333m

USRedbook MM

Actual

Forecast

Previous

-1.2 %

November 21 13:55 UTC 333333m

USRedbook YY

Actual

Forecast

Previous

2.3 %

November 22 12:00 UTC 16581658m

USMBA Mortgage Applications

Actual

Forecast

Previous

3.1 %

November 22 12:00 UTC 16581658m

USMortgage Market Index

Actual

Forecast

Previous

401.7 Bln EUR

November 22 13:30 UTC 17481748m

USJobless Claims 4-Wk Avg

Actual

Forecast

Previous

237.75 k

November 22 13:30 UTC 17481748m

USInitial Jobless Claims

Actual

Forecast

240 k

Previous

249 k

November 22 13:30 UTC 17481748m

USContinued Jobless Claims

Actual

Forecast

1.882 Mln

Previous

1.860 Mln

November 22 14:30 UTC 18081808m

BRForeign Exchange Flows*

Actual

Forecast

Previous

-3.412 Bln USD

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