C.M.O. 4.15.2009
Credit Market Overview
April 15, 2009
April 15, 2009
“We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets. Frankly speaking, I do have some worries.” These words, spoken by Wen Jiabao, the Premier of the State Council of the People’s Republic of China, shortly before the G-20 started could well be seen as posturing. In a more genteel sense they were similar to the smack that’s gets “talked” across the line of scrimmage before the ball is snapped on any given Sunday. (Yes, I know it’s baseball season, and the start of it at, that but a guy can dream can’t he?)
That China is simultaneously making moves within its own country to increase the use of the Yuan for trade purposes might add a little weight to WJ’s pre-G-20 chatter. Last week the Chinese government designated five of its biggest trading cities to take part in a planned program allowing foreign trade to be conducted fully in Yuan, instead of in dollars or other major currencies.
Early beneficiaries of the new initiative will be China’s own industrial conglomerates as they currently price all intra-company transactions in Dollars. The next step is expected to be trade between Hong Kong and China as even though HK is officially part of China they have a separate financial system. There is no time table for the Hong Kong move but “We have the infrastructure ready to be the first”, under secretary for financial services and treasury in Hong Kong Julia Leung said recently.
Ready seems to be an apt word when discussing China these days as the $585BN stimulus package the Chinese put in place appears to be having an affect much quicker than the bang Uncle Sam seems to be getting for his buck.
Crude Oil imports in China hit a one-year high in March and steel mills imported record quantities of their key raw material, iron ore. The increase in activity is being seen on more than just the input side as banks have extended 2.7TN Yuan ($400BN) of new loans in the first two months of the year and the stock market as measured by the Shanghai Composite Index is up 22% from its March 3rd low and 48% from the November 2008 low. Car sales also hit a record last month.
“China is unusual in that it has this incredible capacity to mobilize all its institutions. There is now a growing degree of confidence that the stimulus package is having an impact.” The World Bank’s chief economist, Vikram Nehru said recently.
True coordination is something to be envied as it is doubtful the discussions on how much to spend and where by the Chinese government looked anything like the $787BN stimulus package passed by our own Congress or the $410BN omnibus spending bill that was “oinked”, sorry inked, shortly afterwards.
All of this has implications for us here in the U.S. as the global nature of the current slowdown that was caused by the global distribution of AAA rated BBB debt means that the world will come out of its hole sooner if Uncle Sam isn’t the only one pulling on the rope.
Of interest here is the difference in how this is being accomplished here and in China. The latter is working from massive reserves saved during the boom years in an economy that was based on exports and has one of the highest savings rates in the world.
The U.S. is the exact opposite; the boom for us was ignited by low interest rates and fueled by debt. Until recently we were a country of consumers not savers and whether the switch from one to the other is happening at the most propitious time is not the point of this note. The point here is that in order to pull ourselves back out of the hole we’ve dug we’ve got to spend even more of the money we don’t have and to get that done we need someone to lend it to us.
Re-enter the Chinese. According to the Treasuries own records (always good to know who your best customers are.) China’s holdings of U.S. debt exceeded Japan’s for the first time last September. Since it is baseball season the box scores on that are $618.2BN at the end of 3Q08 with $121.4BN added through the end of the first month of this year totaling $739.6BN. During the four months between September 2008 and January 2009 Japan added only $17BN more to it’s holdings of U.S. debt.
To put this in perspective in September 2001 there was just under $1TN of our I.O.U.’s held by other countries. At the end of January 2009 that number was a little over $3TN. During this same period the amount of U.S. debt that China held increased from $72BN to the $739.6BN mentioned above. U.S. debt held by foreigners up three-fold in seven and a third years the amount of U.S. debt held by China up ten-fold in those same seven and a third years. (Am I making my point?)
The CDS quote for China closed last night at 138.34 after a near term peak of 263.21 on March 2nd. The previous and all time high was reached back on 10/24/2009 at 295. The CDS for the U.S.A. closed last night at 44.42 and hit its high of 100 on February 24th of this year.
While the world still views America as the better credit risk it should not go unnoticed how much we are indebted, literally, to our global neighbors for our standing.
Enjoy the week.
Jim Delaney
That China is simultaneously making moves within its own country to increase the use of the Yuan for trade purposes might add a little weight to WJ’s pre-G-20 chatter. Last week the Chinese government designated five of its biggest trading cities to take part in a planned program allowing foreign trade to be conducted fully in Yuan, instead of in dollars or other major currencies.
Early beneficiaries of the new initiative will be China’s own industrial conglomerates as they currently price all intra-company transactions in Dollars. The next step is expected to be trade between Hong Kong and China as even though HK is officially part of China they have a separate financial system. There is no time table for the Hong Kong move but “We have the infrastructure ready to be the first”, under secretary for financial services and treasury in Hong Kong Julia Leung said recently.
Ready seems to be an apt word when discussing China these days as the $585BN stimulus package the Chinese put in place appears to be having an affect much quicker than the bang Uncle Sam seems to be getting for his buck.
Crude Oil imports in China hit a one-year high in March and steel mills imported record quantities of their key raw material, iron ore. The increase in activity is being seen on more than just the input side as banks have extended 2.7TN Yuan ($400BN) of new loans in the first two months of the year and the stock market as measured by the Shanghai Composite Index is up 22% from its March 3rd low and 48% from the November 2008 low. Car sales also hit a record last month.
“China is unusual in that it has this incredible capacity to mobilize all its institutions. There is now a growing degree of confidence that the stimulus package is having an impact.” The World Bank’s chief economist, Vikram Nehru said recently.
True coordination is something to be envied as it is doubtful the discussions on how much to spend and where by the Chinese government looked anything like the $787BN stimulus package passed by our own Congress or the $410BN omnibus spending bill that was “oinked”, sorry inked, shortly afterwards.
All of this has implications for us here in the U.S. as the global nature of the current slowdown that was caused by the global distribution of AAA rated BBB debt means that the world will come out of its hole sooner if Uncle Sam isn’t the only one pulling on the rope.
Of interest here is the difference in how this is being accomplished here and in China. The latter is working from massive reserves saved during the boom years in an economy that was based on exports and has one of the highest savings rates in the world.
The U.S. is the exact opposite; the boom for us was ignited by low interest rates and fueled by debt. Until recently we were a country of consumers not savers and whether the switch from one to the other is happening at the most propitious time is not the point of this note. The point here is that in order to pull ourselves back out of the hole we’ve dug we’ve got to spend even more of the money we don’t have and to get that done we need someone to lend it to us.
Re-enter the Chinese. According to the Treasuries own records (always good to know who your best customers are.) China’s holdings of U.S. debt exceeded Japan’s for the first time last September. Since it is baseball season the box scores on that are $618.2BN at the end of 3Q08 with $121.4BN added through the end of the first month of this year totaling $739.6BN. During the four months between September 2008 and January 2009 Japan added only $17BN more to it’s holdings of U.S. debt.
To put this in perspective in September 2001 there was just under $1TN of our I.O.U.’s held by other countries. At the end of January 2009 that number was a little over $3TN. During this same period the amount of U.S. debt that China held increased from $72BN to the $739.6BN mentioned above. U.S. debt held by foreigners up three-fold in seven and a third years the amount of U.S. debt held by China up ten-fold in those same seven and a third years. (Am I making my point?)
The CDS quote for China closed last night at 138.34 after a near term peak of 263.21 on March 2nd. The previous and all time high was reached back on 10/24/2009 at 295. The CDS for the U.S.A. closed last night at 44.42 and hit its high of 100 on February 24th of this year.
While the world still views America as the better credit risk it should not go unnoticed how much we are indebted, literally, to our global neighbors for our standing.
Enjoy the week.
Jim Delaney
Labels: CDS, CEC Strategy, correlation, credit, cross asset, equity, Jim Delaney
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4:04 AM
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