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Research Edge Position: Long the Chinese Yuan via the etf CYB


“Going forward, we are gradually promoting liberalization of the exchange rate.”

–Ma Delun, Deputy Governor of the People’s Bank of China, November 10th, 2009

When Keith and Brian are out of the office, the responsibility of running the morning meeting gets passed to me.   I’m not sure whether that makes me important or not so important, but it does lead to a different tone and nature to the meeting.  I am focused on Macro 100% of the time, so my perspective is different than both Keith and Brian’s.  In these morning meetings, I’m looking for important Macro data points from our Sector Heads.  This morning our new, and as of yet unnamed, Financials Sector Head provided a few nuggets to feed my ravenous macro data point appetite.

The first related to Russia and the Russian Banking System.  Sberbank, which accounts for 1/4 of Russian banking assets and a 1/3 of Russia’s banking capital, indicated that he believes that bad loan provisions will peak in H1 2010 at around 12 – 14%.  The implication of this statement is that the Russian banking system is seeing a light at the end of the tunnel in terms of the credit crisis.  While 12 – 14% bad loans is certainly nothing to dismiss, the idea  that bad loan provisions may be peaking in the not so distant future is certainly positive for the Russian economy, especially when this news comes from a bank that extends 31%  of all Russian loans.

Sberbank is relevant for many reasons, but primarily, as noted above, it is by far the largest consumer bank in Russia and in some communities is the only bank available.  In total the bank has ~20,000 branches and ~265,000 employees.  It is a pseudo public institution as the Bank of Russia, the Russian equivalent of the Fed, owns 60.2% of Sberbank’s voting shares, with the remaining shares in private hands.

The second data point related to China, and supports our call for an early 2010 slow down for The Client (Research Edge parlance for China).  It appears that loans internally in China came in well below expectations for October.  New yuan loans in China were reportedly at CNY253BN versus an expected amount of CNY370 – 380 in October, so a dramatic miss versus expectations.  This was on the back of a data point from the South China Morning Post on October 12th, 2009 in which the four largest banks in China, Industrial and Commercial Bank of China, Bank of China, China Construction Bank, and Agricultural Bank of China, lent CY110BN in September which was the lowest monthly total for the year.

In aggregate, these are mixed data points:  the Russians are starting to see a peak in bad loans, while the Chinese are seeing a slowdown in loans, which will be a key leading indicator in the coming quarters.  Currently though, China continues to roar in the Year of the OX.  The Chinese reported Industrial Production this morning that was up 16.1% y-o-y, the largest gain since March 2008.  In addition, retail sales gained an annual 16.2% in October.  While we have our eyes on the leading indicators, and a potential slow down in 2010, there should be no confusion that the Chinese economic is currently in high gear.

As it relates to the virtual portfolio, these recent economic data points have also led to a shift in the Bank of China’s view of on the yuan.  Previously, the stated policy was to keep the yuan “stable”.  The new policy, as articulated in a quarterly statement yesterday, is to set the yuan’s rate in a “proactive, controlled and gradual manner and based on international capital flows and movements in major currencies.” This change in stance is obviously bullish for the yuan.

Daryl G. Jones
Managing Director