Courtesy of Also Sprach Analyst.
Interesting research from Standard Chartered shows that corporate China is short the US dollar. That may seem surprising, but it makes sense if the Chinese yuan is expected to go up while the US dollar is expected to go down, which has been the case for the best part of the last 2 or 3 years. That expectation has not disappeared until recently.
Essentially, Standard Chartered is suggesting that while corporate China have to sell US dollars whenever they receive their payments in that currency, the data suggests that they are selling a lot more US dollars than the trade surplus data suggests that they should, thus they seem to have been building up a net short position in US dollars. Or, in other words, they borrow US dollars.
I note that StanChart is aware of the potential inaccuracies on these numbers (as I noted yesterday, China’s trade figures can be very inaccurate), thus it is not certain how large this net short position is. However, if this is indeed the case, a deleveraging of the short US dollar position due to an expectation of a depreciation of Chinese yuan and appreciation of US dollar (which are both happening) would mean a lot of US dollar buying.
If corporate China was deleveraging this position, we would see a lot more USD buying in the onshore FX market and much more CNY weakness. We believe setting off such a deleveraging process is something the People‟s Bank of China (PBoC) would very much prefer to avoid (more on this below). However, the data suggests that corporate China kept its position more or less stable during the January-May period.
The chart below from Standard Chartered illustrates the point:
