China’s markets have been closed since the end of September and re-open tomorrow. It is interesting to note what has happened in the global capital markets in the interim. The US dollar has fallen against all the major currencies, but the Japanese yen, which is off about 0.2%. Major equity markets are 3%-5% higher. US and Germany benchmark 10-year bond yields are up about 3 bp, though UK gilt yields are up 9 bp, with half of this gain being recorded today. Many industrial commodity prices are higher, with the price of Brent up a little more than 9%, and the CRB index is up 4%.   

Arguably, two of the most important developments since China’s holiday began is the weakness in the US employment data and, leaving aside the UK, output of the major economies appeared to slow in August.  Although many market participants have shifted their expectations of a Fed hike out to March 2016, many Fed officials themselves continue to signal the likelihood of a rate hike before the end of the year.  

The Hang Seng China Enterprise Index, which is comprised of Chinese shares that trading in Hong Kong has risen by 10.5% since the mainland markets closed.  Recall that in September the Shanghai Composite was bouncing along the trough that was set in August.  It traded between 2983 and 3215. A trendline connecting the June (~5178) and the August (~4006) high comes in tomorrow near 3192. 

Earlier today, China reported that its reserves fell to $3.514 trillion a $43.3 bln decline over the course of the month.  This was a somewhat smaller decline than market participants expected. However, if the PBOC intervened in the forward market, perhaps trying to force a convergence between the onshore and offshore yuan, as many suspect,  the impact in reserves would not be immediately evident. 

Some observers insist that the decline in PBOC reserves also understands the capital outflows because, given the large trade surplus, reserves should have risen.  That may have well been the case previously, but the liberalization measures weaken this link.  Chinese businesses appear to have greater latitude in converting their foreign currency earnings.  Less of it may be winding up in the PBOC coffers.