This report presents the March 2022 update on the Commodity Leading Index Monetary China (CLIMC, see Appendix for index description).
Increasing Tightening Our CLIMC shows that financial conditions as of mid-March are tightening. Consumer inflation remained at +0.9% yoy in March, but the month-on-month numbers increased from higher food and energy prices. Producer inflation is at +8.8% yoy, above expectation, due to the surge in global commodity prices following Russia’s invasion of Ukraine. RMB is depreciating against the basket of currencies of main trade partner. Correspondingly, as shown in the Swirlogram, the CLIMC places the financial environment in an increasing tightening mode. The monthly index average of -0.29 is down by 0.5 over the month (one year range is -0.29 to 0.67) and is below the yearly average of 0.39.
CLIMC and Sub-Indices Over the previous month, 1 sub-indices of the CLIMC increased, 0 sub-index remained within the month-on-month momentum range of +/-0.1 standard deviations (s.d.) while 5 decreased. On the positive side, the Relative Value sub-index increased due to the steepening of the (government) bond yield curve. On the negative side, the main sub-indices that decreased were the Credit Risk, Arbitrage and Stress, due to increasing default risks, depreciation of the RMB and increasing market volatility.
CLIMC vs. CSI300 The CLIMC correctly captured the major turning points in Chinese equity as measured by the CSI300 during the recent months. The improvement of the index in mid February 2016 has bolstered the markets in March 2016. The improved financial conditions which started in late June 2016 has led to the upward movement of the markets in August 2016. In addition, the weakening financial conditions since November has pointed to the end of the equity rebound in December 2016. The equity market then benefited from relatively loose financial conditions during the first three quarters of 2017. The tightening conditions that prevailed during the last quarter of 2017 and early 2018 weighted on the equity market. The acceleration of loosening conditions only began to support the equity market in 2019. Loosening financial conditions starting in April 2020 supported the equity market in the aftermath of the coronavirus, as shown in the graph below.
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Appendix: Index Composition CLIMC The Commodity Leading Index Monetary China (CLIMC) intends to be a representation of the overall financial liquidity in China. The CLIMC is a composite index of financial variables and includes six sub-indices. Each component is normalized and smoothed before aggregation and updated in the index as new information becomes available. The rolling standard score (Z-score) approach has been applied to normalize each component. As such, a reading above zero indicates loosening and below zero tightening of financial conditions relative to the mean. Upwards movements of the index indicate improving and downward movements deteriorating financial conditions. Each of the sub-indices has been smoothed by the exponential moving average procedure to remove noise from the components. The CLIMC is composed of six sub-indices with equal weighting: 1. Stress sub-index 2. Credit Risk sub-index 3. Lending sub-index 4. Bond sub-index 5. Relative Value sub-index 6. Arbitrage sub-index
Stress sub-index The CLIMC Stress subindex (CLIMCS) intends to capture the level of risk aversion measured by general market volatility. An increase of the CLIMCS means less stress and thus loosening financial conditions.
Credit Risk sub-index The CLIMC Credit Risk sub-index (CLIMCCR) measures regional credit healthiness. The higher the CLIMCCR, the lower the credit default risk which represents a loosening factor.
Lending sub-index The CLIMC Lending sub-index (CLIMCL) is a composite index of relevant short term regional rates. A higher level of the CLIMCL indicates lower lending cost which reflects a loosening factor.
Bond sub-index The CLIMC Bond subindex (CLIMCB) represents the long term government bond prices and debt securities. A higher level of the CLIMCB is associated with lower average market yields, and thus cheaper long-term financing, implying a loosening effect.
Relative Value sub-index The CLIMC Relative Value sub-index (CLIMCRV) intends to assess the market expectations on the monetary situation versus current conditions, in particular whether current market conditions are tightening or loosening relative to market expectations. An increase of the CLIMCRV indicates a likely change toward a loosening situation.
Arbitrage sub-index The CLIMC Arbitrage sub-index (CLIMCA) approximates the margin of engaging in RMB arbitrage transactions, thus providing a measure of hot money inflows (outflows) that contribute to loosening (tightening) of financial conditions in China. A surge in the CLIMCA corresponds to an increase in arbitrage margins favoring hot money inflows into China and vice versa.
Source: Four Elements Capital