From: Richard Kahn

From: Richard Kahn To: "jeffrey E." <[email protected]> Subject: Fwd: Update in USDCNH Date: Tue, 11 Aug 2015 14:51:44 +0000 Inline-Images: Mail_Attachment.gif; Mail_Attachment(1).gif; Mail_Attachment(2).gif; Mail_Attachment(3).gif; Mail_Attachment(4).gif; Mail_Attachment(5).gif; Mail Attachment(6).gif; Mail_Attachment(7).gif; Mail Attachment(8).gif; Mail_Attachment(9).gif not sure daniel understood trade when we were finally at breakeven and he recommended we keep trade on books.. Richard Kahn HBRK Associates Inc. Begin forwarded message: From: Daniel SI Sub'ect: Update in USDCNH D To: jeevacation@ mail.com Cc: Paul Morris < . Vahe Ste anian >, Stewart Oldfield < >, :17:38 PM EST Classification: Public Jeffrey, Rich and I spoke last week on USDCNH, and I wanted to send a recent piece from our research team on this topic. For full disclosure, I personally don't share our research team's recommendation, as USDCNH vol still extremely low and it represents a very cheap out-of-consensus expression of CNH out-performance vs. USD, so don't see the value of crossing bid offer on the transaction. Having said that, our research team advocates closing their USDCNH put spreads as they view "the next phase of FX depreciation will be driven more by China's own worsening fundamentals, namely: 1) slower growth and disinflation, (2) a pick-up in outflows, (3) de-leveraging that increases short-term risks and (4) valuations approaching expensive extremes" You could unwind you $75mm USDCNH put struck at 6.16 expiring on 12-Aug-2015 for $270k bid (Spot ref 6.1310 - the mid would be $315k - pricing as of noon 11/03/2014) You paid $273k for it. More details on the research piece below. Best regards, Daniel EFTA01197426 ---- Forwarded by Daniel Sabba/db/dbcom on 11103/2014 11:49 AM ---- Classification: Public China growth is facing increasing headwinds, with DB Economics downgrading our 2015 growth forecast to 7.0% this week. In this context, we believe RMB weakness will return to haunt the market in 2015. This weakness will be different from the early 2014 squeeze, which appeared to be engineered by policy-makers to target speculative capital. The next phase of RMB depreciation will be driven more by China's own worsening fundamentals, namely: (1) slower growth and disinflation, (2) a pick-up in outflows, (3) de- leveraging that increases short-term risks and (4) valuations approaching expensive extremes. In our view, the resistance from policy-makers to FX weakness will be minimal since it will reflect underlying fundamentals, and authorities should be comfortable with a more market-driven RMB. Moreover, retaining the current policy bias for appreciation would only pull in more 'hoe money flows, which increase systematic risks in China. With this in mind, we are reducing the long CNH exposure in our portfolio by closing out our USD/CNH put spread. The slowdown in Chinese growth and RMB weakness is also likely impact other Asian currencies. We examine four channels of spillover: (I) exports, (2) FDI, (3) financial linkages, and (4) FX policy, and find the KRW, MYR and TWD to be most likely to be affected. Link: 23 0900138c0138c00869.pdf Figure 3: The Chinese authorities have been loosening monetary policy, particularly in the past few months Oates Measures announced 8-Apr-14 COB was granted about 100 billion yuan in loans to shantytown rebuilding projects le-Apr-14 The State Counci announces a 50bps RRR cut for county-level rural commercial and cooperative banks The P80C announced an increase in lending to micro and small-sized enterprises (MSEs). arranging 50 billion yuan re-leridng quota 21-Mar-14 specially for loans to MSEs. 0-May-14 The Peat lent RIAB100bn to some of smal banks and rural credi unions via its re-lending 3c 'sty. 21-May-14 China allows local governments to independently issue bonds. 10 local cpavemments to sell bands on the: own credit 22-May-14 The PBot lent 300 billion yuan to the China Development Bank for re-lending to reconstruction projects of shanty towns 30-May-14 Targetted RRR cut for financial institutions with loans. to SME and agricultural sectors 9-Jun-14 12-Jun-14 30-Jun-14 7-Jul-14 to expo . . 20-Jul-14 I PBOC otters . COB a RMBltm credit line tor Shantytown developments ooments 31-Jul-14 Peat. cuts its 14-day repo operation today by 10bp to 3.7%. . . P8oC announces that it will increase its rediscount facility quota by FOAB12bn for some of es branches to support the financing of 8-Aug-14 the agricultwal sector and small and micro enterprises 27-Aug-14 PBot sets aside another 20bn yuan for a re:ending program 18-Sep-14 Local press reported PBOC carried out Standing Lending Facility (SLF) operation. provding 500 billion liquidity to five major banks. 18-Sep-14 Pea: cuts its 14-day repo opera: on tocay by 20bp to 3.5%. The PBOC and the CBRC jointly announced measures to loosen mortgage policy and encourage banks to support shantytown 30-Sep-14 projects and better-quality developers. developers. 14-Oct-14 Peat cuts its 14-day repo opera; tocay by 10bp to 3 4% 17-Oct-14 PBoC announced it wit inject RMB200bn into Joint-Stock banks The PBoC lent 100 billion yuan to some small- and medium-sized banks to allow them to re-lend the cash to agricultural ' projects PBoC announces it wil cut the RRR by 50bp for maiimaI banks, effectite 18 June The PBot announced a string of credit measure exporters CBRCs tweak loan-to-deposit ratios to support growth The Peoples Bank of Chna started a 100 billon yuan (S18 baion) quota for reloading for agriculture and small businesses. EFTA01197427 Figure 4: RMB policy normally moves in sync with monetary policy 12% Ir"..1 I I 10% 8% 6% 4% 2% 0% I I I I 1 -4156 I I nis I um, o% Jana( Jana, g Joe-10 Jan- Id — Deposal rates (%. WS> (%YoY. LHSI — RRROG. RHSI Sums Ostsato M. Ll9C Elkesgteg Arra LP Figure 6: RMB could again shift towards being more market-driven. particularly since fundamentals no longer support a strong RMB 6.50 6.45 6.40 625 620 625 95.0 6.20 6.15 6.10 85.0 6.05 6.00 80.0 Jan-12 Jul-12 Jan-13 Jul-13 Jan 4 Jul-14 —CNY Spot —USD Index Irebased to 2 Jan 2012 =100. FIRS' 110.0 105.0 100.0 90.0 Figure 5: Ongoing RMB strengthening could add to the disinflationary environment China is facing 25% 12.0% % 10% YCIY % • 10.0% 8% 20% ECM 6% 15% 6.0% r 4% 0 4.0% 2.0% 5% 0.0% -2.0% 2007 2008 2009 2010 2011 0% -2% -4% 2012 2013 2014 2015 —CM'appreation vs USD (PBoC lions I —China CPI I RH SI .bra Gnu IS* a Bonin fient • IP Figure 7: From a valuation perspective, the RMB is looking expensive 40% 30% 20 10 0 -10 -20 2 std dev 30% -40% Jan-CO Jan-03 Jan-06 Jan-09 Jan-12 REER: Deviation horn LT average: CHY Son Danlath• Batt eff Isagdegt F a IP &en Oaths ant COC Sadao Fawn IP EFTA01197428 Figure 8: China tends to experience capital outflows when the domestic economy slows Figure 9: Recent weakening in growth and RMB has resulted in flows into China becoming more balanced 20.0% 60 120 16.0% I 40 103 16.0% 20 80 14.0% 60 a 120% 10.0% 40 8.0 6.0 4.0% 430 -40- % 2.0% BMMA -100 0.0% 120 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 eoP. Currency &Deco IRHS —Industrol prod' I%YOY. 3MMN 40 20 a Sore& Lambda ant CRC Sarraderg Awns LP Sbn I -80 Jan-10 Jan-11 Jan-I2 Jan-13 Jan-14 rade OS FDI *UAOxpillitlerf flows Jet Fl FX purchases Sacra Awes*. ago* a aborts Frea Figure 10: Corporates are actively rebuilding their USD 'Figure 11: ...and actively hedging more of their FX risks balance sheets.... 700 Sbn 800 500 400 300 203 103 II Juk12 Ja'n13 Juk13 Jan-14 Juk14 F)( dope in ChM, USCIII:NY spot IRHSI Sem:salads Elatt a Saaitherg nets LP 8.40 8.35 8.30 8.25 8.20 8.15 8.10 8.05 8.00 Figure 12: Increasingly. 7.5% growth target is not achievable in the absence of stimuli 14.0% % YoY 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% /0% 6.0% 5.0% 4.0% -Largan,b,,i'gatfGopeloa2 •Lan-GDPT4A-13 SIP (96 YoY. 3MMA) % YoY, 3MMA so 70 60 50 40 30 20 10 0 .10 40 -30 6.50 Janl 1 Jan.12 Jan.13 Jan-14 —Net USD,CNY h•ds by Corporates lint} USINI:NY Spot Sbn.3111 Stigma 6.10 6.15 620 625 6.30 6.35 6.40 6.45 Sara Ortsho ha* raC —J--y Fs= IP I Figure 13: More credit required for every incremental bit of GDP growth 18.0 CNYtm 111 1024 6.0000 ♦ •E . 16.0 - 14.0 • • - 12.0 111 11 11 III - 10.0 8.0 - - 8.0 -- 641°O 6.0 - 4.O. 2.0 . 1Mm iEl-M . 1 2.0 0.0 -2.0 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 • Bank Loans • Bonds & Equity •Soles5 Son Oates Batt MC Eltaidegt Ansa IP &wet Catch•• Sank MC bran Fame IP • Offbalance sheet financing • Others EFTA01197429 Figure 14: China's overall debt level is rising dramatically, particularly corporate debt, which stands at 150% of GDP Figure 15: China's corporate debt has been rising faster than that of the US over the past few years 250% 160% seine Ditto Bat likaatn Rhea LP 100% 50 0% MCcrporate debt •Local Gem with LGFV Jani08 Jan-09 13.1-10 Jan-11 Jan-12 seential govt • Househokl ken Sea Carames Sink Smiths" arra LP 140% 120% 100% BO% 80% 20 40: 2008 MG 2010 2011 2012 2013 ■ Mecipetate debt as a % el GOP US . 11 . 1 1 EChna CRC CRC 200% 150% Figure 18: Rising risk of loss-making enterprises and possible default if credit growth slows further 20% 35% 18% • 30% 16% 14% r 25% 12% • 20% 10% 8% 15% 6% 10% 4% 2% 5% 0% 0% Jan-07 Jan-C6 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 BNo of Loss Making Enterprise % of total Large •Medium ANew Yuen bans growth INS, Savor- Bar* CSC bads, fires LP Figure 16: SOEs' RoA has not picked up, despite rising debt level 6.0% 5.0% - 4.0% - 3.0% - 2.0% - 1.0% - 0.0% .3s 2004 2005 2006 2007 2006 2009 2010 2011 2012 2013 China 50Es: Return onassas Figure 19: Industrial profitability is at risk of declining as IP slows YoY% 3MMA 18 13 3 Jan-C6 Jan08 Jan-10 Jan-12 Janie fridustnal piod'n fridustrial Enterprise profitability YoY% 3MMA bar- ant a a,.j Ping. na IP 100% 80% 60% 40% 20% 0% -20% -40% Figure 17: In fact, net profit margin has been low despite easy funding compared with private enterprises in China 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 44 0.0% annualsed Ma 03 Mar-C6 Mar07 Mar-09 Mar-11 Mar-13 Net margin SOE lex. Financials) Peyote (ex Financials) Son Oasethi 11s; a abases, Rea LP San Cbsthe &ink CSC Borden ;arra LP EFTA01197430 'Figure 22: Asia exports to China have slowed notably 40% 30% 20% 10% 0% -10% -20% JuAll Dec4I Dec-I2 Ju I3 Dec-I3 Jvc-14 —9C ----MY —SI ----TA ----TN —PH Figure 23: Taiwan, Malaysia and Korea are the most exposed to China's slowdown. given that the majority of their products are electronics % al &Nods 100% 90% 80% 60%- 50%- -40% 30%- 20% 10% 70% 0% O TA MY SK PH SI TH •Othe s *Iran 60 •Chern • Primary ProcEMMachinaN•Bectrocic SomtwOwees&mtaMarthergamodAP SastambeSaivitaXamehmawer0 I Figure 24: Taiwan and Korea are the most exposed to China % of NixOs 100% 90% - 80% - 70% - 60% - 50% - 40% - 30% - 20% - 10% - 0% 1 TA 5K MY PH 0 TH SI 14 n:Ahel •Asia XCH •EU NNI. America China America MILATAM NEU mAsia Figure 25: Chinese investment into Asia is the largest relative to other regions 120 lusobo 100 80 60 40 20 O • I I 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sourer Owatsth• Br; CB4 a—i—S Arra LP Sawa n. the hot CSC Illanhey Fire ta. This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and destroy this communication. Any unauthorized copying, disclosure or distribution of the material in this communication is strictly forbidden. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. EFTA01197431