A rumour started floating around last week that a CNPC-Sinopec merger might, just might, be on the cards with the FT suggesting China’s national planners were “openly discussing the idea of mergers in a number of state-dominated industries, following the $26bn marriage of high-speed rail companies China CNR and CSR Corp at the end of last year to create a more formidable competitor in international tenders.”
Fair enough and we’re not saying this definitely won’t happen, stranger things etc, but there’s something really very funny about the idea. Read more
The invention of modern accounting in Renaissance Venice was arguably one of the prerequisites to the development of capitalism, so it’s interesting to discover that Chinese merchants developed methods distinct from those employed by their European counterparts that nevertheless made it possible to run successful and growing businesses.
That knowledge comes to us from scholars at the Chinese Academy of Social Sciences and the London School of Economics, who recently found and dug into a remarkably complete archive of business records going back to the late 1700s. This is far from the first study of Chinese accounting but it is the first comprehensive look at a firm that was run by people who probably never encountered European bookkeeping techniques. Read more
China’s richest man has been loading up on high interest shadow banking loans — and selling off a private jet — to fuel the rapid growth of the most valuable solar company in the world.
A Financial Times investigation has found that Hanergy Group, run by founder Li Hejun, has borrowed billions of renminbi from high-interest Chinese “trust products” marketed to wealthy individuals, and loans secured through pledging shares in its Hong Kong-listed subsidiary.
Yup, you’re never short of a lede when your subject is China. A little more, still courtesy of the FT: Read more
Charts from Nomura showing, on the left, China’s largest cumulative two-month decline in FX purchase positions on record occurring despite a record trade surplus over the same period and, on the right, the probable hoarding of foreign currency as reflected in a sharp monthly rise in foreign-currency deposits in January.
Or to paraphrase a bit further: more signs of capital flight and depreciation pressure in China. Read more
A guest post by Simon Cox, Asia-Pacific Investment Strategist, BNY Mellon Investment Management
China’s weak inflation numbers, updated on February 10, underscore why the People’s Bank of China (PBOC) is now easing policy wholesale, after a long sequence of targeted tweaks. (It cut reserve requirements on February 5 less than three months after cutting benchmark interest rates in November.) But does monetary easing work in China the way it works elsewhere? Does it, indeed, work at all? Read more
With an unspoken currency war supposedly upon us and a cry for China to join in — according to BofAML the market is pricing about a 30 per cent probability of a 10 per cent devaluation of the CNY this year while insistent market forces push the yuan down anyway — we thought a lopsided CNY depreciation pro and con list from Nomura might be helpful:
1. Makes exports more competitive, helping to boost growth.
2. Raises the cost of imports, helping to reduce the risk of CPI deflation.
There have been enough pixels spilt over yesterday’s required reserve ratio cut from China so we’ll keep this short (ish).
First, go read your 2012 Mark Dow explaining why a “Chinese RRR cut is NOT like a rate cut in the developed world. And it does not necessarily signify an easing of the monetary policy stance.”
Which is basically true here again Read more
Another BoAML FX observation on Thursday, this by way of Claudio Piron, emerging Asia FI/FX strategist, and his team.
On the analysts’ radar this week, the continuing risk of CNY depreciation, and in particular this chart:
Since 2008, debts owed by China’s nonfinancial sector have soared by more than 90 percentage points relative to GDP. As David said, that’s “pretty damn fast.”
Almost all of that increase can be attributed to corporate borrowers. Chart via Goldman:
The thing about a “pervasive implicit state guarantee” is that it’s pretty pervasive. It gets everywhere. Well, just about everywhere. Everywhere that an implicit state guarantee can get.
Futhermore, it’s hard to get rid of once it spreads. (We’ll spare you an analogy) Read more
Pretty obviously — with ECB QE, a presumed resultant euro funded carry trade, and all sorts of central banks rushing to cut rates — there’s some sort of renewed currency war movement going on.
And while we’re all ears for arguments about positive-sum outcomes (in a deflationary world), it’s worth remembering those who might struggle to get involved. Read more
Like 97th percentile fast.
From Goldman, do click to enlarge: Read more
The Chinese government seems to have noticed that the country has no policy institutes or think tanks with global clout. So it’s going to get some. Up to a hundred, in fact. But this isn’t Xi Jinping reworking Mao’s famous 100 flowers campaign. Wouldbe think takers are not being invited to think freely…
A new type of think tanks with Chinese characteristics would support development and strengthen soft power, according to a guideline issued Tuesday.
As Goldman flagged this morning, December has brought with it $19bn of FX outflows from China. That’s the biggest move since 2007 (with our emphasis):
The position of FX purchases for the entire banking system (the PBOC plus commercial banks) decreased by about $19bn in December (vs. essentially flat in November)…
The FX outflow in December underlined the weakness in demand for the CNY, despite a strong trade balance of close to $50bn. The FX outflow size is the largest since December 2007 (and this earlier data point was skewed by the MOF’s FX injection in China’s sovereign wealth fund). The PBOC has been setting the daily USDCNY fix on the strong side of the spot rate since late November to counteract depreciation expectations. Today’s data suggest that besides displaying such a bias in fix setting, the central bank might have gone further in supporting the currency by buying CNY in the market. But we await PBOC balance sheet data, due out in the coming weeks, to confirm if it is indeed the case. The FX outflow also partly explains the slow M2 growth in December.
Or the risk of “lethal damage” if you’re into that sort of thing.
As said before, we’ve had 34 months and counting of negative PPI inflation in China with CPI at best lacklustre — coming in at 1.5 per cent in December. The risk is that, in a country charmingly wrapped in debt based uncertainty, we get outright deflation. Read more
The thing about the relationship between monetary stimulus and inflation in China is that — much like like a Wookie, an 8ft tall Wookie, living on the planet Endor with a bunch of 2ft tall Ewoks — it does not make sense. At least not if you approach it with a conventional eye.
So says China maven Michael Pettis, who emailed us over the last few days to say we must, at minimum, consider the possibility that there is a reason rapid credit growth in China has failed to do what it’s “supposed” to do. And, by extension, why deflationary pressures in China indicate the probable need for monetary tightening, not loosening. Read more
Said China of its own mooted plan on Thursday:
“It’s not a stimulus program by expanding fiscal input, it’s about guiding social capital into investment projects,” Luo [an investment official with the National Development and Reform Commission] said. “It has nothing to do with the 4-trillion-yuan stimulus plan in 2008, and it is fundamentally different from that.”
But wasn’t it already pretty clear it wasn’t a legit stimulus? Read more
Here’s what 33 months of negative Producer Price Index inflation in China look like:
Of course, we’re now at 34 months, following December’s print. This clocked a 3.3 per cent year on year fall in the index — the biggest annual fall in more than two years.
Dramatic. But the question is, should we care? Read more
This installment in our occasional and disjointed series into the risk of balance-sheet driven currency crises in EMs — based on the hidden debt that lurks beneath — features a new if well flagged villain: oil.
The broad question as ever is: have the majority of emerging markets still got manageable foreign currency external debt levels? And do they rule themselves out as candidates for a self-fulfilling currency crisis? Even when dark debt is taken into account?
Tl;dr: Yes, with a few exceptions. Read more
Sentences to warm the New Year heart, from Deutsche:
This year, China will likely face the worst fiscal challenge since 1981. We believe this is the most important risk to the economy and one that is not well recognized in the market.
Assuming the second bit is true… Read more
What you think of the new one will probably depend on what you thought of the old one. For many people “not much” seems inadequate.
From Capital Economics’ Mark Williams on the likely Tuesday announcement of an upward boost of up to 10 per cent to the Chinese government’s estimate of the size of its economy (our emphasis): Read more
You’ve read about the scope for a dynastic bull market in the Economist… now read the report. If you can read Mandarin, like P/E ratios and have a good feel for Chinese imperial history that is.
Do click through the below for the pdf from Cinda. Joseph Cotterill, our resident Mandarin translator, assures us that it’s a chart of the last two millennia of order and chaos in China… which is nice: Read more
Some cut out and keep from Morgan Stanley:
Biggest fall in five years that, even if it’s still up 35 per cent this year. Might be time to talk about the potential consequences of all this, no? Read more
Nice from Simon Rabinovitch at the Economist:
One middle-aged man, Mr Xu, had come to meet a manager to inquire about how to subscribe to initial public offerings; their average first-day gain has been about 40% this year. He said he had taken the afternoon off work for the meeting and could hardly conceal his glee. “I’ve been trading since 1992 (just two years after the Shanghai Stock Exchange was established) and I guarantee you this bull market will last,” he said. He confessed to getting badly bruised by the last big one – his portfolio of 500,000 yuan had swollen to 3 million yuan by 2007 at the peak of the market, before falling back to its original level.
At the other end of the spectrum in terms of experience was Ms Zhou, 25, an interior designer with dyed-blonde hair. Like many other young professionals, she had previously put a big chunk of her savings in an online investment fund marketed by Alibaba, an e-commerce company. The fall in interest rates has reduced the return on that fund, pushing her to look for alternatives. “I had been thinking for a while about buying stocks but I had to travel for work and missed the best opportunity,” she sighed. “I will be conservative at first. Just one or two thousand yuan. Or maybe ten thousand.”
Which says a lot about the mechanical nature of this “super-bull” run. There’s simply quite a bit of money in China and a limited number of places for it to go. Once one is found… Read more
And in the Shanghai Composite, from Fast, “as of 2:34pm in Hong Kong, turnover today is already $91.4bn, a record high according to Bloomberg data going back to 2005.”
Blame retail, blame leverage but don’t, as already mentioned, put too much weight on the Shanghai-Hong Kong Stock Connect scheme — uptake has been light and the timing is off. It’s up to you how much weight you put on that rate cut in late November. YEAH the equity rally got off the ground well before the rate cut with the Shanghai Composite up by 23 per cent between the start of June and 21st November, more than any other major equity market. BUT shares have also gone up 17.5 per cent since the rate cut so it’s obviously part of the story.
But to get back to the more important retail, leverage stuff…. Read more
Consider this from Gavekal’s Chen Long on the run up in China’s A-shares:
Clearly there are incentives for China to join the currency wars in earnest.
The RMB is up 6 per cent in Nominal Effective Exchange Rate terms since August 2014 with, say SocGen, the JPY, EUR, KRW and RUB the top contributors, accounting for 1.9pt, 1.3pt, 0.5pt and 0.4pt of the appreciation respectively. Honourable mention to the USD, naturally, against which the RMB is up 0.5 per cent.