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.
Well, kinda. Or that was the assumption ever since the closure of Hainan Development Bank in the 1990s, when household deposits were made whole courtesy of the fiscal chequebook and an implicit guarantee was born, at least.
But as of Sunday night there is the beginning of a delineation as the PBoC published its draft plan for setting up a real deposit insurance scheme in China. The highlights from Bernstein: Read more
The first rule of currency wars is: you always talk about currency wars.
The second rule is: you can always find one to talk about if you look hard enough.
This month’s FX war location of choice is Asia, and here with its proximate cause is BNP Paribas (our emphasis): Read more
More on that Friday PBoC rate cut — and just as China goes ahead and cuts its 14-day repo operation rate by another 20bp to 3.20 per cent too. That move on Tuesday, according to Nomura, suggests that the PBoC will continue to ease monetary policy… which would be true to form.
As Barc note, “the policy rate cut suggests that China is once again following the typical sequence in a monetary easing cycle – the pace of CNY appreciation is often slowed in advanced, followed later by the same directional moves in the policy rate and banks’ required reserve ratio.” Read more
Indeed, nobody expects the PBoC…
But, despite Friday’s surprise announcement, as SocGen’s Wei Yao says: “due to the further rate liberalisation announced at the same time, there is actually no de facto rate cut.”
She continues, (with our emphasis): Read more
The People’s Bank of China likes to act unexpectedly. And Friday’s surprise announcement of a Chinese rate cut only confirms that being unexpected is indeed the PBOC’s preferred communications strategy.
As Reuters noted, this is the first Chinese rate cut in two years and lowers the benchmark lending rate by 40 basis points to 5.6 per cent. One-year benchmark deposit rates were lowered by a smaller 25 basis points.
But, as Marc Ostwald at ADM Investor Services International commented in an email, the timing of this move looks to be as much about the sharp appreciation of the Chinese currency versus the yen as the fact that China’s economy is experiencing difficulties, with both Chinese CPI and PPI remaining very benign. Read more
Rumours of stabilisation in China’s property sector abound…
From UBS’s Wang Tao (our emphasis):
New property starts leapt up by 43%y/y in October reversing September’s marginal 0.2%y/y decline, as sales narrowed their pace of contraction from 10.3%y/y previously to 1.6%y/y…
State Owned Enterprise reform optimism in one chart, courtesy of Bernstein:
And here’s at least part of its foundation:
While investors can get impatient with the pace of change, it is worth pointing out that corporate China today looks similar to pre-privatized Europe of the 1980′s.
This man is in charge of China. Like, really in charge:
And he wants to make sure everyone he’s in charge of remains nice and calm. So he’d like them kept busy. That, for the most part, means they should be working — call it a social compact or call it a security measure, it doesn’t really matter. Read more
A sad demise or just an over-hyped concept from its Wikileaks conception? Either way, the below is sensible stuff from Gavekal’s Chen Long and Andrew Batson on analysts’ favourite growth proxy for waning Chinese growth. Read more
The latest from SocGen’s Albert Edwards features this eye-catching chart:
Chart du jour from BCA Research:
If there’s one sure bet in China it’s that money, uh, finds a way and that shadow banking (or whatever less objectionable name you wish to apply) will do its damndest to help. Otherwise, what’s the point?
In this episode, crowd funding. Read more
With a h/t to Marginal Revolution, here’s Larry Summers and Lant Pritchett on why — for the same reason the USSR didn’t overtake the US, and Shinzo Abe has a tough job on his hands — “excessive extrapolation of performance in the recent past and treating a country’s growth rate as a permanent characteristic rather than a transient condition” is a bad idea.
Most particularly where China is concerned. Read more
For a couple of years now we’ve made the case that the Chinese currency isn’t undervalued as many people believe, but rather, overvalued — especially, once all the other fundamentals are considered.
But, of course, the mantra that the Chinese renminbi is being repressed by the government is so ingrained in investor consciousness, it’s the sort of “whacky” out of the box thinking that tends to draw sceptical denial.
In the last few days, however, a number of analysts seem to have realised that something has changed in the nature of global capital flows, which may mean views that were taken for granted for years no longer really apply. Read more
Sometime tennis partner of Larry Summers and People’s Bank of China governor Zhou Xiaochuan looks to be on the way out, according to a detailed WSJ report. Read more
Oh look, China’s property market has worsened again:
Evidence of something — even if it’s not necessarily reform — from Deutsche:
Noteworthy announcements about SOE reform and deregulation have appeared about every two days since the Third Party Plenum in November 2013…
Some thoughts from Nomura a little while back on where exactly all of this anti-corruption cash being swept up in China on the orders of Xi Jinping might end up.
Potentially, in the coffers of local and central government:
Our anecdotal checks reveal that for cases involving cooperation among various local and central governments, distribution of any recovered funds has largely been based on negotiation among the governments involved.
… a billion here, a billion there