China’s Party Pep Talk Preening

2017 August 16 by

Chinese shares were up over 30 percent on the MSCI index through July, as solid economic data and financial work conference rhetoric overcame US trade retaliation threats following lack of agreement to cut steel exports in particular during the bilateral strategic dialogue in Washington. Second quarter GDP growth was 6.9 percent, with majority contributions from consumption and services, as infrastructure investment rose 20 percent and fixed-asset outlays at half that pace. Inflation was steady at 1.5 percent with money supply expansion continuing to drop to 9.5 percent on shadow banking and international conglomerate- centered deleveraging. The Yuan appreciated 3 percent against the dollar as the central bank hailed “market confidence” and Fitch Ratings pointed to a 1 percent jump in foreign ownership under the new Bond Connect. President Xi called for improved currency trading and internationalization efforts at the annual financial sector Party forum, ahead of the landmark October Congress which will formalize his second term. Reserves have returned to the $3 trillion mark, and banks have been net foreign exchange sellers the past year, as Chinese tourist spending abroad increased 2.5 percent in 2016. The Economist’s “Big Mac Index” puts RMB undervaluation at 45 percent, but less subjective expert readings have it in the 5 percent range.  Politburo statements at the July meeting focused on debt risks, including in local governments and households, with the latter soon to reach 50 percent of GDP. Ratings agencies reinforced caution, with S&P keeping a long-term negative outlook due to runaway credit despite the high savings rate. A financial stability council was formed to coordinate regulation and urgent action through the central bank, which ordered lower wealth management product returns as they approached a 2-year top toward 5 percent. It will be on the lookout for capital and insurance market “abnormal fluctuations” as well as real estate froth and the warning helped prompt a 17 percent loss on the small company tech-heavy ChiNext.

All big state enterprises will be converted to joint stock ownership by year-end but private capital participation has not yet been defined. Profits were up 15 percent among a cross-section of 100 firms in the first half, but company leverage averages over 150 percent, according to official statistics. The government has introduced curbs on further lending to aggressive overseas acquirers like HNA and Dalian Wanda to set an example as it consolidates holdings, most recently in the shipping industry, with coal and heavy machinery deals in the pipeline. Property investment jumped 8.5 percent at mid-year and the 70-city price index again was higher in June. President Xi may leave the sector alone until his reelection, but he has tightened controls over local government borrowing with phase out of financing vehicles, with large real estate assets, in favor of more disciplined bond issuance. He may elevate anti-corruption chief Wang Quishan, who oversaw the biggest investment trust bankruptcy during the 1990’s financial crisis with foreign creditors, to premier in a sign that top-level restructuring expertise and vision may again be pressing. His latest target was a party boss in Chongqing who may now be eliminated from standing committee consideration, as gaming center Macau continues to suffer from the anti-capital flight and money laundering purge.


Asean’s Ambivalent Crisis Anniversary Anchors

2017 July 27 by

The two-decade anniversary of the Asian financial crisis originating in Thailand and quickly spreading to Indonesia, Malaysia and elsewhere was marked quietly by regional investors and officials, as they acknowledged comeback since that grim period but were wary of new debt and capital flow risks despite healthy first half securities market results. The IMF, which extended $40 billion in rescue programs, noted the pain from broken currency pegs and widespread corporate bankruptcy and average GDP growth at roughly half the previous 7-8% pace, while commending foreign reserve accumulation and financial sector cleanup and regulatory strengthening. The episode prompted local currency bond market expansion under the auspices of the Asian Development Bank, and bilateral and multilateral swap line arrangements with the Chiang Mai Initiative. Franklin Templeton emerging market chief Mark Mobius commented about sovereign and business “harsh lessons” from untenable debt loads at the same time that the Bruegel think tank tracking these trends put ASEAN corporate leverage at 100% in terms of total liabilities to equity, over half of it short term. The Chinese ratio is more extreme at 175%, and although ASEAN’s position is “sound” the Brussels-based monitor stipulated that trade and funding shocks could reprise crisis-era qualms.

Thailand’s ruling generals also hesitated to cite the occasion as a possible reminder of democracy loss since, as its MSCI Index rose 9% through the first half. Since passage of a constitutional referendum a year ago, future election plans remain murky and the army’s self-proclaimed reputation for integrity was dented by a major human-trafficking scandal involving neighboring Myanmar’s Rohingya refugees. The new King has now assumed full control of the estimated $30 billion Crown Property portfolio, which includes stakes in blue-chip stock exchange listings Siam Cement and Siam Commercial Bank. Growth was over 3% in the first quarter on decent consumption, but public investment up 10% was the main driver. Exports rose 7% from January-May, and the central bank recently intervened to curb the baht’s 5% appreciation against the dollar to safeguard gains. The benchmark 1.5% policy rate otherwise is on hold under a loose monetary stance with negligible inflation. The trade surplus recovered to almost $1 billion in May, but consumer confidence is still low with a 75 reading, under the positive 100 threshold, and the manufacturing PMI is barely expansionary. Poor farm prices are hitting agriculture, at one-tenth of GDP, as foreign direct investment there continues under 1% of the total with lingering restrictions.

Indonesian stocks advanced almost 15% through mid-year despite a political scandal around the parliamentary speaker, from the Golkar Party founded in President Suharto’s time and a close ally of the incumbent Joko Widodo. Growth is humming at 5%, below the President’s 7% promise, and fiscal space is limited nearing the 3% of GDP deficit cap. With rising food and energy costs, inflation is 4.5% and the central bank has paused its easing cycle. Credit growth is only in single digits as banks turn wary of private sector debt, which is half the $330 billion external total. Former Bank of Indonesia chief Djiwandono, interviewed about the Asian financial crash, expressed resumed concern over “scary leverage.” Foreign investors have poured $7.5 billion into rupiah notes earning 9%, but Fitch Ratings was cautious about the doubled bad loan ratio at 3% since the 2013 “taper tantrum,” persistent 2% current account gap, and stalled reform momentum from “religious frictions.”

In Malaysia, where the MSCI Index climbed 12%, former Prime Minister Mahathir Mohamed was back in the news not just for crisis retrospective but possible renewed candidacy for the post against under a startup political party against successor Najib Rezak, still stalked by the multi-billion dollar IMDB fund diversion under investigation on three continents. A separate commission of inquiry was established in July to review questionable central bank foreign exchange transactions in the 1980s and 1990s in a counterattack against Dr. Mahathir’s tenure. In advance of likely elections, GDP growth was 5% in the second quarter, and the 2018 budget offered new tax incentives for high-tech innovation. China pledged $80 billion in medium-term projects under the Belt and Road scheme, but household spending remains squeezed by 80% of GDP debt. Inflation was 3.5% in June, and the central bank overnight rate stayed 3% with the currency down 7% the past year despite a recent surge, reflecting the dichotomy in ASEAN’s post-crisis 1998, 2008, and perhaps 2018 investor haven pitch.


China’s Index Inclusion Indentations

2017 May 13 by

China’s respective main and A share categories were up 15 percent and 5 percent respectively on the MSCI Index, as the provider is poised to marginally add the latter to the country’s 28 percent global weighting with access upgrades from the Hong Kong Connect experiment. Big houses like Black Rock consulted for the June decision have endorsed progress to begin incorporation, despite existing underweight positions and continued reservations over banking system and currency paths. PMI readings were barely over 50 in April, as the IMF reported that RMB assets were only 1 percent of combined central bank reserves after SDR entry and Fitch Ratings cited internationalization stall the past two years with depreciation and capital outflow streaks. Cross-border bank transfer rules requiring inward and outward matching were lifted, but the state foreign exchange body indicated that onshore trading must deepen and stabilize before broader controls are eased. In March bank hard currency sales were the lowest in six months, but major policy changes will likely be suspended until after the next Communist Party Congress due to extend President Xi’s tenure. He and US President Trump also have been in contact over the North Korea nuclear crisis, but harsher trade and financial moves against ally Pyongyang may in the same vein be postponed until after the leadership conclave. Consensus GDP growth estimates are between 6.5-6.7 percent for the rest of the year, and the President recently criticized slow government enterprise restructuring, as planners previewed statistical  overhauls and tax cuts.

The benchmark 7-day repo rate passed 3 percent as the central bank embraced “neutral and prudent” monetary policy in view of “alarming” leverage which provoked another shadow banking crackdown in a flurry of risk management edicts. Bond and equity flows though entrusted investments, conservatively estimated at $1 trillion and commingled with wealth management products, could be caught in the net. The Shanghai stock market had the biggest daily loss this year as the securities regulator joined in to punish irregularities “without mercy.” Insurance will not be spared from coordinated stricter oversight and reporting as assets more than doubled in 5 years to RMB 15 trillion in 2016, and policy holders channeled money offshore to evade restrictions. In April China Minsheng bank was snared in an unguaranteed high-yield offering scandal and trust companies were explicitly order to slash property exposure as credit overall rose 25 percent to the sector in the first quarter. Standard bond issuance in social financing also attracted supervisory scrutiny with banks buying half of all dollar bonds for potential currency mismatch, and the junk category accounting for $12 billion through April compared with $2 billion in 2016. According to JP Morgan data, Chinese corporates have represented two-thirds of global activity, and yields have narrowed toward onshore ones with buoyant conditions and double-digit profit jumps from last year’s nadir. The Hong Kong Bond Connect is scheduled for launch in the coming months to further meld the investor base, as RMB deposits in the enclave otherwise dip to half the 2014 peak, and the local dollar continues to weaken against the greenback. However first quarter mortgage credit soared 80 percent on an annual basis with private home prices again at a record triggering index indigestion.


India’s Harvard Yard Weeding Waft

2017 March 25 by

Indian shares up 10 percent through March were further buoyed by 7 percent last quarter growth defying demonetization gloom and Prime Minister Modi’s strong party showings in state elections cast as a referendum on his personal popularity and economic reform policies. He savaged the downbeat forecasts “from Harvard and Oxford” experts with banknote confiscation targeting illegal funds, and described the continued expansion as vindication for hard work, even though statistics do not capture the estimated 40 percent informal sector hardest hit by the physical cash squeeze. A good monsoon and civil servant salary hike contributed, but real estate and financial services slowed and government spending was the main manufacturing driver with capacity utilization still under 75 percent. However the reading is not final and may undergo downward revisions following the pattern of previous quarters recalculated with changing methodologies challenged by international statisticians. The Prime Minister’s runaway victory in Uttar Pradesh in particular was interpreted as satisfaction with his business-friendly agenda, although average voters focused more on pro-poor rhetoric and the coalition’s financial inclusion platform. Officials continue to sweep bank accounts for evidence of “black money” despite caution by top economic advisers that the crackdown risks overkill. On the tax question, companies and wealthy individuals are already unnerved by Finance Minister Jaitley’s admission that the national goods and services levy rollout due this summer has encountered “teething problems” and may be delayed as states reconsider their own revenue mix. He also panned the “bad bank” proposal to handle the 15 percent NPL load at state-owned lenders as a non-starter since it could jeopardize the 3 percent of GDP budget deficit goal. The central bank is considering faster write-off rules, but corporate credit is flat and many big property borrowers are in trouble after the demonetization fallout. Consumer lines were increasing 20 percent annually and are likely to suffer under tighter classification standards and more lenient bankruptcy treatment for individuals than companies in a new code. The process currently takes 4-5 years, and many politically connected debtors are protected from harsh action. Despite the administration’s anti-corruption vow, the former head of defunct airline Kingfisher, a well-known Delhi insider, fled to luxury exile in London after accusations of defrauding banks and shareholders.

Pakistan national elections will also be held for the first time in two decades in the coming months, with the stock market slated to reenter the core MSCI group on a 50 percent in local terms the past year. GDP growth is 5 percent and daily power cuts have halved after completing an IMF program. On infrastructure a $1 billion road between Islamabad and Lahore has opened and Prime Minister Sharif has negotiated $40 billion in Chinese investment under the One Belt One Road scheme. Consumer goods listings have enjoyed a run, with multinationals like Nestle doubling sales and banks are in the process of more privatization. In the business capital Karachi kidnapping and terrorism incidents may have abated, and the army has claimed rebel suppression in the Federal Autonomous Areas unable to be independently verified. The Prime Minister and US President Trump reportedly have exchanged cordial phone calls, despite the latter’s fulminations against the political and commercial elite with the Sharif family a charter member.


Mongolia Struggles With Financial Instability (Asia Times)

2017 March 13 by

Mongolian shares rose 4 percent into March according to Bloomberg’s top company index, after the IMF extended another multi-year bailout for $440 million which can unlock an immediate additional $3 billion from bilateral and multilateral partners. China, which receives 90% of mineral exports, will bolster a $2 billion currency swap as part of the package, coming just five years after expiration of 2009’s post-crisis program. With its 85% of GDP public debt, the country faced imminent default on an almost $600 million Development Bank external bond repayment due this month, as headline mining ventures unraveled over investor commercial disputes and alleged corruption  and political favoritism. The new government in power led by the Mongolian People’s Party has promised to restore economic stability and creditworthiness through the Fund plan and more business-friendly policies, but protracted banking system and fiscal cleanups may exhaust multinational company and average citizen patience.

The Fund announcement described long-term agriculture and tourism diversification scope alongside natural resource wealth, but criticized “ineffective” spending designed to offset commodity price and foreign direct investment collapse. GDP growth “stagnated” at 1% in 2016, with high debt and low international reserves, which dipped to $1 billion or four months imports, in its wake. The currency lost one-quarter its value against the dollar, and a diplomatic spat with Beijing over hosting the Dalai Lama resulted in administrative and tariff penalties at year-end.  The population went into the harsh winter with livestock under further claim as officials requested donations to help pay off overseas obligations. Nature was unusually unkind as disease ravaged rare antelope and drew appeals from global conservation groups.

In the mining sector, which accounts for one-quarter of output, the long impasse was ended in principle over royalties and management control at copper venture Oyu Tolgoi, operated by cross-border giant Rio Tinto. However the timetable for the project’s second phase has slipped, and private funding initially secured may have to be renegotiated with rising world interest rates. The fate of a $400 million sale of a Russian stake in state company Erdenet to a politically-connected Mongolian investor by the previous government is even more precarious. The parliament annulled the deal in February and called for renationalization amid charges the specialist Trade Development may have been an illegal hidden backer. President Elbegdorj complained the action would scare away foreign capital, but acknowledged the need to pursue investigations.

The financial system has been a shambles since independence starting with the central bank, which has been euphemistically engaged in “quasi-fiscal” activities including recent support for $800 million in cheap mortgage loans which had sustained household consumption. The Development Bank DBM, which provides one-quarter of total credit, carries an unconditional sovereign guarantee for its 2012 external bond as ratings agencies assign the issuers near-default status. The Bank’s former chief executive was arrested last year for abuse of the proceeds, and the latest Fund arrangement mandates a split between the government and lender, which is be run commercially according to a new law. A separate statute will overhaul the central bank’s governance and enforcement powers, and it is responsible for overseeing recapitalization and restructuring and shoring up the deposit insurance scheme after a comprehensive industry assessment.

Ordinary citizens have organized in anger against DBM, which they accuse of covering up losses and management failure at state coal producer Erdenes TT, whose non-voting shares were distributed to the public in 2010. The Mongolian Stock Exchange was considered a candidate to join MSCI’s frontier market roster early in the 2012-14 boom period, when cooperation pacts were forged with Hong Kong and London counterparts, but actual trading has stayed quiet in a handful of shares alongside hundreds of nominal  listings  and an absent local income market. With fiscal consolidation a “key priority” to reduce the 15% of GDP deficit, privatization offerings could inject momentum, but the record to date has been disappointing.

The IMF believes such overdue policy and reform steps can usher in 8% growth and $4 billion in reserves, comparable to the 2012 peak, by end-decade. It predicts mining diversification and solar and wind power has already drawn investors like Japan’s Softbank, and fashion, information and health service have started to appear. However Mongolia also owes $2 billion in external debt before that deadline and without bank and bondholder workouts at home and abroad, it may again fall into the pit.


Asia’s Stray Economic Strategy Strictures

2017 February 20 by

A fifteen member Center for Strategic and International Studies panel headed by a former US Trade Representative issued a report to guide Asia-Pacific economic policy in the new administration after a year and a half of preparation and heavy emphasis on TPP ratification if the pact is redrawn. Infrastructure and technology are major pushes and it stresses China reciprocity and an updated architecture through the Asian Development Bank and APEC forum and dedicated staff at the White House National Security Council. The geography will account for 40 percent of global GDP by 2030, and already takes almost 30 percent of US exports for 3.5 million. Asia’s direct investment total here is over $550 billion, with the Chinese deal pace tripling in 2016 from the previous year. The ASEAN bloc alone has 600 million customers and $2.5 trillion in output as an unrealized prospect, despite “governance challenges,” the review stipulates. It laments Washington’s “distracted and inconsistent” approach the past 15 years resulting in botched diplomacy toward the Asian Infrastructure Bank’s launch as a recent example, which should have been embraced for its organizational and ownership contributions. TPP withdrawal may be “politically expedient” after the election result but rule-based order should be a linchpin of future agreement to be preserved as a goal. Services and energy are two sectors that could form specialized pacts. The former include health care, transport, information processing and finance. China and India will drive alternative fuel expansion and technology like wind and solar for decades, but the analysis points out that the era of double-digit growth is likely over across the region amid mounting debt and continued protectionism. Japan and South Korea have aging demographics, while low-income countries grapple with lagging corruption rule of law, and environment-natural resource indicators.

APEC, with Latin American participation, was founded almost 30 years ago and managed an information technology accord in 2015 but was largely overshadowed by TPP negotiations the past decade and is “amorphous” in the report’s view. The Trump team should stay engaged with the diversity of competing arrangements like the proposed ASEAN+6 free trade zone, as no single framework is likely to prevail. It should promote balanced and sustainable growth as recognized at the post-2008 crisis G-20 summit, greater American company access and entry, and trans-pacific commercial integration. Health pandemics and natural disasters can be tackled jointly by public and private sector representatives. The paper advises President Trump to articulate a vision in an early dedicated speech which can remedy TPP’s structural and political drawbacks with another market-opening campaign. Chinese intellectual property and cyber theft issues should be emphasized bilaterally in the Strategic and Economic Dialogue and informal channels at the top of White House coordination responsibility. Connectivity should be the main infrastructure thrust with US firm superiority, and private capital should be enlisted alongside official lending programs including Beijing’s One Belt-One Road. Congress and the Executive Branch should hire and train more Asia-focused staff and economists should be placed at the highest foreign policy making level, in contrast with the initial Administration preference for defense and public relations heavyweights potentially obscuring this background.


India’s Relentless Cash Squeeze Cascade

2017 February 13 by

After a 2016 5 percent loss on the MSCI Index Indian shares were further saddled with GDP growth slipping below 7 percent, with the December PMI at a 3-year low under 50 due to the immediate demonetization effect of eliminating high-denomination banknotes representing 85 percent of currency in circulation. Auto sales as a consumption proxy were down double-digits, and according to small business surveys thousands of firms shut their doors or shed a large worker share. Housing transaction dropped 45 percent in the last quarter with a “complete standstill” described by industry experts, as Prime Minister Modi promised additional steps against “black money” ahead of a big March state election round which shows the opposition BJP likely to regain support in early opinion results. The Prime Minister’s image was dented by appearing to mimic the pose and dress of independence hero Gandhi in a public photo, and the supreme court head stepped down after months of mutual recriminations between the judiciary and ruling coalition lawmakers over respective powers, especially concerning boundaries between government and religion. Consumer inflation has been a bright spot and is under 5 percent with food price production, setting the stage for rate easing as banks are also flush with liquidity from rupee return allowing them to cut borrowing costs. However they are still contending with an estimated 15 percent bad loan ratio under stricter classification standards, which the new central bank head has signaled for possible review since the monetary reform he was not informed or consulted about in advance. Although an experienced technocrat he has come under criticism for official subservience to the sudden decision and failing to stress the lack of alternative electronic payment access for rural and poor savers. Conspiracy theorists have posited that his predecessor Rajan may have been removed as a potential impediment, and foreign investors who have been overweight local bonds are also upset quotas remain in place without the same drive to join JP Morgan’s GBI-EM index.

In Indonesia, where the MSCI gained 15 percent last year, that bank was suspended from primary dealing after negative research comments Finance Minister Indrawati called “irresponsible.” She insisted that international investment houses adopt new conflict of interest and transparency practices against “instability” while insisting they were not censorship. JP Morgan later upgraded its recommendations as growth and fiscal policy stay largely on track, and foreign ownership of domestic government debt slid just slightly from one-third after the actions. However the Minister’s initial warm welcome may have evaporated after her credibility also suffered from overestimating the tax amnesty take.  Korean shares, after a 5 percent jump in 2016, are under their own crisis microscope after presidential impeachment and chaebol executive arrests in an influence-peddling scandal which have widened valuation discounts to regional peers. The won has shed 8.5 percent the past quarter to help revive exports, although the 2017 GDP growth forecast was lowered from 3 percent to 2.5 percent. The next President will be expected to more effectively attack crony capitalism against the backdrop of solid current account and budget positions, although Trump administration military and trade pushback could be another existential possible cross-border clash.




China’s Protectionist Wave Bashing

2017 February 6 by

Chinese stocks grasped for direction with Washington and Beijing hardening commercial and diplomatic positions, as President Trump took office with “America first” vehemence and President Xi led a business contingent to the World Economic Forum in Davos asserting “no winners” in trade conflict. Trump cabinet nominees unleashed criticism against alleged currency manipulation, import barriers and illegal South China Sea moves without detailing policy responses, while dismissing talk that TPP withdrawal as one of the administration’s first executive orders would cede regional trade supremacy to the mainland. GDP growth last year came in at a two-decade low 6.7 percent with both import and export volume dropping for the first time since 2009. Consumption is now two-thirds of output as urban fixed investment expansion softens to single-digits. Producer prices rose over 5 percent in December from previous deflation on commodity recovery, but steel and other industries still suffer from massive overcapacity to be reduced under G-20 commitments. The month broke a capital outflow streak since mid-2015 with $10 billion of inward securities investment, while US Treasury reserve holdings continued to drop, according to official statistics. Capital outflows were $320 billion in 2016 and the foreign exchange body attributed them mainly to intervention and the dollar’s surge against other currencies as it tightened controls on bank cross-border transfers to achieve equal coverage receiving and sending amounts. Consensus Yuan forecasts are for a 5-percent range devaluation this year despite stricter controls, including on the alternative Bitcoin scheme, as outbound direct investment is expected to decrease after a decade of 30 percent annual growth under dedicated developing country programs. The central bank continues to guide both onshore and offshore rates, resulting in periodic overnight liquidity squeezes, as it also raised medium-term loan costs generally. Bad credit ratios approached 2 percent by local standards, as the total portfolio was up almost 15 percent last year, half to households. Shadow financing rose at the same clip, and regulators are scrambling to monitor it at the same time they urge dollar-bond issuance locally to protect the exchange rate.

The international market remains open despite currency and trade war fears, with placement due to top 2016’s $110 billion, although the pace continues to lag maturities. The state reform commission has directed coal and steel firms to restructure debt and the equity IPO pipeline was unblocked to relieve fundraising pressure, with consultant Deloitte projecting over 400 flotations this year. Property developers must repay $8 billion in loans they intend to refinance overseas, but home prices in major cities have slipped with new taxes and restrictions. Hong Kong, with a new chief executive, has become the least affordable residential market globally with mainland spillover demand according to industry surveys as home-buying confidence dips below 50 on a widely-quoted index. The IMF in its latest review predicted 2 percent growth and warned of fiscal stress from the aging population. It praised the longstanding currency peg for stability, but cited local dollar and financial sector risks from the upward US interest rate cycle and likely “bumps” from China’s economic rebalance entering an extreme bilateral vertigo bout.


Japan’s Errant Helicopter Heave

2017 January 10 by

Japanese investment trusts continued net emerging market fund outflows as domestic bond yields turned positive and the Nikkei index was up 5 percent through December on over 5 trillion yen in central bank annual ETF buying for 60 percent of the market. New UN statistics boosted the economy’s size on estimated 1 percent growth this year and next on indications that monetary policy will switch from quantitative easing to government bond absorption in gradual “helicopter money” fiscal stimulus. Officials will target long-term yields above zero in an effort to encourage 2 percent inflation expectation, as prices again verge on deflation and the yen settles in the 105/dollar range after an immediate post-Trump election plunge. Business sentiment as measured by the Tankan survey has improved but manufacturers remain wary of China and other key overseas markets. The central bank is now a top shareholder in one-third of listed companies, and has begun to draw criticism from the over $1 trillion state pension fund and other institutional investors for large block control affecting values. The so-called third structural reform “arrow” of Abenomics has also stumbled with US rejection of the Trans-Pacific Partnership, and the Prime Minister flew to New York for a brief meeting with President-elect Trump to get reassurance on bilateral commercial and military ties. Tokyo continues to be evaluated in the Treasury Department’s regular currency manipulation analysis, and the Republican candidate called for possible renegotiation of the Okinawa base presence to secure more local payment and personnel. Japan “hawks” in Washington have resurfaced from 1980s battles urging tougher trade stances, but the argument is blunted by the country’s recessionary “lost decades” since which have also reversed banks’ global power and profitability. Smaller regional banks are struggling again with the zero-interest rate policy and anemic borrower demand, while mega-lenders have rediscovered export finance niches abroad which have come under pressure with slowing trade. In recent years they have expanded into frontier markets like Myanmar bolstered by aid agency programs which may soon be retrenched on human rights and foreign opening setbacks. The civilian-military regime headed by Nobel laureate Aung San Suu Kyi has been in the spotlight for alleged abuses of the Muslim Rohingya minority, forcing large-scale exodus to neighboring countries by land and sea. Despite headline 7 percent growth and sanctions lifting, liberalization and privatization efforts have been halting and banking and the nascent stock market still lack basic oversight.

Singapore stocks were flat through December as the hub endured a Q3 4 percent contraction on a double-digit slide in non-oil domestic exports. Local foreign exchange deposit growth has shrunk noticeably with the unwinding of China-oriented carry trades, and real estate prices have likewise softened with reduced Chinese purchases. The monetary authority has kept a neutral stance into 2017, while allowing “some flexibility” to ease especially if deflationary tendencies persist. Bank bad loans are creeping toward 4 percent of the total, and the local dollar has been in the cross hairs on more services weakness and safe haven reputation harm with implication in Malaysia’s 1MDB scandal. The Prime Minister also took a personal blow after a special appearance with President Obama to promote TPP before the treaty was consigned to the chopper.


China’s Wooly Work Conference Antics

2016 December 27 by

Chinese stocks scrambled for traction despite equity raising up 30 percent through December and a record 50 IPOs in November, amid general securities panic with bond market futures suspended on a sudden 100 basis point 10-year sovereign yield spike coinciding with the US Federal Reserve 25 tick nudge. The central bank injected RMB 600 billion in immediate liquidity to calm nerves, as the Central Economic Work Conference convened with the motto “pursuing progress while maintaining stability” and proposed additional fiscal stimulus and exchange rate flexibility. The onshore-offshore Yuan gap has widened to imply a near-term 7/dollar level, with reported monthly capital outflows increasing to $70 billion in November, and hard currency bank deposits up 10 percent. The authorities have cracked down on outbound credit card, insurance and company acquisition channels in preparation for January’s reset of the individual $50,000 access cap, as multinationals cite blockages and delays in money transfers which could stifle future FDI. According to the IIF and other public and private sector sources the biggest outflow category continued as loan repayment and portfolio exit at $300 billion though Q3, as compared with an estimated $90 billion in resident capital flight. November data showed solid industrial production and fixed asset and real estate investment with high single-digit gains, and retail and property sales ahead at double that pace to attain the 6.5 percent GDP growth target. However developer bond sales have come to a screeching halt with dollar yields hitting 7 percent and local issuance through the Shanghai exchange affected by stiffer requirements. Mortgages remain the bulk of new loans and although ratings agencies assign a stable outlook, big players like Vanke have started to forecast hefty housing price drops into 2017. Banks will no longer be able to mask exposure through off-balance sheet wealth management products under revised rules scheduled for the first quarter, as shadow credit exploded toward end-2016 with trust loans at a 2-year peak.

The IMF repeated the urgency of tackling the 170 percent of GDP corporate debt, with 800 billion due next year, one-third foreign. Moody’s puts defaults close to the 3 percent “danger line” among the 3500 firms rated, as the Fund noted the absence of “buy-in” across government and business levels for restructuring. The stakes have increased as the incoming Trump administration signals tougher commercial and diplomatic policies, and the US and EU sustain objections to “market economy” treatment 15 years after WTO entry to facilitate anti-dumping penalties. Beijing threatened “real crisis” if Washington changed the One China practice to explicitly recognize Taiwan, and trade retaliation since China takes 15 percent of US exports. A special White House Trade Council was established with academic critic P. Navarro in charge, and Commerce Secretary-designate Ross has blamed unfair competition for gutting manufacturing firms his distressed fund acquired the past decade. Against this backdrop once popular Chinese debt has disappeared from the most-frequently traded list in EMTA’s quarterly survey, while India has catapulted to the top, followed by Brazil, Mexico and South Africa. Of the $1.25 trillion turnover, two-thirds was in local currency and the external category was evenly divided between corporate and sovereign as investors gird for rough work balance.