China’s Disconnected Landing Gear
Chinese shares turned positive as the official PMI approached 52 on a record monthly trade surplus and Shanghai-Hong Kong cross-trading preparations were completed despite continued property price decline, heavy trust repayments due next quarter, and critical IMF review of economic stabilization and reform steps. The Fund’s Article IV check urged a lower 6.5-7 percent growth aim and immediate tackling of real estate risks as it estimated 5-10 percent persistent currency undervaluation. In banking full interest rate liberalization and clarification of state guarantees and support were recommended as another round of capital raising and partial stake enterprise divestiture begins at both the provincial and central government levels. Debt buildup, income inequality and environmental degradation have worsened to slow output gains and can resurrect the “hard landing” scenario, according to the analysis. The services PMI still faltered as consumers trimmed discretionary spending even with subdued 2.5percent inflation, and tourism held back with the Tiananmen Square clash’s 25th anniversary. Gold jewelry demand also fell and large enterprise profit was barely ahead double-digits in the first half. The anti-corruption campaign has dampened activity and sentiment as prominent national security and oil company heavyweights have been accused of illegal enrichment and multinational drug and technology companies face clampdowns for alleged collusion. The monthly property numbers further soured as Beijing land auctions failed and values were off 50 percent on an annual basis in 100 cities. The China Development Bank has gotten 1 trillion Yuan in new credit to aid housing and other strategic sectors as big developers rallied briefly on the mainland exchange at bargain single-digit P/Es. The individual investor channel with Hong Kong is set to launch in October at $4 billion in maximum daily trading without uncovered short sales. A previous “through train” pilot failed to materialize as it coincided with the 2008-9 global crisis, and Shanghai officials argue the infrastructure is now better equipped and competition can also keep pace with the $80 billion in corporate bonds approved through end-June, more than in all 2013. High-yield names placing directly with institutional investors have already defaulted as the overseer stiffens public offering standards. The big central bad asset managers like Huarong are expected to draw attention with the bilateral opening as local governments begin to create such entities on their own.
Hong Kong has experienced cross-border chill with reduced tourism under tighter visitor rules and protests against Beijing’s refusal to allow direct elections as retail and housing sales eased. Bank exposure to the mainland is put at one-fifth of total loans as earnings come under pressure and giant HSBC warns of the combination of regional and global regulatory drag. Under sanctions Russian companies may transfer cash to the center to provide a cushion but their action has pushed the local dollar toward the upper band limit prompting Exchange Fund intervention. With the renewed mandate it has resisted calls to use the vast pool for infrastructure or social purposes that connect the loosely affiliated citizenry.
