China’s Crossed Signals Trade
Chinese stocks stumbled on mixed macro data as the Hong Kong cross-trading connect project entered final trials with custody, tax and short sale rules awaiting clarification. The resumed “through train” aims through incremental two-way liberalization to align volume and valuation disparities and repair relations with the enclave after Beijing refused direct chief executive elections as described in the original turnover deal 25 years ago. Mass demonstrations have since erupted against the decision, with Moody’s warning they could be “credit negative” for the hub already feeling re-export and tourism pinches. The demonstration effect for the other self-governed territory of Macao has also been bracing as mainstay casino revenue softens with high-rollers heading instead to Las Vegas and Singapore to escape implication in the new leadership’s anti-corruption sweep. Premier Li shook confidence when he signaled an end to credit stimulus at the same time the central bank offered big state lenders $50 billion in facilities despite reduced borrower demand in surveys. In August industrial output was up just 7 percent for a post-crisis low as closely-watched power generation fell. Fixed asset investment and money supply expansion kept a flagging double-digit pace, as the producer price index declined. The trade surplus increased mainly reflecting commodity import decline. FDI was off 2 percent to $80 billion through August with the worst reversal from Japan as non-financial outward investment jumped 15 percent to $65 billion suggesting overseas preference. Shadow banking continues to meld with mainstream provision as unlisted firms will be able to issue bonds on the Shanghai exchange. Subtracting corporate fixed-income the IMF puts trust and wealth management products at one-third of GDP, as total social financing retraced to almost 1 trillion Yuan in August. The property outlook sobered with house price drops in most cities and Q2 trust offerings halved. Developer bond yields have soared above 20 percent as 10 billion in debt comes due before year-end. Mortgage access rebounded slightly although borrowers usually pay a premium over the average rate. Profit margins at steel and cement firms disappeared in the first half as local governments plan to join central authorities in selective stake sales.
Real estate may become a drag as well in thus far resilient Australia as the central bank cautioned on a dual blow alongside mining downturn. Iron ore is trading at a 5-year bottom and coal exports to China may be largely banned under new pollution regulations. S&P urged mortgage market pullback to avoid “disorderly correction” as the Aussie dollar slipped to a six month low at 90 cents to the greenback. Business and consumer sentiment have slipped with unemployment at 6 percent but part-time hiring the main engine. The banking supervisor may no longer accept internal risk models in setting prudential standards as experts believe the system needs more equity and retained earnings. Home loan appetite is flat as investors displace buyers as the dominant force despite potential bail-in norms that can throw junior holders under the train.
