China’s Delayed Graduation Gradients
Chinese stocks endured $7 billion in foreign fund outflows with the index still up 25 percent as MSCI decided not to add “A” listings until access and ownership issues were clarified. The China weighting including Hong Kong is already one-quarter the index, and total inclusion could raise the portion to 45 percent. A first incremental phase was foreshadowed which could precede a formal review as the company and Beijing officials established a working group to resolve outstanding constraints. Local retail investors, with an estimated $400 billion in margin loans and two-thirds of the free float, were unperturbed after opening a record 4.5 million accounts the last week of May. The securities regulator has conducted spot brokerage checks and may limit credit to four times capital, but asserts the practice is “healthy” as the Shenzhen direct HK link will soon join Shanghai. The former has over 1500 companies with a small-cap emphasis and P-E ratios above 100 times. The stock market mania has displaced other non-bank pursuits, as they collectively dropped to 25 percent of RMB 1.2 trillion in total social financing in May. According to S&P 70 trust companies had $2.5 trillion in assets in Q1, with CITIC and CCB among the largest. Zhongrong International recently floated a $225 million dollar bond to prepare for losses, as the professional association cited hundreds of products at risk from property and general economic corrections.
The central bank shaved the GDP growth forecast to 7 percent as consumer inflation hovered at 1.5 percent while the producer version shows another year of deflation. Monthly exports are down but imports shrink even more with the current account surplus projected at 3 percent of output. PMI has stayed over 50, but fixed investment barely up double digits is at a decade low. Foreign car makers lamented the “death” of the luxury market as oil and iron ore sales continue to flag. New airport and rail projects were announced, and following relaxation of previous restrictions home prices rose in 30 cities, although construction and inventory indicators remain decisively negative. Moody’s changed the sector outlook to stable as developers became the biggest Asia high-yield class and a core component of the benchmark CEMBI. Local governments reported a 40 percent drop in Q1 land sales as their bond issuance quota was doubled to RMB 2 trillion to reduce immediate interest burdens. Banks originally shunned the rollovers at low yield but were persuaded to participate with special collateral and loan facilities. With these maneuvers Jilin Province, the riskiest bet according to a Bloomberg analysis, could offer 3-year bonds at the same rate as the central government.
On the currency front officials continued their internationalization campaign with encouragement to foreign central banks to hold Yuan reserves as they anticipate the IMF’s favorable nod for SDR incorporation. Capital inflows were $20 billion net positive through May despite outbound direct investment up 50 percent as the Silk Belt and Road initiatives spread their tracks across the region. The Asian International Infrastructure Bank convened its first meeting as the institution and the CIC sovereign wealth fund recruit executives abroad. Hong Kong’s talent pool faces stiffer competition, with cross-border relations further soured by legislative council rejection of Beijing’s preferred leadership promotion process.
