China’s Shrouded Shenzhen Shuffle
Chinese shares aimed to slough off negative performance and fund outflows, in contrast with the core emerging market surge elsewhere, with the opening of the direct Shenzhen-Hong Kong link alongside Shanghai, where bilateral allocation quotas remain slack a year after last summer’s crash. Shenzhen’s daily turnover is second in the world after New York, but price-earnings ratios top 20 for the second-tier high tech listings snapped up by local retail investors track records and detailed information. Foreign investors increased domestic bond positions $7 billion in June, but half that amount was pulled from equities, according to fund trackers, amid a near $15 billion move into the larger universe. July economic figures offered limited optimism with imports and exports slipping, and bulwark fixed asset investment ahead a meager 4 percent. Property development slowed to 5 percent, while retail sales growth was steady at 5 percent. Wholesale deflation was 1.7 percent, while consumer prices rose by the same amount. Money supply expansion was 10 percent, but new loans fell one-third from the previous month and contracted overall for corporate borrowers for a decade low. Monthly capital outflows continue at $50 billion, and offshore Yuan deposits shrank 25 percent since last year’s devaluation, with the central bank arguing the exchange rate is “near equilibrium” in advance of hosting September’s G-20 summit. Ratings house Moody’s nudged the GDP growth forecast to 6.5 percent, as the IMF’s Article IV review predicted below 6 percent results by end-decade. It decried lagging state enterprise balance sheet and governance reforms, and banking system recognition of loan and capital losses. Non-financial state companies account for one-fifth of output but six times that level of debt, and high yield “shadow” credit products have reached Yuan 19 trillion, with half at default risk, the report remarked. This unfinished agenda will feature at the G-20 Hangzhou meeting amid rumors of a top leadership Xi-Li split on the balance between consolidating political power and accelerating economic transition, as the 2017 Communist Party Congress approaches with sweeping politburo and provincial head retirements.
Hong Kong stocks have been positive by comparison and bounced with the southbound pipeline activation as another channel as Q2 GDP growth exceeded 1.5 percent. Exports were again off double digits, but mainland visitor arrivals resumed despite continued tourist spending weakness. Taiwan has been the Greater China winner with a 15 percent gain in dollar terms, as the new government budget envisions a public works outlay boost and diplomatic spats with Beijing seem temporarily defused. In Australia, where shares are also up to the same extent, the re-elected Turnbull administration ignited a firestorm by refusing a Chinese acquisition of electricity network assets on national security grounds. The rejection came as central bank chief Stevens cited China as his biggest external concern while dealing with high household debt leverage. The main four banks have likewise borrowed heavily abroad, with offshore bond issuance jumping 40 percent through August, while 60 percent of funding is from deposits. Commonwealth Bank, a major listed, announced another record profit year despite an uptick in sour business and mortgage credit, with the future success formula increasingly shrouded in mystery.
