China’s Yuan Entry Yawn
Chinese stocks were stuck at a double-digit loss as the currency barely budged on officially joining the IMF’s SDR basket in October, following a report pressing financial system overhaul and cautioning on “incomplete” economic transition. GDP growth is in line with the 6.5 percent forecast as the Fund cited higher correlation between the RMB and Asian units. Commercial bank foreign exchange sales in August were the lowest in a year, as 2015 outward direct investment was $10 billion more than the $135 billion FDI total. The independent private sector Beige Book gauge surveying thousands of smaller firms confirmed retail and services slippage, as monthly fiscal spending continued at a pace double revenue. The government launched a $50 billion state enterprise restructuring fund, with initial capital from big telecoms and oil companies that could be used for overseas acquisitions. Toll road debt has ballooned with 80 percent of income needed to repay loans, according to the Transport Ministry. Policy banks have been tapped to support projects unable to get normal funding, as Fitch Ratings puts the true NPL ratio in the 15-20 percent range. A separate brokerage tally has shadow financing at the same damage level, as credit increases at a near 15 percent annual clip in a chronic divergence with economic growth presaging crisis over the next three years, the BIS reiterated in its latest review. Household mortgage transactions have been the main driver, up 50 percent in a bid to stabilize the property sector. One third of urban dwellings may be vacant nationwide, but house prices are again rising in 65 out of 70 cities, with purchases reverting to no down payment. Developer offshore dollar bonds have sold easily, with $1.5 billion in August issuance, as $7.5 billion comes due in 2017. The central bank has injected record liquidity through repo auctions, as ratings agencies calculate the recapitalization hole as high as 20 percent of GDP. Local government vehicles are likewise active again with RMB 1 trillion in placements through September exceeding all of 2015, and provincial authorities have ordered resident banks to open the spigots to protect jobs.
Industrial profits rebounded 20 percent as of August, but steel groups have lagged on bond defaults and state-directed consolidation reflecting an overcapacity reduction pledge at the recent G-20 summit. Unlisted Dingbei, owned by the Liaoning government, was the latest to renege on repayment and state-run Guangxi Metals was liquidated. Giant Sinosteel completed a debt-equity swap for its $60 billion in obligations to 80 Chinese and foreign banks involving convertible bonds. Hong Kong’s exchange has been positive for the year and reacted well to the nascent industry shakeups and large $7.5 billion Postal Bank offering anchored by cornerstone investors. However its share price fell after launch on weak retail and institutional appetite otherwise, as locals saved their powder for November’s scheduled Shenzhen connect activation. All other Asian exchanges were ahead through Q3, with Indonesia topping the core universe with a 20 percent gain. Pakistan was up by the same amount after rejoining that tier, despite renewed Kashmir squabbles with India, where excited foreign debt and equity inflows contrast with China’s lethargy.
