China’s Manipulative Mood Bending
Chinese “A” shares stayed in a rut trying to escape double-digit MSCI loss and the Yuan slipped past 6.8/dollar as President-elect Trump added to economic and banking drift with his threat to impose high import tariffs after a “currency manipulator” finding. That designation has never appeared in the history of US Treasury reports, and the latest one reversed traditional criticism to praise market-determined direction, and attributed depreciation to strong capital outflows. Reserves fell another 45 billion in October to $3.1 trillion, a 5-year low, but central bank intervention accounted for just one-quarter the drop, with the rest dollar-euro valuation effects. The IIF calculates net outflow at $450 billion this year, $200 billion less than in 2015, and cites its long-term asset diversification benefits along with negative implications. The foreign exchange body SAFE reiterated tight monitoring of cross-border movements, while at the same time noting the hundreds of billions in holdings abroad of many state banks and government entities not counted in the reserve figure. Insurance policy purchase through Hong Kong has been a recent crackdown target for individuals, and authorities are also closely tracking institutional investor offshore bond allocation. At home Bitcoin has been a popular alternative with prices up 25 percent since September, and transaction curbs may soon be introduced. Average citizens are also looking to real estate investment abroad as values resumed their rise nationwide and the bulk of new bank lending was mortgage-related. Property sales rose 25 percent from January-September according to the statistics bureau, more than double the pace of retail, industrial and fixed asset activity. The PMI index was 51 in October as services exactly matched the overall 6.7 percent growth rate. Consumer inflation was 2 percent, and exports tumbled for the seventh consecutive month notwithstanding the prospect of US trade war with President Trump in office. A structural tourism deficit joins it with the Chinese visitor spending overseas, and the renimbi share in global payments remains stuck around 2 percent with this pattern, according to SWIFT. The November-January seasonal period typically sees high dollar demand, and the central bank has hinted at further restrictions with potentially frosty relations between Beijing and Washington.
Political changes may reflect a siege mentality as the Communist Party endorsed President Xi as core leader, a precedent last set by Jiang Zemin 25 years ago after the Tiananmen Square confrontation. The reformist Finance Minister was also ousted and replaced with the tax administration chief in a further power consolidation move. The Standing Committee also ordered additional access to foreign company technology and internet operations as anti-crime and national security imperatives, and may remove member age limits to protect President Xi’s allies. Bank Q3 earnings were flat on reported bad loans at 1.5 percent of the total. Credit default swaps were launched and the distressed debt securitization pace has picked up with an updated framework. The first debt-equity swap was completed for RMB 5 billion between China Construction Bank and Yunnan Tin Group as 1000 bankruptcies were filed in the first half, a 50 percent annual jump. Fitch Ratings described the mechanism as reducing headline leverage but not underlying risk, as the IMF warned the window was “closely quickly” to forestall credit crisis, which could cost 7 percent of GDP as another war casualty.
