China’s Stuttering Strait Talk
Chinese A shares continued to languish on the MSCI index into December despite Hong Kong-Shenzhen’s link inaugural, as Taiwan’s component roared ahead 15 percent after US President-elect Trump engaged in direct phone conversation with his island counterpart for the first such bilateral exchange in decades. The call was described as a deliberate harder-line strategy against Beijing on diplomatic, commercial and monetary fronts, with the first 100-day plan explicitly outlining “currency manipulator” designation, as a congressional advisory commission also recommended new curbs on Chinese company American acquisitions. The Obama Administration in its waning days blocked a communications deal citing defense implications, as Beijing authorities signaled their own heightened scrutiny over $150 billion in outward investment from January-October contributing to an estimated $250 billion in Q3 capital outflows and a Yuan trajectory toward 7/dollar. Previously they cracked down on cross-border credit card use and insurance policy purchase as an exit channel, as the central bank reported that offshore renimbi deposits halved the past two years to RMB 1 trillion. Shanghai shares continue to sell off despite the exchange’s earlier Hong Kong connect arrangement, as even the experimental free trade zone has come under pressure to stop flight. GDP growth remains on the 6.5 percent-plus target, as electricity, rail cargo and bank loan total comprising the so-called Li Keqiang index recently reached a 3-year high. Fixed asset investment rose 8 percent through October, and the property sector accounted for almost one-tenth of output improvement, but retail sales and construction projects have slowed and the combined provincial and central fiscal deficit will top 10 percent of GDP.
The household share of new loans was two-thirds in Q3, and regulators have reportedly ordered a halt to more mortgage business in select cities. The official loan-deposit ratio is 65 percent, but S&P Ratings put it at 80 percent for the biggest banks including off-balance sheet items, and over 100 percent for a swathe of mid-tier lenders. The central bank proposed rules for a “risk cap” on wealth management products, up 10 percent the past year for over RMB 25 trillion outstanding. Home prices continue to increase in 60 of 70 cities, and municipalities such as Nanjing have taken anti-overheating action with a developer borrowing ban. However local government reliance on land sales as a main revenue source weighs against widespread moves, as Beijing tries to forge greater self- responsibility with its formal “no bailout” stance. The state enterprise asset side of the ledger may be in worse shape with over 2000 identified as “zombies,” with total corporate debt due near $400 billion and outsize leverage in heavy industry, building and materials. Hong Kong has felt mainland retrenchment in tourism, luxury property, retail sales and exports, and a November stamp duty hike will further cool housing. Neighboring Macau has returned to growth after a 2-year recession from slack gaming proceeds with the Party’s anti-corruption sweep, as its traditional fiscal surplus likewise slips. Taiwan’s export and output expansion is just 2 percent, and trade and financial relations worsened with the victory of the independence-minded DPP party, which has tacked to seek closer Washington ties. However the container industry had to be rescued and the global tech outlook may be uneven into 2017 despite soothing presidential words.
