China’s Wooly Work Conference Antics
Chinese stocks scrambled for traction despite equity raising up 30 percent through December and a record 50 IPOs in November, amid general securities panic with bond market futures suspended on a sudden 100 basis point 10-year sovereign yield spike coinciding with the US Federal Reserve 25 tick nudge. The central bank injected RMB 600 billion in immediate liquidity to calm nerves, as the Central Economic Work Conference convened with the motto “pursuing progress while maintaining stability” and proposed additional fiscal stimulus and exchange rate flexibility. The onshore-offshore Yuan gap has widened to imply a near-term 7/dollar level, with reported monthly capital outflows increasing to $70 billion in November, and hard currency bank deposits up 10 percent. The authorities have cracked down on outbound credit card, insurance and company acquisition channels in preparation for January’s reset of the individual $50,000 access cap, as multinationals cite blockages and delays in money transfers which could stifle future FDI. According to the IIF and other public and private sector sources the biggest outflow category continued as loan repayment and portfolio exit at $300 billion though Q3, as compared with an estimated $90 billion in resident capital flight. November data showed solid industrial production and fixed asset and real estate investment with high single-digit gains, and retail and property sales ahead at double that pace to attain the 6.5 percent GDP growth target. However developer bond sales have come to a screeching halt with dollar yields hitting 7 percent and local issuance through the Shanghai exchange affected by stiffer requirements. Mortgages remain the bulk of new loans and although ratings agencies assign a stable outlook, big players like Vanke have started to forecast hefty housing price drops into 2017. Banks will no longer be able to mask exposure through off-balance sheet wealth management products under revised rules scheduled for the first quarter, as shadow credit exploded toward end-2016 with trust loans at a 2-year peak.
The IMF repeated the urgency of tackling the 170 percent of GDP corporate debt, with 800 billion due next year, one-third foreign. Moody’s puts defaults close to the 3 percent “danger line” among the 3500 firms rated, as the Fund noted the absence of “buy-in” across government and business levels for restructuring. The stakes have increased as the incoming Trump administration signals tougher commercial and diplomatic policies, and the US and EU sustain objections to “market economy” treatment 15 years after WTO entry to facilitate anti-dumping penalties. Beijing threatened “real crisis” if Washington changed the One China practice to explicitly recognize Taiwan, and trade retaliation since China takes 15 percent of US exports. A special White House Trade Council was established with academic critic P. Navarro in charge, and Commerce Secretary-designate Ross has blamed unfair competition for gutting manufacturing firms his distressed fund acquired the past decade. Against this backdrop once popular Chinese debt has disappeared from the most-frequently traded list in EMTA’s quarterly survey, while India has catapulted to the top, followed by Brazil, Mexico and South Africa. Of the $1.25 trillion turnover, two-thirds was in local currency and the external category was evenly divided between corporate and sovereign as investors gird for rough work balance.
