China’s Protectionist Wave Bashing
Chinese stocks grasped for direction with Washington and Beijing hardening commercial and diplomatic positions, as President Trump took office with “America first” vehemence and President Xi led a business contingent to the World Economic Forum in Davos asserting “no winners” in trade conflict. Trump cabinet nominees unleashed criticism against alleged currency manipulation, import barriers and illegal South China Sea moves without detailing policy responses, while dismissing talk that TPP withdrawal as one of the administration’s first executive orders would cede regional trade supremacy to the mainland. GDP growth last year came in at a two-decade low 6.7 percent with both import and export volume dropping for the first time since 2009. Consumption is now two-thirds of output as urban fixed investment expansion softens to single-digits. Producer prices rose over 5 percent in December from previous deflation on commodity recovery, but steel and other industries still suffer from massive overcapacity to be reduced under G-20 commitments. The month broke a capital outflow streak since mid-2015 with $10 billion of inward securities investment, while US Treasury reserve holdings continued to drop, according to official statistics. Capital outflows were $320 billion in 2016 and the foreign exchange body attributed them mainly to intervention and the dollar’s surge against other currencies as it tightened controls on bank cross-border transfers to achieve equal coverage receiving and sending amounts. Consensus Yuan forecasts are for a 5-percent range devaluation this year despite stricter controls, including on the alternative Bitcoin scheme, as outbound direct investment is expected to decrease after a decade of 30 percent annual growth under dedicated developing country programs. The central bank continues to guide both onshore and offshore rates, resulting in periodic overnight liquidity squeezes, as it also raised medium-term loan costs generally. Bad credit ratios approached 2 percent by local standards, as the total portfolio was up almost 15 percent last year, half to households. Shadow financing rose at the same clip, and regulators are scrambling to monitor it at the same time they urge dollar-bond issuance locally to protect the exchange rate.
The international market remains open despite currency and trade war fears, with placement due to top 2016’s $110 billion, although the pace continues to lag maturities. The state reform commission has directed coal and steel firms to restructure debt and the equity IPO pipeline was unblocked to relieve fundraising pressure, with consultant Deloitte projecting over 400 flotations this year. Property developers must repay $8 billion in loans they intend to refinance overseas, but home prices in major cities have slipped with new taxes and restrictions. Hong Kong, with a new chief executive, has become the least affordable residential market globally with mainland spillover demand according to industry surveys as home-buying confidence dips below 50 on a widely-quoted index. The IMF in its latest review predicted 2 percent growth and warned of fiscal stress from the aging population. It praised the longstanding currency peg for stability, but cited local dollar and financial sector risks from the upward US interest rate cycle and likely “bumps” from China’s economic rebalance entering an extreme bilateral vertigo bout.
