China’s Multi-Front War Whirlwind
Chinese stocks were at the bottom of the Emerging Asia pack into August, down 20% in local index terms, as the so-called “trade war” with Washington added another 25% mutual tariff blow on tens of billions of dollars in goods. The International Monetary Fund urged a negotiated settlement as it predicted only “limited direct impact” on the economy shaving growth half a percent under a medium-case scenario, while holding to this year’s 6.6% forecast. However the Fund also warned that credit expansion was unsustainable and that tighter global financing conditions posed “downside risk,” as the renimbi continued its 10% slide since April.
The IMF’s Beijing representative described the Yuan as “fairly valued,” even though analysts estimated that depreciation would translate into higher exports with a time lag to offset the tariffs. . US Treasury Secretary Steven Mnuchin raised the stakes with notice that his department was “carefully monitoring weakening” in preparation for another currency manipulation assessment due in October. The dollar is less than a one-quarter weight in the overall daily fluctuation basket, comprised 40% of neighboring emerging market currencies. Chinese officials insist that market forces rule with no competitive devaluation strategy, as the central bank reinstated bank forward position reserve requirements to curb speculation. However the bilateral exchange rate and trade regimes now closely overlap as an overhang on “A” share consideration, despite China’s 30% slice on the benchmark MSCI index, with a clean resolution of cross-cutting issues unlikely to offer recovery prospects in the coming months. As if these battles were not enough to daze foreign investors, whose first half $45 billion in inflows have turned to outflows, another theater opened after Pakistan’s July election brought the prospect of another IMF balance of payments rescue that could also repay Beijing’s Belt and Road commercial infrastructure lending, as the two systems try to reconcile debt workout procedures. US Secretary of State Mike Pompeo, responding to congressional concerns, insisted that a Fund program would not benefit mainland coffers.
Although exports increased over 10% on an annual basis in July, a $30 billion current account deficit in the first half was the sole instance the past two decades as outbound tourism jumped. The official purchasing manager index hit a five month low of 51, and the services optimism reading was the poorest since 2015. Monetary policy was loosened as money market rates fell 200 basis points year to date, and the State Council pledged “more active” fiscal steps short of stimulus. The mid-year budget deficit came in less than 2017’s, as one hundred fixed investment projects were approved worth $40 billion. Local government spending will ramp up in the second half as RMB 1.8 trillion in bond issuance is allowed, in part to compensate for sliding land sales. The Housing Ministry ordered provincial authorities to better manage risks, as the news agency Xinhua tallied 200 property tightening rules across the country to deflate bubbles. With the domestic downturn Chinese institutional investors only allocated $4.5 billion to overseas property in the second quarter, a 45% drop on an annual basis according to global tracker Cushman & Wakefield.
Financial sector troubles continue despite “preliminary deleveraging results” in the government’s view, as the central bank injected a record RMB 500 billion in one-year liquidity. It called for greater small business credit, as regional lenders with 40% of system assets retrench under capital constraints and seek to launch share offerings in Shanghai and Shenzhen. According to the banking regulator only 35% of RMB 250 trillion in assets are onshore, and overseas disclosure is opaque. Financial services overseers were otherwise swamped with depositor protests after 150 P2P lending platforms suddenly closed. Thousands have proliferated to serve an estimated 50 million borrowers, and range from well-known e-commerce units to personally-run pyramid schemes. The asset management association also revealed “lost registration” with hundreds of private equity and hedge funds that failed to renew registration. The State Council announced further measures against illegal financial firms and activities, after twenty mainstream corporate bond defaults through July, with state enterprises facing a heavy rollover schedule in 2019. Standard & Poor’s Ratings found that over half of investors with put options, mostly in the property sector, exercised immediate repayment rights over that period. The National Development and Reform Commission calculated foreign exchange liabilities were back to 2014’s steep levels, as currency mismatch also prominently surfaced as an element in the belligerent terrain.
