China’s Belt Hole Punch
Domestic investors continued to dump “A” shares for a 20% loss on the MSCI Index through August as backlash appeared against President Xi’s latest developing world Belt and Road $60 billion multi-year funding package for Africa, repeating a previous bilateral summit pledge. The US criticized the deal as well amid bilateral trade and investment acrimony and warned that sovereign borrowers already tapping the IMF for emergency support could deepen a “debt trap,” even though the Chinese portion is a fraction of the total. On the fifth anniversary of the initiative, a number of studies have offered mixed reviews, with Washington’s Center for Strategic and International Studies examining the half dozen “corridors” and 175 projects to find that they are often bypassed and uncoordinated. The sweep across 80 countries with a $1 trillion goal encompasses both hard and soft infrastructure but lacks definition, as it extends to unrelated athletic and cultural events, according to the review. The analysis tries to reconcile on the ground and strategic outcomes and reiterates that regional land, air and sea connections are well established economic strategies historically promoted by development lenders, and that the ADB has mirrored the approach in the Greater Mekong for example. Subdividing the Asian categories shows an absence of priorities outside Pakistan, and that China’s 30 provinces vie at the same time for program benefits. Geography has extended to the Arctic and outer space without pinpointing borders and locations, and implies that Beijing has less control and vision than described in official media and popular coverage. This gap leaves the field open to the US and other competitors for large-scale alternatives as legislation to create a $60 billion unified development finance agency awaits passage.
In August the manufacturing PMI was 51, barely above neutral, as the currency gained against the dollar with the daily band again subject to the “counter-cyclical factor” used in former periods of stress. The foreign exchange regulator punished two dozen violations, as overseas investors increased their local government debt share to 8% on official agreement to stretch tax exemptions to three years. They are also buying bank bad loans through the Qianhai Assets Exchange as real time delivery versus payment is now in force. According to fund research, two-thirds of international “A” shareholders are in consumer listings and have shunned real estate, where S&P ratings believe debt service capability is at a multi-year low. Cash/short-term debt ratios averaged 125% in the first half, with an estimated $40 billion in maturities over the coming months. Leading developer profits were up 75%, but they have started to shy away from second-tier cities with price declines and resort to heavy discounts to sustain sales. Along with property bubble vigilance regulators have expressed concern over the serial collapse of internet P2P credit platforms and vowed immediate inventory and resolution. While bank non-performing assets are still below 2% by current standards, the central bank has warned of private corporate debt’s rapid rise as industrial profits continued to slow in July. Economic and earnings drag may worsen with the prospect of additional US tariffs on $200 billion of Chinese exports which could force company belt-tightening.