China’s Stumbling Star Turn

With foreign net inflows in June at $3 billion as “A” shares added to the MSCI index were up over 30%, domestic investor attention in July was on opening of the new Star small cap market designed to lure listings from the US Nasdaq and Shenzhen’s tech tier. Stocks jumped 150% the first trading day pending creation of a benchmark, with 100 companies in the offering pipeline. It has no daily fluctuation limit, but investors need a minimum RMB500,000 account and two year track record. International access is expected over time as officials announced further steps at capital market and industry entry, as rating agency S&P assigned its first financial institution grades with a AAA to an ICBC unit. The moves came as Q2 growth was reported at 6.2%, the lowest in almost three decades, with consumption and fixed investment the main drivers. In the first half exports were flat in dollar terms, as US sales dropped 8% in June with continued trade friction. President Trump has accused Beijing of currency manipulation as well, but the IMF’s periodic review of major economy interaction found fundamentals in line as it urged more flexibility. Analysts point out that depreciation would aggravate the external debt burden, as part of the overall 300% of GDP load according to the latest IIF tally. A new report by the Germany-based Kiel Institute also estimated Chinese overseas lending in dollars at $700 billion, dwarfing other bilateral and multilateral providers, as another impetus for maintaining relative rates.

Corporate bond placement doubled in the first half, and China accounted for 40% of the emerging market total, industry trackers calculate. Dozens of defaults, including at high-profile Minsheng Investment Group, were recorded, and the government is steering real estate developers to refinancing only operations offshore to curb future exposure. House prices in most cites rose 10% on annual basis through June, and municipalities still rely on rising land values as collateral for their own borrowing. The Kiel institute survey also reveals increased non-payment and restructuring among Belt and Road initiative countries, with low-income recipients in Africa and elsewhere in particular experiencing troubles. The total cross-border package of loans, sovereign bonds, and portfolio and direct equity is up tenfold this century to $5 trillion, with thousands of operations in over 150 nations.

The Star market inauguration contrasted with clashes between police and pro-democracy protesters in Hong Kong around the Star ferry, including a standoff in the legislative chamber where the extradition law focusing initial anger was considered. Beijing and its allies condemned student violence and blamed the US for fomenting it with trade negotiations on hold. Shops remain shuttered and damaged, as banks cut the economic growth forecast to 1.5% on home price and tourism tapering. Food costs climbed 3% in June on pork shortages from a disease outbreak, as the local dollar regained its footing within the intervention band despite a setback from cancellation of a multinational beverage company IPO. Official unemployment was 3%, but housing costs and income inequality are major social issues that future Beijing-backed representatives must tackle as the current Carrie Lim-led team’s star fades.

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