China/Hong Kong’s Stubborn Standoff Stripe
China’s MSCI components were pressed to keep double digit gains and Hong Kong to stay positive as months of pitched trade and political battles promoted foreign investor outflows and IPO delays, after the renimbi settled below 7/dollar. The US extended the bilateral tariff and investment restriction fight into currencies with a “manipulation” declaration at odds with the IMF’s conclusion that value reflected economic fundamentals. The finding did not meet legislative criteria for current account surplus and intervention size, and since retaliation is already in effect with another duty round the practical effect is limited beyond a negotiating tactic. Ratings agencies pointed out that weakening may have been a tariff rejoinder, but that a combination of flexibility and stability was likely in the future to forestall capital flight and permit Chinese company repayment of $800 billion in dollar debt. Reserves fell $15 billion in July but still exceed $3 trillion, with the manufacturing PMI under 50 with exports and fixed investment only ahead 5%. Retail sales were negative during the month, and producer prices show deflation. The IMF’s Article IV report predicted ‘moderate slowdown” and raised the alarm on debt approaching 275% of GDP this year. The current account balance will be just 0.5%, while the errors and omissions tally is negative with the Fund advising floating exchange rate transition. In the financial sector, the central bank embraced previous recommendations with scrutiny of property borrowing and holding companies, and launch of a benchmark “prime rate” structure reflecting market competition. It has also overseen takeovers of second-tier banks and steered credit toward small business under dedicated facilities. The shakeup contributed to a lower RMB one trillion monthly loan total and single-digit monetary expansion. Real estate developers in particular have turned to onshore and offshore bond issuance and “shadow” commercial acceptance bills, now at $200 billion outstanding for a 30% annual jump. Chinese credit abroad is also under pressure, with BIS Q1 statistics reflecting Japanese lines at four times the $45 billion extended.
The overseas development and Belt and Road portfolios have entered the mix with a Rhodium Group study of 40 restructurings calling sustainability into question, and Johns Hopkins University research tracking $150 billion in African lending the past two decades as the number one creditor. While mainland growth will still be 6% plus, Hong Kong faces recession with a paltry half a percent output improvement in the end-June quarter before the summer street battles between marchers and police. Protesters demand less control from Beijing and the resignation of its allied chief executive Carrie Lam. Officials announced a 0.3% of GDP stimulus package with the political and economic squeeze, as monthly home prices also fell signaling softness in that critical sector. Retails sales and tourism suffered and the PMI index is at a decade bottom. Foreign reserves around $400 billion remain ample to back the dollar peg and ten months imports, but the CNY is half the currency basket and a military crackdown could suspend the arrangement under emergency law. Yuan deposits and equity Connect flows are down, and the Hang Seng index could be the regional laggard with typhoons unleashed in all forms.