China’s Rutted Road Trip
As the Chinese President visited the Middle East to promote the One Belt, One Road outward trade and investment program before hosting G-20 summit preparations in Shanghai with a no-devaluation pledge, the MSCI index again slipped double-digits on mixed economic and banking system readings. The manufacturing PMI was below 50 in February for the weakest result since 2009, and services also faltered as producer price deflation at 5 percent extended a 4-year trend. The central bank came under fire for omitting capital outflow statistics in the latest reserve compilation after committing to basic IMF transparency standards, as import data continue to reflect large leakages that may account for one-third of exit. It warned of continued Yuan fluctuation against the new currency basket and shelved another Qualified Domestic Institutional Investor scheme for asset placement abroad, but eliminated the reverse quota on interbank bond market participation as corporate issuance jumped 25 percent in 2015 to over $2 trillion. The flurry has lasted with RMB 200 billion in activity so far this year on scant secondary trading, with company debt now 160 percent of GDP, according to rater S&P. Rival Moody’s in turn cut the sovereign outlook from stable to negative on mounting government debt at 40 percent of GDP, including contingent liabilities from provincial borrowers and policy banks. The Finance Minister however insisted that fiscal policy could be further loosened going into the March People’s Congress, following another reserve requirement reduction for monetary stimulus as the money supply expansion target was steady at 12 percent.
Foreign banks which previously scrambled to secure a foothold are now leery of second-tier competitors in particular with questionable balance sheets and state support. Citigroup sold its minority stake in a provincial lender, and joint stock and city commercial banks have outsize exposure to wealth management products totaling $3.5 trillion by industry figures. Regulators have granted quotas to the biggest institutions to clear non-performing loans through asset-backed securities transactions, as new debt assumption to repay old is increasingly rampant in natural resource sectors. Coal and steel “zombie” firms will shed millions of employees under the government’s enterprise reform and environmental and overcapacity push. Profits were off 7 percent in 2015 and state company debt/assets is above 60 percent, and international partners like the EU Chamber of Commerce lament that excess production “damages the global economy.”
President Xi visited Iran on his swing and set a goal of increasing trade tenfold over the next decade, as $20 billion in post-sanctions released bank accounts will go to settling Tehran’s past arrears in oil for infrastructure deals. Beijing’s AIIB has a small Iranian founding share, and ICBC has applied for a local branch license as the system is reconnected to the SWIFT clearing network. The just-elected parliament will weigh a new banking law to enshrine oversight and resolution procedures, as non-performing loans are officially reported at 15 percent with a central disposal agency under consideration. The stock market has rallied after implementation day, but listed banks lag with profit drops despite a recent government discount credit program for cars and housing that my repeat past unbelted riding.
