China’s Sleeper Train Trials
Chinese shares stayed positive but were mostly unmoved by the “through train” Hong Kong tie-up which after initial hype barely filled a fraction of daily quotas. Mainland retail investor south bound connect use particularly lagged even as income was tax-exempt and HK authorities lifted previous renimbi access limits. Foreign institutions dabbled in Shanghai with the launch as holders of QFII allocations considered bond shifts, as both clamor for additional entry into Shenzhen’s small-cap market. Renewed street protests against Beijing’s refusal to allow popular elections in the city-state may have quelled enthusiasm as the rationale for “backdoor” capital account opening was also dashed by official insistence on a gradual timetable at the APEC summit. The dollar will be the currency for the new Asian Infrastructure Bank created against Washington’s opposition, as traditional FDI strength was eroded with a year-to-date flat total of $95 billion. The state planning agency has acknowledged growth toward 7 percent in 2015 as retailers report sales declines and the PMI sits at 50. Wholesale prices show deflation and the government has steered its exhausted fixed investment push overseas with a $1.25 trillion outbound target over the coming decade aided by a new “Silk Road Fund” for neighbors and a proposed pan-Asian free trade pact to match the US Trans-Pacific Partnership. Recent export figures reflect EU weakness and Japan’s latest yen depreciation round will roil both diplomatic and commercial relations despite a handshake between the two leaders at the APEC meeting. October’s total social financing was almost half the previous months as banks reasserted dominance over shadow units where trust activity especially has frozen under tighter rules and property sector exposure. Home prices were down in almost all cities according to the latest survey, and developers are highly leveraged with debt up fivefold post-crisis as they represent one-third of regional speculative external issuance, rater S&P reports. Banks have slashed mortgage loans despite official exhortations and restriction easing as they worry about capital positions in view of domestic asset impairments and global prudential pressures. Bank of China entered the US private placement market with a Basel III structure as the central bank confirmed a $125 billion system liquidity injection this quarter to bolster defenses in the absence of mobilization for stimulus.
Sovereign CDS spreads have widened as big houses grab the trade with Pimco recently selling $7 billion in protection on a bullish Chinese outlook in the waning days of the Gross era. Volume has roughly doubled the past year as a main instrument behind Italy and Brazil according to New York Depository Trust statistics and the International Swaps and Derivatives Association. The emerging market total was $37 billion in Q3 as tracked by EMTA, with Argentina, Russia, Turkey and Venezuela also featuring alongside Brazil’s $70 billion. Quasi-sovereign oil and gas credits were active at the same time, led by Gazprom and Petrobras facing their own train wrecks.
