China’s Fretful Free Zone Fiddling
Chinese stocks finished Q3 barely down as PMI readings remained over 50 and financial services free-trade experimentation was previewed in Shanghai, with greater exchange and interest rate latitude for foreign bank and securities firms still barred from full control. International integration was highlighted by official reporting of overseas commercial debt at $775 billion and RMB trade settlement at one-fifth the total despite continued doubts over invoice veracity after a recent probe into mainland and Hong Kong practices. So-called “backdoor” stimulus through tax breaks and infrastructure projects has sustained the 7.5 percent GDP growth target, along with still buoyant housing prices and mortgage lending despite repeated cooling attempts. As Asian bond markets reopened in September with the US Federal Reserve’s tapering postponement high-yield property developers continued to be shunned by normal investors, forcing resort to corporate “entrusted” credit which has ballooned on the shadow banking balance sheet next to wealth management products. Local government exposure which was downplayed in the immediate leadership change period regained urgency as regulators fanned out for an urgent national audit ahead of an important November party gathering. Financial statements are not publically available for hundreds of vehicles of the 11,000 estimated which may have already borrowed RMB 20 trillion or near 40 percent of GDP, according to industry calculations. Local raters have downgraded a handful of city bonds, with one-third of issuance now going to repay old obligations, experts believe. Price Waterhouse in its latest survey of top banks cited a 10 percent NPL rise generally the past six months, while S&P noted worsening “liquidity strains” particularly at mid-sized institutions reliant on wholesale lines. A prominent domestic research firm warned that medium-term bad asset accumulation could erase half of system capital, and securitization will likely be on the agenda at the upcoming policy meeting after a small pilot program was approved for offloading state railway holdings. An explicit deposit insurance scheme could also be proposed, and exchange overseers may get further authorization to expand short-selling and other modernization steps.
As the Asian Development Bank cut the regional economic growth outlook to 6.5 percent with lower export and portfolio flow potential, Korea nudged China’s equity performance as a safe haven play after returning to the sovereign bond market for an oversubscribed post-2009 placement at 115 basis points over the 10-year US Treasury. The won has been firm against the dollar since June as the current account surplus hit a record and housing relief in the new budget aided overstretched borrowers. Second quarter output was up almost 2.5 percent, and the North’s nuclear threats were sidelined on reactivation of cross-border commerce and talk that inspection overtures could proceed along the lines of Iran’s apparent new willingness to negotiate an end to multilateral sanctions. The Japanese yen, which sets the trade and financial rivalry tone, also bumped off the post-Abenomics bottom as the stock market led the major economy pack despite retail investor recoil at doubling capital gains tax.
