China’s Trampled Trust Trails
Chinese stocks finished the year up 15 percent on the MSCI Index on a post-leadership change improvement in economic statistics, despite regulatory urgency over third-party trust and wealth management products which now account for over $1 trillion or one-fifth of total financing as banks were ordered to “check sales.” The PMI is again above 50 and monthly housing prices stabilized as official and private 2013 GDP growth forecasts were raised to 8 percent-plus on infrastructure stimulus and solid retail demand. Exports are barely increasing and Japanese trade and investment ties have been battered by geopolitical rivalry over tiny islands that may be aggravated by the return of LDP leader Abe, who hails from a prominent World War II military family and has vowed also to fight “currency war” more aggressively through greater monetary expansion to weaken the yen. Food-driven inflation is down to 2 percent, and the Q3 capital account outflow moderated as the new party and government senior representatives assumed their posts in a smaller politburo. Their financial sector work agenda will include deposit insurance introduction, insurer asset allocation liberalization, and debt and equity access limit removal for foreign central banks and sovereign wealth funds. Local bodies have shifted from loans to bonds with RMB 550 billion issued through end-September 2102 surpassing all of 2011, at yields often in the 7 percent range. Banks have accounted for less than half of outstanding credit still increasing at a 20 percent annual clip. Smaller competitors outside the big four state giants have dominated the wealth product space while foreign ones continue to represent less than 2 percent of traditional activity. The latter prefer Hong Kong and Singapore for mainland and regional servicing and have likewise exited Tokyo after years of lackluster business. Incoming Prime Minister Abe named veteran policymakers to his cabinet and controls a two-thirds majority in parliament with party allies. He seeks to double the inflation target to 2 percent and revise the pacifist constitution, as the economy fell into recession the last quarter and household confidence hit a yearly low. The current account returned to surplus but GDP growth will end around 2 percent largely on the Chinese spat fallout.
Australia by comparison continues to court exposure as the commodities powerhouse inked a $1.5 billion natural gas deal which should help keep the current account deficit to 5 percent of GDP. Retail property transactions are off 30 percent on softer commercial and consumer sentiment, and non-bank lenders have run into trouble. In emerging and peripheral Europe authorities are targeting Chinese buyers for asset and debt sales with scant success. Hungary has moved instead to diversify its bondholder base with domestic retail outreach, and Cyprus has abandoned insolvency rescue hopes through offering Beijing offshore oil rights as it places trust in a possible EUR 15-20 billion dual lifeline from the EU and Russia.
