This is how a Financier in China sees things

Discussion in 'Wall St. News' started by xandman, Jul 27, 2015.

  1. xandman

    xandman

    Aside from Tacgnol, reforms are going according to plan and doing surprisingly well. Sometimes, you have to look beyond the internet headlines:


    BEIJING - 3 Mtgs / 3 Distinct Conclusions

    I spent all of last week in Beijing and organized three meetings involving old contacts across Tsinghua University, IMF and Peoples Bank of China (PBOC). The rest of the visit was spent wandering around the city, collecting anecdotal vignettes.

    Specific conclusions resonated.

    All three meetings essentially echoed a similar refrain, notably (1) the current austerity measures implemented two years ago under the new Beijing regime were working well and irreversible, (2) overall sluggish pace of economic growth consistent with steady/gradual rebalancing of economy towards consumption and services and (3) renminbi 'fairly/adequately valued' versus US$, thereby providing ample room for further accomodative monetary policy.

    Although many corners outside China argue that Beijing is considering relaxing the harsh austerity measures, nothing could be further from the truth, based on my interactions, as long as the current fifth generation of leaders is in power. These measures are clearly working and have the support of the people. To reverse course now would damage the credibility of the Beijing leadership, especially as the crusade against corruption involving government officials is bearing fruit.

    President Xi Jinping and his top Politburo enforcer, Wang Qishan, have made great strides in reversing the two-decades long embrace of rampant corruption, in many forms, from bribery to embezzlement, which was essentially condoned in the previous two regimes. Macao provides a stark example of the extreme nature of black money from the Mainland. Now, Macao casinos are empty, front-line witness to Beijing's crackdown on corruption. Casino revenues in Macao have taken a battering, collapsing a record near 50% YoY in 1Q2015. VIP business has all but collapsed with even mass market punters now starting to disappear. Casino stocks should become familar with this lower revenue territory; the same for share prices.

    Energy consumption has been another significant target of the austerity measures. This is equally a reflection of the growing urgency to address the dreadful pollution problem, especially in major cities, as lignite remains the primary raw input to fire power plants. Remarkably, Beijing is now essentially pitch dark at night. Chang'an Jie (Ave), the main artery traversing Beijing, with the heavyweight SOE HQs adorning both sides of the boulevard, are dark. For the first time in my near three decades of visits to Beijing, no lights were visible outlining these gleaming monuments to China's rising economic clout. Darkness descended from Nanlishilu in the west all the way past/including Tiananmen Square to Wangfujing in the east. Mao's Masoleum disappeared in the darkness enveloping all of Tiananmen Square. Even the PBOC HQ was lost in the darkness. Beijing in the dark certainly sends a message that times have changed.

    Expectations for asset declarations by public officials remain under discussion, as has been the case the past two decades, but have received more attention lately from President Xi. A disclosure decision would be a significant achievement for the regime, despite the resistance from vested interests.

    While the economy has been visibly slowing the past several years, to levels not seen in a quarter-century, this new normal is welcome and consistent with the gradual rebalancing of overall growth drivers and recognition of the rapid changes in China's demographic profile. The 'Low Wage Ice Age' is largely complete. This overall adjustment phase is truly welcome, reinforcing our 2008 argument that 'Investors should WELCOME, not fear, a slowing China.' No need to panic! The embrace of more efficient growth, while challenging, represents a shift in priorities emphasizing the quality, not sheer quantity of economic growth. This will ultimately serve China's next phase of growth. Recent PBOC policies reflect such a new growth profile.

    Visible progress is also noted across both China's new Asian Infrastructure & Investment Bank (AIIB) and Silk Road ("One Belt, One Road") initiatives, dual programs designed to extend Beijing's sphere of influence. While both projects have a common economic objective of infrastructure and trade, the political and diplomatic realities are undeniable. In many ways, they represent Beijing's ongoing version of the Marshall Plan. 57 nations have pledged to join the AIIB, despite certain objections from Washington, while US$46 billion worth of investments in Pakistan highlight a new bilateral relationship, connecting China to the subcontinent, Middle East and Europe. Energy deals with Russia also figure in the mix, as President Xi was in Moscow this week signing deals with Putin.

    China continues to pursue a greater role for the renminbi within the IMF and progress is again noted. The forthcoming IMF annual economic assessment of China will represent a paradigm shift in perspective, containing significant positive comments regarding the currency, overall economic activity and housing market adjustments. The IMF's new language describing the renminbi, always a sensitive political topic, will herald a breakthrough for which Beijing has long sought. China will most likely allow this annual IMF paper to be published!

    The big prize of gaining new clout for the renminbi from the IMF will be a milestone in Beijing's efforts to further open its economy and internationalize the currency. This follows years of IMF censure of China's currency management. Come June, the IMF will decide to include the renminbi in its SDR. Becoming a constituent in the basket of special drawing rights would be a huge advance for the currency, which is no longer as tightly controlled by Beijing as many observers argue.

    The rewards for Beijing would be more than simply financial (always part of the plan); acquiring SDR rights would be a powerful boost to its geopolitical ambitions. Indeed, this inclusion is largely symbolic to global recognition of China's rise in status. Essentially, it's declaring what we already affirm, another official, yet vital, acknowledgement of China's growing stature in the global economy and financial markets. But recent visits confirm the IMF's shift in view is also a marker underscoring how swiftly China is moving to dismantle capital controls, in line with the reform policies of the PBOC.

    As part of Beijing's currency liberalization plan, China threw open its onshore bond market last week, approving 32 foreign financial institutions access. The current size of the bond market is nearly US$6.0 trillion, with barely 2.0% of that held by foreign investors. Little wonder on the timing of the decision, nor the intention of luring more foreign inflows to shore up a wobbly borrowing class.

    The final hurdle to clear for Beijing to gain currency clout from the IMF involves whether renminbi interest rates are market-based. The IMF has conducted much work in this area the past few years in preparation of a decision.

    This decision will have broad implications for global investors as we experienced with Japan in the late 1980s and both South Korea and Taiwan more than a decade ago. It will ultimately mean China could soon assume a much larger weight in crucial global financial markets to which funds are benchmarked. Furthermore, China is too hard to simply ignore, as was the case with Korea and Taiwan. Today, Hong Kong-listed China companies barely register in the MSCI All Country World Index (similar in FTSE) but could rise to near 15% of the index once adequate currency convertibility is achieved (IMF's call), allowing onshore Shanghai China 'A' shares to be included in the index. Global investors will then be forced to consider increasing allocations to China, not solely based on the merits of fundamentals.

    Which brings me to the final conclusions of my visit....
     
    Last edited: Jul 27, 2015
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  2. xandman

    xandman

    Shanghai stocks have surged the past six months driven entirely by a massive liquidity surge created by the PBOC, in awkward response to the rapidly slowing nature of the economy. Aggressive, arguably reckless, margin lending has also been responsible for driving Chinese shares higher. Estimates indicate RMB6.0 trillion (nearly US$1.0 trillion) of borrowed money, equivalent to near 10% of total market capitalization, is invested in mainland stocks. A significant portion of these funds have been doled out the past three months. Hopefully, the CSRC authorities will shortly announce new measures to rein in margin lending, forcing brokers to disclose lending arrangement data to regulators.

    Momentum is the order of the day, not fundamentals. Earnings have been falling or stagnant.

    Underscoring wider concerns about China's economic health, Moody's reported last week that 87% of all Asian ratings downgrades in 2014/15 were Chinese corporates. Certainly alarming. Retail and real estate were especially exposed to the economic slowdown and anti-graft measures.

    Essentially, the PBOC is following down the same well-worn path of aggressive, and unprecedented, monetary easing implemented by the Fed, Bank of Japan and ECB. The PBOC printing press has been working overtime, despite the darkness. In some circles, this policy is regarded as premature, others argue necessary to maintain a floor to growth. Regardless, China stocks love pouring fuel on the fire. The Hong Kong-Shanghai Connect market partnership has ensured plenty of this money pours south into Hong Kong stocks as well, causing a near +20% surge in share prices during April. Again, a momentum rally. During April, daily trading volumes in the Hong Kong market eclipsed US$30 billion, equivalent to a whopping 10% of GDP!

    Of course, Chinese companies are quick to take advantage of surging share prices, quickly lining up with plans for more than US$50 billion worth of share placements. All this upward movement despite an increasing number of bond defaults by obscure SOEs; irrelevant, so I'm told.

    But rapid cutting of interest rates, three times in six months, combined with reductions in bank reserve requirements, also highlight the potential risks within the economy. Exports have stalled and bank lending is barely negligible. NPLs are piling up despite official data to the contrary. These monetary moves underscore growing fears within Beijing that a severe debt overhang as a result of rapid and reckless credit expansion over the past five years is threatening to derail efforts to revive the economy. I suspect a debt crisis is looming.

    At least the IMF paper will provide stimulating reading.

    RWJ
    10 May 2015

    Sent from my iPhone
     
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  3. Wow, a very informed article. Thanks for sharing. Do you mind sharing who wrote it ? Thanks


     
  4. xandman

    xandman

    I don't know the person who wrote it.

    It came from a cousin who worked in Asian Fixed Income. I only asked him "what's up?" in not so many words.
     
  5. Its a very well written article and resonates with everything I hear being here in Hong Kong and my belief of the political convictions and goals of the standing committee and President Xi Jinping. Would be worthwhile finding out who wrote it cause this is rare quality content, certainly not the standard BS that is churned out of sell-side ibank research. If the author works there then he/she has a lot more upside elsewhere imho.

     
  6. xandman

    xandman

    I suspect the author is already one of those independently wealthy expats. As you know, relatively easy in Asia as long as you don't try to keep up with the Joneses.

    I thought you were in the UK. You should express your economic views on China more.

    The American press can never articulate the true economic "vibe" of what's going on in Asia. It's more roller coaster than the West..that is true. But there is also this incredible optimism for tomorrow that have made many Westerners take root within a strange and oftentimes difficult culture.

    Additionally, I think there is a feeling of envy with China's economic youth. Much like the gradual rise of the US over Britain.
     
    Last edited: Jul 27, 2015
  7. I guess I agree with your view in this particular regard. A lot of misinformation out there and when really looking at historical fiscal and monetary policy it is very hard to argue that PBOC has not excellently learned from the mistakes of Western CBs and that the central government is not doing a pretty decent job. The market in China is a very nascent market and mishaps are part of the game, but they really take things with a long term view and they are powerful enough to not give a darn what the US thinks or those with selfish interest in powerful positions in the West.

     
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  8. i960

    i960

    Surely you can see what's eventually on the horizon, right?
     
  9. China's economy is slowing and the powerful and greedy and trying to gain control of resources out of the country alienating their trading partners. China will continue to slow until you get to a critical point where either the government is overthrown or China becomes its traditional isolated self.
     
  10. not sure what you are alluding to but yes, American dominance will eventually come to an end and the new super power for at least many decades will be China. The US will not trail behind by too much (unlike what has happened to the UK) due to its innovative spirit and "can-do" attitude.

     
    #10     Jul 28, 2015