Asia Pacific Macro – December 14, 2021

Alessandro Ponzetto | December 14th, 2021

Today’s most important theme is the economy, more specifically the signs that there are major problems. Those come from Australia, whose productivity has been anemic, India, whose wholesale prices reached a 30-year high, Pakistan, who had the third rate hike since September, and China, with an important think tank arguing for more stimulus to hit “only” 5% GDP growth.

Other important themes are real estate, with the sector hitting a 5-year low, commodities, with lithium reaching an all-time high trade, with China’s new rules causing problems to food and beverages exporters. These two have also a geopolitical component, due to how prevalent China is in lithium processing and the potential of more trade dispute between Beijing and other countries.

1.  CENTRAL BANKS

1.1 China walks a tightrope with rapidly rising yuan – Asia Times

Yi Gang isn’t known for his acrobatic skills. Yet these days, the People’s Bank of China (PBOC) governor could be excused for feeling like he’s trying out for Cirque du Soleil. The balancing act in question concerns a Chinese currency rapidly decoupling from the US dollar – with the yuan rising, rather than doing its usual weakening act. The tightrope Yi’s team is walking is clear enough. His team must serve both growth demands and the de-risking process he’s pursued since taking the PBOC helm in 2018.

The yuan’s strength can seem paradoxical given the default risks highlighted by China Evergrande Group, the property developer that missed a bond payment last week. Also, the PBOC is loosening monetary policy, albeit slightly, as the Federal Reserve tapers.

Looked at another way, the combination of capital inflows and surging mainland exports has meant increased, and largely organic, demand for the yuan since September. The PBOC could use these dynamics as ammunition should President Xi Jinping’s men complain.

A strong yuan, in other words, makes sense. Yet this currency decoupling is an uneasy one. And it greatly adds to intrigue about where exchange rates are headed in 2022.

Comment: This article highlights the dilemma the PBOC and its governor are facing, complicated by political pressures at home and the upcoming Fed meeting which make matters worse for them. 

2.  ECONOMIC DATA

2.1 The part of the economy making woeful progress – AFR

Productivity grew at a paltry 0.2 per cent last financial year, continuing a decade-long deterioration in the most important input into economic growth and prompting calls for a shake-up.

The result comes after the International Monetary Fund last week said Australia should redouble efforts to boost productivity with more investment in research and development, and technology.

“We need to pull out all stops to make sure businesses can invest in doing things better, that’s what delivers higher productivity and higher wages,” Business Council of Australia chief Jennifer Westacott said.

Productivity accounted for more than 80 per cent of national income growth over the past 30 years, according to the Productivity Commission, but the rate of growth has stagnated in recent decades.

Multifactor productivity (MFP) – the ratio of output to combined input of labour and capital and the primary measure of productivity – rose 0.2 per cent in 2020-21, after rising 0.1 per cent in 2019-20, and nil a year prior.

Over the past six years, MFP grew on average just 0.4 per cent per year, compared with 0.7 per cent in the five years to 2014-15, 0.3 per cent in the 10 years to 2009-10, and 1.8 per cent in the five years to 2000.

“It’s all pretty dismal – you’ve got a clear decelerating trend there,” economist Saul Eslake said. “Labour productivity improved during the two years of COVID-19 years, which is the only positive thing you can find out of this.”

Labour productivity – the ratio of output to labour input – grew 1.1 per cent, following growth of 1.8 per cent in 2019-20 and nil the year prior.

Comment: The above highlights one of the potential side effects of continued dovish policies, as there is little or no incentive to invest in Capex. The other side of the coin is the amount of buybacks: while not unique to Australia itself, the Wall Street Journal reported a record amount of buybacks in the third quarter for the S&P 500, totalling $234.5 billion. It may also be toppled by this fourth quarter: Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said he projects that S&P 500 buybacks will reach $236 billion in the fourth quarter.

Buybacks are clearly one of the reasons why markets have been doing really well, even though there have been multiple signs of weakness in the economy (including but not limited to inflation). 

2.2 India’s wholesale prices unexpectedly rise to three-decade high – Bloomberg

India’s wholesale inflation quickened to the fastest pace in three decades on input costs fueled by high commodity prices and supply constraints. Wholesale prices rose 14.2% in November from a year earlier, data released by the Commerce Ministry showed Tuesday. That’s faster than the median estimate of about 12% gain in a Bloomberg survey of 19 economists, and is the highest level since December 1991 when the print came at 14.3%.

[…] Digging deeper:

  • Prices of food articles rose 4.9%, fuel and power prices jumped 39.8%, and manufactured products posted an increase of 11.9%
  • Data released separately on Monday showed retail inflation inched closer to 5% in November, amid rising costs of food and commodities
  • A sustained rise could threaten the Reserve Bank of India’s case for keeping borrowing costs lower for longer to support the economy, given it has a mandate to keep consumer price inflation within its target band of 2%-6%. The RBI last week left key lending rates unchanged and vowed to keep the accommodative policy stance for as long as needed to support a durable economic recovery

Comment: Yet further signs of a not so transitory inflation, at a critical juncture for several key central banks. Meanwhile, as shown below, the neighbouring Pakistan saw its third rate hike since September 2021.

2.3 3rd successive hike: SBP increases key interest rate by 100 basis points, takes it to 9.75% – Brecoder

The State Bank of Pakistan’s (SBP) Monetary Policy Committee (MPC) has raised the key interest rate by 100 basis points, taking it to 9.75%. This is the third successive interest-rate increase since September 2021. In the previous announcement, the MPC raised the rate by 150 basis points.

Majority of analysts and market participants expected the SBP’s MPC to increase the interest rate to the tune of 100 basis points or over. The interest-rate hike expectation stemmed from a number of factors including inflation, widening current account deficit, and the rupee’s fall.

The central bank raised the interest rate in the previous two MPC meetings with the first rate hike of 25 basis points, followed by another, more aggressive, 150 basis points.

2.4 Editorial: Stabilizing Policies to Stabilize Growth – Caixin Global 

With the New Year right around the corner, now is a good time to take a look back at the major developments in China’s economy over the last year and look ahead to see what’s in store for 2022.

At last week consecutive meetings of the Political Bureau of the Communist Party of China (CPC) Central Committee and the Central Economic Work Conference, where policymakers are charged with coming up with a macroeconomic plan for the coming year, Chinese leaders emphasized that work on the economy should prioritize stability while pursuing progress in 2022.

“Stability” has become a watchword in economic policy circles, and the way it is achieved will directly affect how China’s economy develops in the future.

Comment: This piece highlights the CCP objectives as far as policy is concerned. On the one hand, there is “ensuring stability on six fronts”, which are stability in employment, the financial sector, foreign trade, foreign investment, domestic investment and expectations.

On the other there is “security in six areas”, which are security in jobs, basic living needs, operations of market entities, food and energy security, stable industrial and supply chains and the normal functions of primary-level governments.

The editorial is also rather interesting for a different reason: it expresses a concern regarding the political considerations harming future growth by interfering with market mechanisms, which is what it seems to be happening. 

2.5 China urged to cut interest rates, boost infrastructure spending to hit 5 per cent GDP growth next year – SCMP

China should lower interest rates and boost infrastructure investment to ensure the economy will grow by at least 5 per cent next year, according to an influential Chinese think tank.

Authorities need to boost domestic demand, including consumption and investment, to counter the property slump and any slowdown in exports, Zhang Bin and Zhu He, research fellows at China Finance 40 Forum, wrote in an article on Monday.

CF40 is a Beijing-based think tank whose members include People’s Bank of China (PBOC) deputy governor Chen Yulu and Sun Guofeng, the head of the bank’s monetary policy department.

Comment: It is true that authorities need to boost domestic demand, as consumption has been very sluggish, but it is debatable whether a cut in interest rates would make it so. As stated by Pettis in this thread, in order for this to be true there have to be Chinese businesses eager to expand but unable to do so. Analysts however seem unable to find such investment-hungry businesses. 

The article also argues that cutting rates would enhance valuations in the private sectors and lower debt burdens, freeing in principle household and business income for additional spending. This is true but that spending does not magically lead to higher GDP, as we have witnessed with stock buybacks (just to make an example). All that it does is encourage debt, both directly and indirectly. 

To conclude, Pettis states the three options Beijing faces: rebalancing income, more debt or lower growth. The think tank suggests the second option, which would bring more credence to a Japanification of China. 

3.  REAL ESTATE

3.1 China property plunge worsens as Shimao deal raises ‘red flag’ – Bloomberg 

Chinese property stocks sank to a nearly five-year low after a deal between two units of Shimao Group Holdings Ltd. heightened corporate governance concerns in an industry already grappling with a liquidity crisis. 

Shares of Shimao Group and its property-services units both tumbled by the most ever on Tuesday, while a Bloomberg index of property stocks dropped 43% to the lowest level since February 2017. A connected-party acquisition announced by the developer late Monday “not only implies tight liquidity conditions for Shimao, but is also a corporate governance red flat,” JPMorgan Chase & Co analysts wrote as they downgraded both stocks. 

Comment: Corporate governance is a big issue in China, especially when several units are involved. This is of particular concern due to the importance of the group: Shimao ranked 13th among Chinese developers by contracted sales and has passed all three red lines. 

As such, it not only adds problems to an already compromised sector but shows that no company is above suspicion. 

4.  ENERGY/COMMODITIES

4.1 Lithium Prices Soar, Turbocharged By Electric-Vehicle Demand and Scant Supply – WSJ

Lithium prices are rising at their fastest pace in years, setting off a race to secure supplies and fueling worries about long-term shortages of a vital ingredient in the rechargeable batteries that power everything from electric vehicles to smartphones. 

An index of lithium prices from research firm and price provider Benchmark Mineral Intelligence doubled between May and November and is up some 240% for the year. The index is at its highest level in data going back five years. 

Driving the run up are bets on continued scarcity. Demand is multiplying as Tesla Inc. and other auto makers ramp up sales of electric vehicles. Supply, meanwhile, has been constrained by limited investment in new projects following a recent bear market and supply-chain bottlenecks. Producers often face environmental opposition and cumbersome permitting processes when trying to extract the silvery-white metal.

While there is plenty of lithium in the world, converting it into battery-grade chemicals is a long, expensive ordeal. With traders and corporate buyers riding momentum, prices are prone to big moves in both directions.

Comment: Lithium is among a series of commodities required for electrification, which is getting increasingly mandated by governments across the world. The main issue is that the governments do not realise entirely how things work. 

Most lithium comes from countries such as Australia and Chile. There are two main sources: a salty brine that is pumped out of the ground and spodumene, a mineral contained in hard rocks. After extraction, chemical processes are used to make battery-grade lithium compounds.

Most of the processing, as reported previously, happens in China, both due to their comparative advantages and the fact that the chemical processes required are not exactly environment friendly. One of the reasons why the West has not developed processing is Environmental opposition and permitting delays have been obstacles to such plans. 

5.  TRADE

5.1 New China import rules bring headaches for food and beverage makers – Reuters

Makers of Irish whiskey, Belgian chocolate and European coffee brands are scrambling to comply with new Chinese food and beverage regulations, with many fearful their goods will be unable to enter the giant market as a Jan. 1 deadline looms.

China’s customs authority published new food safety rules in April stipulating all food manufacturing, processing and storage facilities abroad need to be registered by year-end for their goods to access the Chinese market.

But detailed procedures explaining how to get the required registration codes were only issued in October, while a website for companies allowed to self-register went online last month.

“We’re heading for major disruptions after Jan. 1,” said a Beijing-based diplomat from a European country who is assisting food producers with the new measures.

China’s food imports have surged in recent years amid growing demand from a huge middle class. They were worth $89 billion in 2019, according to a report by the United States Department of Agriculture, making China the world’s sixth largest food importer.

China has tried to implement new rules covering food imports for years, triggering opposition from exporters. The General Administration of Customs of China (GACC), overseeing the latest iteration of the rules, has provided little explanation for why all foods, even those considered low-risk such as wine, flour and olive oil, are covered by the requirements.

[…] The European Union has sent four letters to Customs this year requesting more clarity and more time for implementation, said Damien Plan, agriculture counsellor at the European Union Delegation in Beijing.

Last week, GACC agreed that implementation should only apply to goods produced on or after Jan. 1, effectively granting a delay for products already shipped, said the European diplomat, though it has not yet published an official notification.

Comment: Considering the case of Australia, it would not be surprising to see China use trade as a political tool to strongarm the European Union, especially the members who have been increasingly friendly with Taiwan. 

Ultimately, such news should be very worrying due to the potential ramifications: China has effectively cornered the processing of several key commodities, as shown above with lithium, and a supply chain war would pose quite a threat to the West if caught unprepared (as it is at this moment in time). 

It is not the only bad news for supply chains however, as shown below.

5.2 China’s goal for blue sky Beijing Winter Olympics set to cause ‘supply-side shock’ as factories close – SCMP

The Beijing Winter Olympics may weigh on China’s economy as authorities close scores of factories in northern production hubs to cut pollution and ensure blue skies, economists say.

“Although the Yangtze River Delta and the Pearl River Delta are not involved, the area that is affected is also a relatively important part of China’s economy, especially in terms of raw material productions,” Lu Ting, chief China economist at Nomura, said at a webinar on Monday.

Efforts to reduce smog have been extended from 28 to 64 cities this winter and cover five provinces, in addition to Beijing and Tianjin, the Ministry of Ecology and Environment (MEE) said in October.

Comment: China seems to provide more and more reasons for reshoring supply chains. Even assuming the best of intentions from Beijing, it is dangerous to have a single point of failure (or at least have a major one) as these two years have shown us. 

6.  TECH

6.1 Malaysia says Intel to invest $7.1bn in local chip facility – Nikkei Asia

U.S. chip giant Intel is set to invest 30 billion ringgit ($7.1 billion) to establish a state-of-the-art semiconductor production facility in Malaysia, the Southeast Asian country’s investment authority announced on Monday.

The plant will be based in Bayan Lepas, near an international airport in the northern island state of Penang, the Malaysian Investment Development Authority said in an invitation to reporters to a press event scheduled for Wednesday. The facility will mark an expansion in the company’s semiconductor packaging, the invitation said. 

A press conference featuring Intel CEO Pat Gelsinger and Senior International Trade and Industry Minister Mohamed Azmin Ali is scheduled to take place in Kuala Lumpur on Wednesday, according to the invitation. Officials at Intel’s office in Kuala Lumpur could not be reached for confirmation after hours on Monday.

Intel relies on Malaysia for some of its chip packaging operations, the critical final step in the semiconductor manufacturing process. Surging demand for chip-laden products amid coronavirus shutdowns along with production disruptions have caused supply chain headaches for a number of industries relying on semiconductors, leaving Intel and other manufacturers scrambling to meet demand.

6.2 Weibo fined by Chinese regulator for publishing illegal information – Reuters

Chinese social media platform Weibo Corp has been slapped with a 3 million yuan ($470,000) fine by China’s internet regulator for repeatedly publishing illegal information. The Cyberspace Administration of China (CAC) said Weibo had violated a cybersecurity law on the protection of minors as well as other laws but did not give further details. It also said Beijing’s local cyberspace regulator had imposed 44 penalties on Weibo totalling 14.3 million yuan for the year to November.

The company, which operates a platform similar to Twitter, has been ordered to “immediately rectify and deal with relevant responsible persons seriously,” the CAC said in a statement. Weibo said in a statement it “sincerely accepts criticism” from the regulator and has established a work group in response to the penalty.

The fine is the latest in a string of penalties the regulator has imposed on tech companies this year and comes amid tougher oversight of an tightly censored internet that has seen new guidelines issued for news sites and online platforms. Authorities have said they want to promote a “civilised” internet. These efforts include a crackdown on online “fan culture” and banning social media companies from aggressively promoting celebrities, saying they were a bad influence on young people.

Comment: The lack of details makes it difficult to ascertain whether this is due to genuine concerns, which there are, or the CAC putting the squeeze on yet another tech company in order to make it compliant to their version of “civilised” internet. 

6.3 China Mobile set to list in Shanghai – FT

China Mobile will hold a share offering in Shanghai a year after sanctions imposed by former US president Donald Trump forced the world’s largest telecoms company by subscribers to delist in New York.

China Mobile will offer up to 845.7m A-class shares representing a 3.97 per cent stake in the company, according to a filing on the Hong Kong stock exchange, where it retains an existing listing. The company added that it would conduct price consultations for its offering in China on Thursday and Friday.

The Shanghai listing comes as the Biden administration takes an increasingly hawkish stance towards China. Washington blacklisted Chinese artificial intelligence company SenseTime last week as part of broader human rights sanctions on people and entities linked to China, Myanmar, North Korea and Bangladesh.

Stephen Leung, head of research at Crosby Securities in Hong Kong, said that China Mobile’s decision to list in mainland China was mainly “symbolic”.

Comment: This looks indeed like a symbolic action, as there is also a precedent of a similar move by China Telecom, one of China’s state-run telecoms groups, in August had done little to improve the stock’s valuation in Hong Kong or China.