Asia Pacific Macro – December 17, 2021

| December 17th, 2021

Today’s issue has two main themes: economic policies and growth, plus the relationship between Western companies and China. Regarding the first, there is an announcement from the BOJ, which has to be taken with a grain of salt, and a new dashboard made by Bloomberg to evaluate China’s policies. For growth, there is the contrast between China’s difficult, if not impossible, transition away from real estate (which saw developments as well, with Shimao being downgraded to junk-rated by Fitch and Moody’s) and India’s revision upwards. Finally, there is an article from Unheard about Western greed fuelling China, Volkswagen being a case in point.

CENTRAL BANKS

BOJ decides to end some COVID measures in March – Nikkei Asia

The Bank of Japan decided to wrap up some of its emergency COVID monetary stimulus measures during a two-day policy meeting that ended on Friday, in a move that echoes steps taken by U.S. and European central banks earlier this week.

Japan’s central bank will end its purchases of corporate bonds and commercial paper at the end of March, as scheduled. It will also curtail one-year interest-free loans to banks aiding pandemic-hit businesses, ending those for large corporations at the end of March, while extending those for small businesses by six months through the end of September.

“The move reflects an improvement in Japan’s economic situation” amid a sharp reduction in domestic COVID cases, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. By lengthening the duration of emergency funding assistance for small businesses, however, the BOJ is also signaling “it will help the government’s effort to support small businesses,” which have taken the brunt of the pandemic, he added.

The central bank, meanwhile, is keeping its main monetary policies in place, including guiding short-term interest rates to minus 0.1% and long-term rates to around zero.

The decisions come as central banks in other countries have started scaling back the stimulus measures they introduced in response to the COVID crisis. Some of this tapering is in reaction to economic recoveries and supply constraints that have driven up consumer prices.

Comment: Given the position of both the Fed, on which we wrote a piece yesterday, and the ECB, the BoJprefers to wait and see how their respective moves pan out.

Beyond PBOC, rate cuts – New policy dashboard – Bloomberg

[…] To sharpen the picture, Bloomberg Economics has created a new monthly policy dashboard – with a combination of policy measures and market-implied indicators – that brings together the main macro policy matrix with other relevant gauges on property, tech and energy.

The main messages:

Monetary: Easing this year has been more visible in liquidity, led by cuts in banks’ requirement reserve ratio in July and December. But the decline in interbank funding rates hasn’t transmitted much to lending interest rates – suggesting more work is needed. After a slowdown since 4Q 2020, credit growth is poised to pick up in coming months, supported in part by more proactive fiscal stimulus.

Fiscal: Local governments have accelerated issuance of special bonds – a key source of funding for infrastructure investment – in 4Q. The momentum should continue into early 2022, with authorities having approved ‘front-loading’ of next year’s issuance and infrastructure spending. 

Property: The regulatory grip remains tight but the worst has probably passed. Fewer cities are increasing restrictions further and there are signs that more mortgage loans are being extended. Even so, home prices and sales have yet to show any visible turnaround in general sentiment.

Tech, Energy: Activity and market-implied indicators still point to significantly tighter regulations compared with a year ago, though energy controls appear to have eased slightly from September, the height of the power crunch.

ECONOMIC DATA

The Chinese Economy’s Tough Transition – WSJ

No one said China’s economic pivot from real estate would be easy, and now along come more data to prove the point. It’s clearer by the day that China’s economy is under growing pressure, which means so is President Xi Jinping.

A range of numbers released Wednesday paint a gloomy picture. Growth in retail sales slowed to 3.9% year-on-year in November, down from 4.9% in October. Growth in fixed-asset investment was 5.2% for the January-November period, compared to 6.1% for January-October, implying a slowing pace during the most recent month.

Industrial production accelerated a bit, to 3.8% from 3.5%, although that’s modest growth considering the energy-supply problems that hobbled production earlier in the autumn. The official urban unemployment rate rose to 5% from 4.9%; the true number almost certainly is much higher.

This slowdown has many causes. A big one is the rebalancing Mr. Xi is attempting to engineer in China’s bloated property market. Beijing has tightened credit for developers over the past year, pushing several into distress. Evergrande Group, one of the largest, defaulted on a bond payment last week and now appears to be undergoing a form of bankruptcy workout. Wednesday’s data showed property prices and construction starts falling. To the extent this produces slower but more sustainable economic growth, that would be a boon for China.

Comment: Given the resumed stimulus for the real estate sector, one wonders whether the term ‘transition’ is appropriate. At most there is a transition from private to public, as Xi is trying to assert control (either directly or indirectly). Signs of problems can also be highlighted with the following article

Xi Jinping says China will ‘exhaust all means’ to lure global talent, despite push for tech self-sufficiency – SCMP

China is calling for more global talent to bolster technological innovation and national power, amid growing concern from foreign investors that Beijing’s “dual-circulation” strategy might turn it further inward and hamper international collaboration.

China will “exhaust all means” to recruit intelligent and innovative professionals from around the world, President Xi Jinping said in a speech to a key national talent work conference in September.

The transcript, published on Thursday on Qiushi, a state journal covering the Chinese Communist Party’s governing philosophy, laid out a specific timetable for China to become a world power in science and technology within two decades.

“The emphasis on independent cultivation of talent must not mean self-isolation,” Xi said.

Comment: Considering all the policies which discourage foreigners, like the Zero Covid policy, it would be rather hard for China to attract talent. It also highlights something rather important: the transition requires human capital that they do not have, which gives a considerable comparative advantage to India. 

India’s GDP growth forecast raised amid fewer virus restrictions – Bloomberg

India’s economy is seen expanding a notch quicker than previously forecast in the current fiscal year ending in March, according to a Bloomberg survey. Gross domestic product will likely expand 9.4% this fiscal, according to the median estimates of the latest survey. That’s faster than 93.% forecast last month and is mainly due to an upward revision to the third and forth quarter estimates to 6% and 5.8% from 5.8% and 5.3% respectively.

That coincides with economic activity picking up in Asia’s third-largest economy, which has shrugged off most curbs put in place to stem a deadly second wave of coronavirus infections. While there are no new strict restrictions in place to check the omicron variant, policy makers have retained an accommodative stance to support the recovery. 

Comment: If the estimates are proven to be correct, it is yet another sign that India is managing to restart its growth engine post-pandemic. This could attract further investments, especially if coupled with sound policies from New Delhi and the continued Zero Covid policy from China.

The economy is getting better but the budget is not – AFR

When Malcolm Turnbull and his treasurer Scott Morrison unveiled in the 2018-19 budget plans for income tax cuts to be delivered in three stages, they came up with a new, temporary mechanism to target short-term relief to low and middle-income earners.

The low and middle-income tax offset was an income-tested, lump sum payment of up to $1080 paid at the end of the financial year after tax returns were lodged.

The offset, known as LMITO, was supposed to expire on July 1, 2022, by when stage two of the income tax cuts would begin.

Adjustments to the tax thresholds for low and middle-income earners under stage two, and a permanent increase to another existing offset for low-income earners only, would lock in the benefits of the LMITO and deliver it as a permanent tax cut, rather than an end-of-year payment.

When the COVID-19 pandemic struck and everything went out the window, the government brought forward the start date for the stage two tax cuts to July 1, 2020, the rationale being that they would provide extra income support and stimulus in a time of crisis.

At the same time, and for the same reasons, it kept the LMITO for another year, which effectively delivered the low and middle-income earners a double tax cut. It made sense at the time.

But, in the May budget this year, the government decided to roll it over again for 2021-22, at another “one-off” cost of almost $8 billion.

According to Thursday’s midyear budget update, the time for spending restraint will soon arrive – but not until after the election.

[…] The midyear update showed the budget was $106 billion better off in revenue terms since May but all of it was spent, meaning no noticeable improvement to the bottom line.

Had the LMITO been secreted in the midyear update it would have pushed the cumulative deficit over four years to $348 billion, higher than the $342 billion forecasts in the May budget.

[…] The mid-year budget update was full of realistic and upbeat forecasts, be they on growth, unemployment, inflation or wages. The only thing that didn’t improve was the bottom line.

As economist Chris Richardson said: “The economy’s getting better, but the budget is not.”

Comment: The issue of budgets is widespread, as several countries have used deficit spending to support the economy. As in the case of monetary stimulus, with central banks still on the dovish side of things, governments have not started contemplating how to reduce the deficit spending, which will be problematic in both the short to medium term. 

REAL ESTATE

Shimao loses investment grade as Fitch follows Moody’s downgrade – Bloomberg

Shimao Group Holdings Ltd.’s credit rating has been slashed to junk territory from investment grade by Fitch Ratings, making it a ‘fallen angel’ at the international risk assessor.

“Weak sales in recent months and financing conditions” amid Shimao’s deteriorating liquidity position drove the downgrade to BB from BBB-, Fitch analysts wrote in a Friday note, placing the firm on ratings watch negative. The borrower’s credit rating was cut two notches to Ba3 by Moody’s Investors Service the same day.

Long considered one of the industry’s healthier players, Shimao Group had until recently appeared largely immune to the credit-market turmoil that led to defaults this month by junk-rated rivals including China Evergrande Group and Kaisa Group Holdings Ltd. That view has changed dramatically over the past week, as unconfirmed speculation of payment difficulties at Shimao Group sent the company’s bonds tumbling to record lows. 

Comment: The downgrade from both Fitch and Moody’s may lead to further pressure on the company, especially if the payment difficulties become more evident. It may also trigger a response from the authorities, as it is in their interest to avoid yet another company ending up in financial distress (at best) or default (at worst).

ENERGY/COMMODITIES

Coal power at all-time high, threatens net-zero goals: IEA – Nikkei Asia

Coal-fired electricity generation around the world is expected to reach an annual record in 2021, undermining efforts to reduce greenhouse gas emissions, according to a report by the International Energy Agency released on Friday.

Global power generation from coal is expected to increase 9% this year to an all-time high of 10,350 terawatt-hours, according to the agency’s latest Coal 2021 report.

IEA estimates that global coal demand could hit new highs next year — depending on weather and economic growth — and will likely “remain at that level for the following two years,” underscoring the need for fast and strong policy action. The largest consumers China and India hold the key in steering future coal demand. The two economies account for about two-thirds of overall demand.

[…] The coal shortage directly affected the electricity supply in China and India, with the power crunch disrupting manufacturing activities in a wide range of industries leading to a rise in the price of other commodities including aluminum and magnesium, the production of which consumes a large amount of electricity. The crisis prompted China to ramp up domestic coal production.

[…] However, experts say rising coal demand is a threat to the goals.

“This year’s historically high level of coal power generation is a worrying sign of how far off track the world is in its efforts to put emissions into decline toward net-zero,” warned IEA Executive Director Fatih Birol in a news release. “Without strong and immediate actions by governments to tackle coal emissions — in a way that is fair, affordable and secure for those affected — we will have little chance, if any at all, of limiting global warming to 1.5 C.”

Comment: The energy shortage has proven that there is no easy clean alternative to coal able to provide cheap and plentiful energy. It is impossible for certain parts of the world to drop coal as a source of energy, regardless of what the IEA or other international organizations say about climate targets. 

Australia regulator approves Woodside merger with BHP’s petroleum arm – Reuters

Australia’s competition regulator approved Woodside Petroleum’s (WPL.AX) agreed $28 billion merger with BHP Group’s (BHP.AX) petroleum arm on Thursday, saying it would not reduce competition in the domestic gas market.

The Australian Competition and Consumer Commission (ACCC) said it found Woodside would continue to face competition from several suppliers after the deal that will create a global top 10 independent oil and gas producer.

Woodside will have a 20% share in the domestic gas market after the deal and will continue to compete with Chevron (CVX.N) and Santos (STO.AX), as well as smaller suppliers including Shell (RDSa.L) and ExxonMobil (XOM.N), the ACCC said.

Woodside plans to put the merger to a shareholder vote in the second quarter of 2022. read more

“The clearance from the ACCC announced this morning is an important step as the parties progress towards targeted completion of the transaction in the second quarter of 2022,” a spokesperson for Woodside said.

MARKETS

Western greed fuels China’s domination – Unheard

There is a hypocrisy at the heart of the West’s attitude to China: although we’re constantly warned about the threat from Beijing, our political and corporate elites seem intent on making this century a Chinese one. Unlike in the Thirties, this appeasement isn’t driven by fear and ignorance; it is motivated largely by greed.

And that greed could prove fatal. China’s “civilisation state”, deeply rooted in thousands of years of history, represents the most profound philosophical challenge to liberal values since the end of the Cold War. But our oligarchs choose to ignore this, preferring instead to genuflect to Beijing for financial gain.

The cost of such avarice is slowly coming into focus: China’s economy may surpass the US by as early as 2028, and by some measurements already has. Of course, China deserves credit for its remarkable performance, which is mostly thanks to the efforts of its citizens, in particular its rural migrants, the key fodder for the country’s dominant manufacturing base.

But the Middle Kingdom’s ascendency would not seem as inexorable if not for the efforts of the West’s ‘kowtow crowd’, a group of self-interested cheerleaders and enablers of China’s autocratic state. At the height of the Cold War, Soviet leader Nikita Khrushchev threatened that the USSR would “bury” the West. China’s President Xi can count on the West burying itself.

Comment: This piece is important, especially in light of Wall Street’s continued push to invest in China. The US in not alone in this however, as Germany too is most vulnerable to such pressure as we’ll see in the following article.

Olaf Scholz sparks a China crisis for Volkswagen – The Telegraph

[…] As Berlin shifts to the left under the Social Democrat, Scholz faces a tough balancing act. While seemingly set on taking a stronger stance than predecessor Angela Merkel against the repression of Uyghurs in Xinjiang province, Germany also relies on China as its largest trading partner.  

As the new coalition of Social Democrats, Greens and Free Democrats carve out their approach towards the world’s second-largest economy, it could spell pain for Volkswagen. Volkswagen relies on China as its biggest market, while Chinese consumers buy more of its cars than any other brand. That partnership has been forged over the past four decades as China sought Germany’s industrial expertise and Volkswagen tapped into the world’s largest customer base, which was steadily growing in wealth.

[…] As Germany’s new coalition gets to work, the prospect of it ramping up pressure against Beijing could be all the more likely with the Greens – a party known for taking a tougher line on China than the outgoing Christian Democratic Union. Critics blamed Merkel for continuing to allow investment to flood into Europe’s largest economy from Beijing, without sufficiently fighting against accusations of more than one million Uyghurs being detained in re-education camps.

[…] But Berlin may be cautious of dampening relations with Volkswagen, which employs almost 300,000 staff in Germany and supports several more from suppliers.

Its size and political power is significant. German politicians lean on the support and success of companies such as Volkswagen for votes. Other influential employers are also under threat including Adidas, Daimler and Siemens that all count on China for more than 10pc of sales, according to Dr Hilbert.

Meanwhile, selling high-margin products overseas has helped protect jobs and shield Germany’s economy, while facing up to the Asian giant can lead to damaging trade wars as relations unravel.

Comment: Companies which have sizable percentages of their profits coming from China are effectively the best agents the CCP could hope for. This is particularly true for German companies, as its economy is also export driven and, as stated in this article, the larger companies could have a major influence over the politics.

China’s Anti-Monopoly Crackdown Is Just an Excuse – Barron’s

Is China really cracking down on monopolies? The record-breaking fines handed out in recent months certainly suggest so. But as usual in China, the rules apply differently to state-owned firms than to private ones.

In March, the powerful State Administration of Market Regulation, or SAMR, fined 12 companies for “illegal monopolistic behavior.” Those firms included the search engine Baidu and the tech giant Tencent. In April, SAMR fined Alibaba $2.8 billion for antimonopoly violations; in October, it fined the shopping platform Meituan $530 million for similar issues. And last month, amid discussions of strengthening the country’s Anti-Monopoly Law, Beijing opened an Anti-Monopoly Bureau. “Monopoly is the great enemy of the market economy,” the Chinese Communist Party mouthpiece the People’s Daily proclaimed, after the announcement of the Alibaba fine. 

True, but China is not a market economy, nor is it moving in that direction. The Party is using the excuse of an anti-monopoly crackdown to increase its influence over private businesses, especially those in the internet sector. The Party believes—rightly, as it turns out—that nimble, innovative private firms jeopardize the state sector’s economic dominance. So the Party is intervening to maintain its control—and succeeding.

Comment: This is the other big argument against investing in China and there is no way to shield an investment from them. After all, the CCP apparatchiks are powerful enough to boss around Chinese companies listed in the US and that should be enough to warn foreign companies about the pitfalls of investing in the Chinese market directly. 

Hyundai overhauls management in electric vehicle push – FT

Hyundai Motor has replaced its top foreign executives and made more than 200 promotions in its biggest personnel shake-up ever as the South Korean automaker pushes into electric vehicles and self-driving cars.

The management overhaul marks a generational change after Euisun Chung, 51, took over at Hyundai last year from his ailing father, Chung Mong-koo, who had run the company for two decades.

The move comes days after Toyota announced it would pour $35bn into a shift toward electric vehicles as the Japanese carmaker prepares to take on rival Tesla. Both Hyundai and Toyota had been criticised for moving slowly to adopt carbon-neutral technologies.

Comment: This radical restructuring is a great signal of intent, coupled with the $51bn investment announced last year. Together with Toyota, or more broadly the other Asian carmakers, Hyundai could prove to be disruptive for the market, just like they were when they first entered the scene.

TECH

Tsinghua rescue plan opposed by major shareholder of chipmaker – Nikkei Asia

A major investor in China’s Tsinghua Unigroup is fighting a plan to rescue the debt-ridden semiconductor producer, warning that it could result in the loss of 73.4 billion yuan ($11.5 billion) in state-owned assets.

Beijing Jiankun Investment Group, which owns 49% of Unigroup, issued a statement Wednesday objecting to the restructuring plan from a consortium led by Beijing Jianguang Asset Management and Wise Road Capital. The deal involves an injection of 60 billion yuan from the strategic investors.

Jiankun, which is led by Unigroup Chairman Zhao Weiguo, noted that the state owns the tech company through the 51% stake held by Tsinghua University, a leading research school controlled by China’s Education Ministry. Tsinghua University is also Chinese President Xi Jinping’s alma mater.

But retail investors ultimately own the entirety of Beijing-based private equity firm Wise Road, as well as 49% of Jianguang, Jiankun said, citing the potential outflow state assets if the two funds took over Unigroup’s business. Jianguang is partly owned by the state.

Jiankun has reported its objections to the Central Commission for Discipline Inspection — the Communist Party’s anticorruption body — as well as to the investigative arms of the State Council cabinet and the Finance and Education ministries. Jiankun said it has asked the Finance Ministry to provide a valuation of Unigroup’s assets.

Unigroup was once at the forefront of China’s chip industry and hailed as a national champion, but the tech conglomerate defaulted on debt after investments failed to bear fruit. Government-appointed administrators selected the Jianguang-Wise Road restructuring plan on Dec. 10.

Comment: Surprising how a company in a sector seeing excess demand and rising prices can find itself into trouble. Then again, it is not the first case of mismanagement and it won’t be the last. 

Speaking of the shortage: Intel’s chief executive officer said it is set to last until 2023, stressing that demand continues to soar amid the pandemic, even as semiconductor manufacturers rush to expand production. He said so while visiting Malaysia, where Intel announced a $7.1 billion investment to expand its back-end manufacturing capabilities and advanced packaging lines in the country over the next 10 years. 

Seoul has ‘much more to offer’ in the global chip supply chain: US diplomat – Korea Herald

South Korea is an essential partner in the global semiconductor supply chain and has much more to offer, a visiting senior US diplomat in charge of economic and trade policy said Friday. 

Jose Fernandez, US undersecretary of state for economic growth, energy and the environment, made the remark at the start of the sixth Senior Economic Dialogue with Second Vice Foreign Minister Choi Jong-moon. Marking his first trip to the region since taking office in August, his weeklong trip to Tokyo and Seoul is widely viewed as part of Washington’s efforts to effectively corral allies to counter China’s ambition to dominate key industries, including semiconductors. 

During the meeting that lasted more than three hours, the two sides touched on various issues, including the supply chain, infrastructure, COVID-19 response, climate change and science technology, among others, according to the Foreign Ministry. Specifically, the two sides also proposed to strengthen cooperation to develop key technologies, including the 5G and 6G networks, artificial intelligence and biotechnology. 

“The semiconductor shortages that were caused by COVID-19 highlighted the critical functions that these chips play in our daily lives and put a spotlight on Korea as a leader and essential partner in the global semiconductor supply chain,” Fernandez said at the start of the meeting. “We firmly believe that Korea has much more to offer to the global economy. You’ve got world-class technical expertise, high-quality transparent investment and foreign legislation and more.”

TRADE

UK and Australia sign trade deal to open ‘new frontiers’ – The Times

The UK and Australia have signed a trade deal to cut tariffs on imports of wine and surfboards and make it easier for young Britons to work down under.

The deal, announced by the prime ministers Boris Johnson and Scott Morrison in June, was finalised at a virtual signing ceremony. But the agreement, the first to be negotiated from scratch since Brexit, is expected to add little to economic growth. Critics have warned about its impact on British farmers and questioned its commitments on tackling climate change.

The final deal was signed by Anne-Marie Trevelyan, the international trade secretary, last night. She said it was “a landmark moment”. Trevelyan said the deal “is tailored to the UK’s strengths, and delivers for businesses, families, and consumers in every part of the UK — helping us to level up.”

The agreement gives UK firms guaranteed access to bid for an extra £10 billion worth of Australian public sector contracts a year and allows those aged 18 to 35 to work and travel in Australia for up to three years at a time.

Officials said the deal removes tariffs on all UK exports while making Australian products such as Jacob’s Creek and Hardys wines, Tim Tam chocolate biscuits and surfboards potentially cheaper for British shoppers.

Comment: While the impact on GDP is very marginal, estimated between 0.01 and 0.02%, trade is a vital component for the UK’s move towards the Indo-Pacific.