Asia Pacific Macro – December 20, 2021

| December 20th, 2021

Today’s main topic is the Chinese economy, with an article from the Financial Times, which would make the editors of the Global Times impressed, despite the reality of the situation. To disprove that rosy picture, PBOC has once again enacted an accomodative measure, by cutting the one-year loan prime rate, while there are indicators such as steel and the offshore bond defaults showing the true extent of the disaster happening in the property sector. The FT piece also highlights another issue, namely how influential China is in many Western institutions. Today’s piece provides the examples of the IMF and of how many US businesses reacted to the Xinjiang import ban (with more of this present in today’s Geopolitics)

CENTRAL BANKS/IMF

How China’s global ambitions almost unseated an IMF chief – FT

The furore over whether IMF managing director Kristalina Georgieva manipulated data to favour China in her previous role at the World Bank nearly cost the Bulgarian economist her job.

Whatever the truth of the allegations, no one doubts China’s determination to make its mark on the multilateral institutions that underpin the global financial system. “China wants a bigger voice and more chairs at the table,” said Yu Jie, senior China research fellow at Chatham House. “It wants to brand itself as the leader of the global south.”

China’s geopolitical ambitions have stepped up in recent months, from outlawing trading in cryptocurrencies while simultaneously promoting the digital renminbi, to trade measures that target countries with which it disagrees. These included closing its doors to Lithuanian exports this month after the Baltic state allowed a Taiwanese representative office to open in Vilnius.

Just as important are China’s financial and diplomatic ambitions at the UN and Washington-based institutions such as the IMF and World Bank, which lie at the heart of the global system designed by western countries after the second world war.

Comment: Aside from the fact that both the IMF and World Bank were born at Bretton Woods, the issue of China using international institutions to forward its agenda has been at the forefront for some time. 

China has used the global system to further its agenda since the 1971 Resolution which recognized the PRC as the sole representative of China at the UN, having managed to circumvent US efforts to counter such a Resolution. 

It also highlights the inherent weaknesses of the system, designed at a time when a Communist China did not actually exist (another example of which is the permanent Security Council Seat, which was granted to the Republic of China/Taiwan as one of the victors of WWII). 

The whole system should require an extensive review, preferably before a war (as happened to despite the League of Nations).

RBA should stick to fighting inflation, and nothing else – AFR

The economic history of many countries shows that when economies are stimulated by a blown-up money supply that runs into inelastic supply, the result is serious and unmanageable price inflation.

Apart from the Whitlam-Fraser calamity of the 1970s, when the consumer-price level rose for a while at a clip of more than 15 per cent a year and “masochistic monetary restraints” under the Fraser government inflicted pain on businesses and home borrowers, living Australians have no experience with real inflation.

But history demonstrates that major waves of inflation – which may last decades – inflict great pain: unjust wealth redistribution from poor to rich; extreme poverty; growing homelessness; rises in crime, illegitimate births, and alcohol and drug abuse; the popular rejection of freedom and other fundamental values; even insurrections and a greater likelihood of international armed conflict. Credit for private enterprise becomes unpredictable. Governments often go bankrupt. Policy-induced recessions “we have to have” inflict repeated hurt, but often fail to restore stability.

Australia faces such an inflation wave with one major handicap: the legislator has given the Reserve Bank multiple and confusing roles. The Reserve Bank of Australia Act 1959 (article 10) is to ensure not only the stability of the currency, but also the maintenance of full employment and economic prosperity, as well as advancing the welfare of the people of Australia.

In other words, the Reserve Bank board is expected not only to attain three in the short run often incompatible economic objectives (price stability, high employment, and economic growth), but also the feel-good, wishy-washy aim of promoting “the welfare of the people” – however that may be defined.

Comment: While this is about the RBA, the theme of central bank having broad mandates is present in most of the major Western democracies and will become increasingly important as time goes by. 

Chinese banks cut borrowing costs to counter economic slowdown – Bloomberg

Chinese banks lowered borrowing costs for the first time in 20 months, foreshadowing more monetary support to an economy showing strain from a property slump, weak private consumption and sporadict virus outbreaks.

The one-year loan prime rate was set at 3.8% versus 3.85% in November, the first reduction since April 2020, according to a statement from the People’s Bank of China on Monday. The five-year loan prime rate, a reference for mortgages, was unchanged at 4.65%.

The cut comes as the central bank and government increase support for the economy and follows the PBOC’s decision earlier this month to cut the amount of cash banks must hold in reserve, which freed up 1.2 trillion yuan ($188 billion) of cheap long-term funding for banks. Monday’s decision means the strongest companies will be able to borrow at a slightly cheaper rate and also reinforces the shift to looser policy as the leadership aism for stability in 2022.

Comment: Yet another easing measure from the PBOC. While the cut is marginal, being only 5 basis points, it is important due to several other central banks considering the exact opposite. It is also important in light of the following article from the Financial Times, which effectively celebrates ‘capitalism with Chinese characteristics’. 

ECONOMIC DATA

Capitalism with Chinese characteristics is no bad thing – FT

The Chinese Communist party has been on something of a charm campaign in the US. Amid all the stories about a silenced tennis star, a #MeToo scandal, disappeared billionaires and Uyghur concentration camps, Americans are also beginning to hear about Beijing’s efforts to reduce inequality and create a healthier and more balanced type of economic growth. China’s “common prosperity” message has filtered through mainstream television shows such as 60 Minutes on CBS and national newspapers.

And while there are rightful doubts about whether an authoritarian government with a dicey human rights record, a history of debt-fuelled growth and a ruling class with its own vested interests in the old system can implement better policies, there are nonetheless important lessons that America should take from China’s efforts to do so — in particular, the focus on quality over quantity in terms of growth.

Comment: “Common prosperity” is going so well it turned into “moderate prosperity”, with several cracks putting the economy at further risk (as the article below suggests). Also: the Chinese authorities are still targeting a high level of GDP because “quantity has a quality of its own”, as Josif Stalin would say. The whole system relies on economic growth to keep the system up, which is why they have being fuelling the property sector as we have seen on more than one occasion. 

George Magnus countered the idea of Chinese authorities not inflating the property bubble, with also Michael Pettis pitching in with his own thoughts. Quoting from Pettis’ tweets:

‘China’s economy is smaller than either, and yet its real estate is valued more than twice that of the US and three times that of Europe, which makes it a little rich to claim that Beijing has moved more preemptively than other countries to deflate the property bubble.

It’s certainly a good thing if Beijing is taking steps to rein it in, but the truth is that even as many policymakers worried openly about soaring real estate for years, they nonetheless allowed (encouraged?) it to inflate to an astonishing level before they finally did.’

Still it is true that America should take important lessons from China, namely that concentrating all the power in the hands of too few people, with a political agenda, could cause several problems. This is of course notwithstanding the “dicey human rights record”, which is an appalling way to describe the kind of behaviour held by the CCP on more than one occasion. 

In China, Job Cuts Mount in Sectors Hit by Tighter Regulations – WSJ

Chinese companies are laying off tens of thousands of workers as Beijing’s regulatory clampdowns weigh on the technology, education and property sectors, which in many cases offered higher salaries than other industries and helped drive economic growth.

Video-streaming services are cutting staff. Companies that offer tutoring are reducing teachers and shutting down apps, and real-estate agents have been let go as China’s housing market slows.

Beijing has unleashed a raft of new regulations on the industries as Chinese leader Xi Jinping seeks to rein in what Chinese officials have described as capitalist excesses.

In the entertainment sector, authorities ordered streaming platforms to ban artists that don’t meet political or moral standards. For-profit education services were forbidden from teaching during weekends and holidays. Property firms faced new rules that restricted how much they could borrow, leading to a liquidity crisis for highly indebted developers.

A slowing economy has added to the pinch on all of these sectors. Average new-home prices for 70 cities fell for a third straight month in November, and consumer spending showed new signs of weakening.

While the overall unemployment rate is lower than it was before the Covid-19 pandemic, economists said that is masking stress in segments of the job market. Joblessness has been rising among young people, and income growth for urban workers hasn’t returned to pre-pandemic levels.

The job cuts mean dimmed prospects for college graduates. That is likely to exacerbate a mismatch in the country’s labor market, with people vying for a shrinking pool of high-paying jobs in urban China, while factory owners struggle to find and retain workers.

Comment: Higher youth unemployment and lower income growth for urban workers are two key data points indicating a weakening economy overall. It is hard to say when those will have a major impact on GDP and other macro data but the cracks are increasing. 

REAL ESTATE

Chinese Developer Kaisa Follows Evergrande Into Restructuring Talks – WSJ

Kaisa Group Holdings Ltd., which in 2015 became one of the first Chinese developers to default abroad, said it had failed to make several payments on dollar bonds as planned, and is talking to creditors about a wide-ranging restructuring plan.

The move sets the stage for parallel debt workouts by two of the mainland real-estate sector’s biggest offshore borrowers, Shenzhen-based Kaisa and China Evergrande Group. EGRNF 5.00% Kaisa said Monday it had $11.8 billion of dollar bonds outstanding, while the tally for Evergrande is nearly $20 billion.

[…] The company said it had been in talks with bondholder representatives about “a comprehensive debt restructuring plan” covering its offshore bonds. It has hired restructuring specialist Houlihan Lokey Inc. as financial adviser, and the law firm Sidley Austin. Houlihan is also advising Evergrande and another developer that recently defaulted, Fantasia Holdings Group Co.

China easing fails to calm Evergrande jitters in property sector – FT

Evergrande’s slow-motion collapse reverberated through China’s property sector on Monday, as property stocks tumbled despite assurances from Beijing it would support “quality” companies.

Shares of Chinese Estates Holdings, a Hong Kong-based property group, dropped as much as 35.2 per cent after a bid to take the company private and reduce its exposure to Evergrande failed.

The group, controlled by the family of Hong Kong billionaire Joseph Lau, had been a significant investor in the world’s most indebted developer and its other ventures, including its electric vehicle unit.

Comment: Commodities too have been impacted by the slump in the property sector, with the following article showcasing how steel (another key product in China) was affected. The sector has also impacted heavily the bond market, as shown by the amount of offshore bonds’ having defaulted.

ENERGY/COMMODITIES

China’s property distress sours steel sector in warning sign for economy – Reuters

Debt problems at a major Chinese property developer have now spilled over into a vital artery of the nation’s industrial engine – the steel sector – and started to ripple through to other critical parts of the world’s second-largest economy.

The spreading balance-sheet crisis at real estate firms is a warning for policymakers as a swing in the fortunes of the steel industry would have significant repercussions for China’s economy, with cement, glass, and household appliances all vulnerable to demand drops.

Already, steel prices are down from their record highs seen earlier this year due to easing demand from construction activities, which account for over half of the metal’s consumption, while steelmakers’ share prices have also been hurt. read more

Comment: Signs of the pain in the Chinese economy going upstream from the property sector, which may force the CCP to boost stimulus.

India halts futures trade in key farm commodities in bid to calm inflation – Reuters

India’s market regulator ordered a year-long suspension of futures trading in key farm commodities on Monday, as the world’s biggest importer of vegetable oils, and a key producer of wheat and rice, struggles to tame food inflation.

The halt, India’s most dramatic move since it allowed futures trade in 2003, threatens market confidence by making hedging difficult for traders, weeks after farmers ended a year of protests that led to the scrapping of contentious reforms. read more

“It’s like shooting the messenger, but we have sympathy with the government, because they were worried over edible oil inflation,” Atul Chaturvedi, president of trade body the Solvent Extractors Association of India, told Reuters.

In its order, the market regulator told commodity exchanges not to launch futures contracts of soybean, soyoil, crude palm oil, wheat, paddy rice, chickpea, green gram, rapeseed and mustard for a year.

Comment: As stated in the article, this is indeed like shooting the messenger as closing futures trading does not solve the underlying issues fuelling food prices.

MARKETS

December marks fresh record for offshore bonds – Bloomberg

Offshore bond defaults by Chinese companies have hit a high of $13.3 billion this year, fuelled by December’s record amount of repayment failures, according to Bloomberg-compiled data available since 2018.

The year-to-date tally includes 26 dollar bonds and four denominated in the euro, with about half contributed by the nation’s distressed property developers. Quickening the pace of debt blowups is a record $38 billion that Chinese firms have failed to make good this month on notes issued overseas, surpassing the previous high of $2.7 billion in January. 

U.S. ban on Xinjiang imports to set off supply chain scramble – Nikkei Asia

With a bill that would in effect ban imports from China’s Xinjiang region now awaiting U.S. President Joe Biden’s signature, companies from apparel vendors to solar panel makers are getting ready to rework their supply chains.

The legislation, passed by the Senate on Thursday, blocks finished goods and material from the region, citing concerns about forced labor by Uyghurs. Xinjiang supplies 20% of the world’s cotton and 45% of all silicon usable in solar cells.

This could hit companies like China’s Longi Green Energy Technology, the world’s largest solar panel maker, which derived 16% of its operating revenue from the Americas in 2020. The ban is set to take effect in 180 days after the bill is signed into law.

Xinjiang is a major production center for a wide variety of items, including electronic components, shoes, gloves, noodles, printed material, toys and wigs. Companies that operate in the U.S. will need to look out for forced labor two or three levels down in their supply chains.

The curbs allow imports of Xinjiang goods only with “clear and convincing evidence” that they were not made with forced labor — which some experts say is essentially impossible, as Beijing’s tight grip on information makes third-party reviews less reliable. Manufacturers may end up seeking alternatives elsewhere.

Comment: It will take some time to see the true impact of this bill, both for the US market and for the Chinese exports coming from Xinjiang. One thing is certain: such a bill is yet another step towards a diminished reliance on China. The following piece, from the Spectator, argues precisely in favour of such a position, in light of how businesses reacted to the bill in question. 

Ending our corporate dependence on China – Spectator

In the toxic world of American politics, the bipartisanship showed by the House of Representatives last week in overwhelmingly passing a bill to stop the import of Chinese products made with forced labor from Xinjiang is a rarity. The428-1 vote on the Uyghur Forced Labor Prevention Act, the second in as many years, is the clearest indicator yet of how a new era in American relations with the People’s Republic of China (PRC) is developing. It’s one where national security and moral concerns find common ground in opposing the oppressive and predatory policies of the Communist Party of China (CPC).

Yet while American politicians are at last beginning to grapple with the threat posed by unrestrained engagement with China,American companies remain conflicted, pursuing their bottom lines in the world’s most important manufacturing country while professing their opposition to abhorrent policies they would never countenance in the United States, Europe, or Africa.Widespread media reports indicate that companies such as Apple, Nike, and Coca-Cola have either lobbied against the Uyghur labor bill or (in Washington speak) “suggested edits” to the legislation.

This current divide between American corporations and the government reveals a larger fracture in American society. It’s one that presages an ongoing battle between those who seek to reduce the threat to US interests posed by our half-century-old China policy and those who are too deeply embedded with the PRC to easily extricate themselves or who continue to benefit from unlimited engagement with China.

China’s US Enablers – Gatestone Institute

One of the sadder realities of modern business is seeing how China has managed to co-opt and make hostages of American capitalists dazzled by the riches of the Chinese market. Ray Dalio of Bridgewater Associates is just the latest financial titan to play the “Who am I to judge how another country runs itself?” card.

For Dalio, moral relativism is great for business.

Bridgewater’s business is investment funds. Having more of those in China means more money for Bridgewater. It is really that simple. In China, however, business deals are not done with fellow capitalists who are dedicated to economic liberty and the free flow of capital to its most rational uses. They are conducted with western-educated, government-tied, military-tied, intelligence-tied Chinese kingpins and princelings who understand their ultimate loyalty is to the Chinese Communist Party.

After the Wall Street Journal reported that Dalio had raised $1.25 billion to create Bridgewater’s third investment fund in China, Dalio was asked by a CNBC host the frequently asked questions about doing business in China, given its many human rights abuses. Dalio demurred, claiming “I can’t be an expert in these types of things.” When asked in the same interview about the Chinese regime “disappearing” tennis star Peng Shuai from the public view for a month, Dalio stuttered out the explanation that the Chinese regime is really “like a strict parent.” He even tossed in the moral relativist’s favorite argument:

“And then I look at the United States and I say, well, what’s going on in the United States and should I not invest in the United States because other things, err, human rights issues or other things?”

For a man once described by former FBI director James Comey as “one smart bastard,” Dalio’s willfully ignorant defense of Chinese communism looks pathetic. It is actually even worse than that — it is the calculated hypocrisy of the rope-selling capitalist.

Comment: This, and the previous article, show the hypocrisy of US businesses and Wall Street. On home soil, several of these use their clout for social causes but when it comes to China they look solely at their pockets.

SenseTime Revives IPO Days After U.S. Investment Blacklist Forced Delay – WSJ

Chinese artificial-intelligence giant SenseTime Group Inc. filed revised documents for a Hong Kong initial public offering and said it still plans to list before the end of the year, after the U.S. government moved to restrict American investors from buying its stock

[…] SenseTime has stepped up its use of cornerstone investors to support the deal. Cornerstone investors are common in large Hong Kong IPOs. They commit to buy a set dollar amount of shares wherever in the range a deal prices, and agree to hold that stock for six months or more, serving as an endorsement of the deal to others.

At the midpoint of the deal’s price range, cornerstone investors would now account for about 67.7% of the deal, up from 59.7% previously. Those figures assume that underwriters don’t exercise a so-called green shoe option to boost the deal’s final size by 15%.

SenseTime still has nine cornerstone investors, though five of the nine have changed. Some Hong Kong-based hedge-fund managers, including Pleiad Investment Advisors Ltd. and WT Asset Management Ltd., are no longer participating. The biggest new cornerstone is Xuhui Capital, a state investment vehicle established earlier this year that is funded by the state-owned Assets Supervision and Administration Commission of Shanghai Xuhui District.

The company added new information to its prospectus, warning that current and potential U.S. restrictions “could limit our group’s ability to raise funds, in particular, from U.S. investors, and the liquidity and market price of our publicly traded securities” could be hurt.

Comment: The revised IPO shows the US a way to hurt companies, as SenseTime had to increase its reliance on cornerstone investors, with the largest being state-owned. This detail also will not put to rest the concerns underlying the blacklist. 

China pressures Germany’s Continental to cut out Lithuania – Reuters

China is pressuring German car parts giant Continental (CONG.DE) to stop using components made in Lithuania, two people familiar with the matter told Reuters, amid a dispute between Beijing and the Baltic state over the status of Taiwan.

The targeting of Continental is an example of how the China-Lithuania diplomatic spat is spilling over into business in an era of global supply chains and affecting Germany’s car industry, a lucrative pillar of Europe’s biggest economy.

The Chinese government, which views self-ruled Taiwan as its territory, downgraded diplomatic ties with Lithuania last month after the opening of a representative office by Taiwan in Vilnius. Lithuania’s ruling coalition had also agreed last year to support what it described as “those fighting for freedom” on the island.

Continental, one of the world’s largest car parts maker, has production facilities in Lithuania, making electronic parts such as controllers for vehicle doors and seats, and exports to clients globally including China.

German industry sources said the pressure was not only being felt by Continental but up to a dozen companies, mainly from the automotive and agricultural sectors, they said.

Comment: As said by Harald Malmgren in the tweet below, it may hamper the relationship between China and the German companies which are invested in the Chinese market. A lot will depend on whether said companies will value the Chinese market more than the cost of relocating production away from Lithuania, as some may decide to simply kowtow and move. 

China to tighten antitrust legal enforcement – new antitrust bureau head – Reuters

China’s antimonopoly bureau will step up legal enforcement against monopolistic behaviour and push forward the amended antimonopoly law to improve the regulatory framework, said Gan Lin, chief of the national antimonopoly bureau.

China last month elevated the seniority of the market regulator’s antitrust unit, the National Anti-monopoly Bureau, and appointed Gan as chief, a move which would help antitrust investigators gain resources when examining mergers and acquisitions. read more

Gan said China still faces “insufficient punishment” for some monopolistic activities, while some antitrust regulations remain at the elementary level.

“With the rapid development of the digital economy, and new industries and business models emerging one after another, there are great differences in competition modes between the new and the traditional economy,” Gan said in an interview published on the official website of State Administration for Market Regulation (SAMR) on Sunday.

Comment: While there may be a genuine concern, the possibility of using antitrust laws to punish companies is there. 

Shanghai-London Stock Connect to include Germany, Switzerland – Reuters

A stock connect scheme linking Shanghai and London will be broadened to include Shenzhen-listed companies, as well as capital markets in Germany and Switzerland, China’s securities regulator said on Friday.

Expanding the Shanghai-London Stock Connect scheme helps facilitate cross-border investment and promotes the opening-up of China’s capital markets, the China Securities Regulatory Commission (CSRC) said in a statement.

Under the current scheme, companies traded in Shanghai and London can list on each other’s bourses, by selling so-called depository receipts. Chinese companies can raise fresh capital, but U.K.-listed companies can not, only allowed to issue Chinese Depository Receipts (CDRs) backed by existing shares.

On Friday, CSRC published revised rules for consultation, allowing offshore companies to raise fresh capital under the scheme, which will expand to include Germany and Switzerland.

Comment: Given what has happened to US-listed Chinese companies, like Didi, making such investments easier could potentially backfire without first addressing issues like transparency, proper auditing et al. 

With this said, as reported by the Financial Times, Chinese ETFs such as ChinaAMC MSCI China A 50 Connect, E Fund MSCIChina A 50 Connect ETF and China Universal MSCI China A 50 Connect ETF, were among the top 15 globally for net inflows in November, according to ETFGI, aLondon-based consultancy, pulling in a combined $4.6bn.

More strikingly still, KraneShares CSI China Internet ETF (KWEB) has seen $7.8bn of net inflows since mid-February, more than twice as much as any other US-listed thematic ETF, according to Goldman Sachs.

Such net inflows show that global investors still view China positively, although the validity of this choice remains in question.

SUPPLY CHAINS

Toyota to cut production by 20,000 cars in Japan next month – Nikkei Asia

Toyota Motor will suspend operations on seven production lines at five factories in Japan next month due to a chip shortage, the automaker said Monday.

The suspension will reduce Toyota’s output by about 20,000 vehicles amid procurement delays for semiconductors and other parts. The Japanese automaker said it will maintain its global production plan of 9 million vehicles for the fiscal year ending March 2022. Toyota’s January production plan, announced in mid-December, which called for 800,000 cars to be made globally, will also be carried out.

[…] In December, Toyota expects to reduce output by about 22,000 vehicles at its domestic plants due to bottlenecks in parts procurement in Southeast Asia.