Asia Pacific Macro – December 23, 2021

| December 23rd, 2021

The most important theme of today’s issue is stimulus and the dangers that debt poses to the economies, with these two aspects tied together in an op-ed from the AFR regarding the zombie economy, and what could happen in case of a tightening. Other important themes are China hoarding commodities, like grains and lithium, while its trade imbalance, which is way off the mark set in the Phase One deal with the US; yet more developments on Evergrande’s woes and more pain within the Chinese tech companies.


1.1 Japan PM Kishida calls for BOJ efforts to hit inflation target – CNA

Japanese Prime Minister Fumio Kishida said on Thursday he hoped the central bank continues to make efforts to achieve its 2per cent inflation target and work closely with the government on economic policy.

“Japan’s economy can restore healthy growth by ensuring the Bank of Japan’s monetary policy and the government’s fiscal policy work hand in hand,” Kishida told a seminar. “That’s why it’s important for the two sides to coordinate and communicate closely together,” he said.

Comment: Meanwhile, his government is going to unveil tomorrow a record 107.6 trillion yen (US$943 billion) annual budget for the 2022 fiscal year. Contextually, they revised the GDP growth upwards to 3.2%, from 2.2%. expecting the pace of recovery from the coronavirus pandemic-caused slump to pick up following a weaker-than-anticipated improvement in the current year.

The projected pace of growth in gross domestic product, the total value of goods and services produced in the nation, will be used as the basis for the government’s tax revenue estimates as it draws up the draft budget for fiscal 2022 starting April, which Prime Minister Fumio Kishida’s Cabinet is set to approve on Friday.

All this shows that, despite the lack of results, the Japanese policymakers have continued since the crisis of the early ‘90s to trying to put an end to the period of anaemic growth and inflation. This time, however, they may finally reach the 2% inflation target but it may not be the one they were looking for, as the Fed said. 

1.2 Housing prices, household debt are major risks to financial stability: BOK – Yonhap News

South Korea’s financial system has remained stable, but a rise in housing prices and high household debt serve as major potential risks to financial stability, a central bank report showed Thursday.

In a biannual report on financial stability, the Bank of Korea (BOK) called for policy efforts to stabilize the housing market and curb the growth of household debt, raising the need to ease the high level of financial imbalances.

“Since the first half of this year, the country’s financial system has remained relatively stable, but gains in home prices and the high level of household debt serve as vulnerability to financial stability,” the report said.

The BOK said volatility in the country’s financial market has recently heightened, but its financial system has largely remained stable amid the economic recovery and an improved capability to repay foreign debt.

The financial stability index, a gauge of overall stability in the financial system, reached 5.1 in November, rebounding from the lowest level of zero in June. But the index still stayed below the warning stage threshold of eight.

The report said growing household debt and rising home prices are latent risks to the financial system as they can hurt financial stability over the medium term.

Comment: The issue of debt, coupled with all the other conditions present in the current economy, are a cause of concern. The reason why is well explained in the following op-ed, which focused on the zombie companies which have been allowed to survive all this time thanks to cheap financing.


2.1 Be afraid: the zombie economy can’t last – AFR

The contradictory cocktail of extremely high inflation, zero interest rates, tight labour markets, robust wages growth, elevated inflation expectations, and record asset prices should have you worried. But the party may not be over just yet…

As the comparatively more benign omicron variant of the virus reinforces the new normal of coexisting with the disease, and sluggish central banks get further behind the curve, this bull market could elongate for some time.

That’s what we saw in 2016 when the US Federal Reserve commenced a hiking cycle, lifting its cash rate from near-zero to above 2 per cent by late 2018. In 2016 and 2017 equities and credit spreads both rallied. It was not until the latter stages of this tightening process, when the Fed’s cash rate rose materially above 1 per cent and the 10-year government bond yield pierced 2.5 per cent, that credit and equities turned.

Current conditions are, however, different because of the absence of an inflation shock between 2016 and 2018. To better understand the downside risks, it’s worth considering the deep disconnects in both the data and monetary policy settings.

[…] Following the “tech wreck”, the Fed quickly reacted via the infamous “Greenspan put”, slashing its cash rate from 6.5 per cent (!) all the way down to 1 per cent by 2003. The Fed could provide this support because core inflation was benign and sitting around its 2 per cent target.

Since 2000 there has been a correlation between rising equity valuations and declining long-term interest rates, which makes sense given the latter are the discount rates used to price the present value of a company’s future cash-flows.

The currently very low US 10-year government bond yield of 1.5 per cent, which is a key discount rate proxy, is less than half its average level since 2000, and a full 100 basis points below the Fed’s 2.5 per cent estimate of its so-called “neutral” cash rate. This is the interest rate the Fed would maintain if inflation was bobbing around its target and the labour market was fully employed. It is conspicuously much lower than the interest rates required to bring a bona-fide inflation outbreak back to earth.

This is where the financial market outlook gets gnarly. There is an unprecedented divide between the current US inflation pulse and the monetary policy settings of the world’s most important central bank. The Fed’s preferred measure of core inflation is running at 4.8 per cent on a six month annualised basis or 4.1 per cent year-on-year, which is the highest level recorded since the early 1990s (and double the Fed’s target).

To make matters worse, burgeoning price pressures are impacting the way households think about their future with consumer inflation expectations rising to between 4-6 per cent, the loftiest levels since the early 1990s.

Comment: As of now, a sizeable percentage (15-20%) of all US listed businesses are zombies, kept alive by the current environment of free money. For this reason it will be quite a shock to see an actual tightening (and not the wishy washy response from the Fed, as we already commented on here), given that those companies would find themselves unable to remain in business. 

The question then becomes: are policymakers willing to pull the trigger and accept the consequences or, as Biden recently showed in one of his press conferences, care only about the stock market? 

Of course the issue is not only confined to companies but to private citizens too, as people took advantage of low borrowing rates. Even now, there are accelerations in borrowing as in case of Australia, which saw private-sector credit growth go up 0.9% month-over-month in November, with personal loans up 0.6% and housing loans up 0.7%.

2.2 Budget 2022: Fiscal support crucial in deciding India’s growth trajectory, says JM Financial Institutional’s Dhananjay Sinha – Money Control

[…] Despite the expected rebound in real GDP growth to 9 percent in FY22 from a contraction of 7.8 percent in FY21, the big picture is that India’s GDP trajectory remains fairly muted. The GDP trend after the Covid shock, including the Q2 print, is flat (0.3 percent YoY) compared to the pre-Covid trend of 4.5 percent. Thus, if one extends the pre-Covid real GDP, which was already weak (4.3 percent), the post-Covid trajectory so far is 11.3 percent lower, widening from -10.4 percent in Q1. This GDP gap is due to lower domestic absorption: private consumption is 15.6 percent lower than the pre-Covid trend and fixed capital formation is 9 percent lower.

[…] We believe fiscal support will be very crucial in deciding India’s growth trajectory if private consumption and private investments remain on a modest recovery path. Therefore, the Budget should focus more on providing support on the demand side compared to the supply side. Revival in the damaged informal sector and small businesses that create more jobs will be crucial.

High domestic inflation despite sub-trend GDP is a concern, which hints at supply bottlenecks at the individual industry level. Offsetting this may require incentives to promote greater domestic supply, without undertaking protectionist measures.


3.1 China hoards over half the world’s grain, pushing up global prices – Nikkei Asia

Less than 20% of the world’s population has managed to stockpile more than half of the globe’s maize and other grains, leading to steep price increases across the planet and dropping more countries into famine.

The hoarding is taking place in China.

COFCO Group, a major Chinese state-owned food processor, runs one of China’s largest food stockpiling bases, at the port of Dalian, in the northeastern part of the country. It stores beans and grains gathered from home and abroad in 310 huge silos. From there, the calories make their way throughout China via rail and sea.

China is maintaining its food stockpiles at a “historically high level,” Qin Yuyun, head of grain reserves at the National Food and Strategic Reserves Administration, told reporters in November. “Our wheat stockpiles can meet demand for one and a half years. There is no problem whatsoever about the supply of food.”

According to data from the U.S. Department of Agriculture, China is expected to have 69% of the globe’s maize reserves in the first half of crop year 2022, 60% of its rice and 51% of its wheat.

Comment: Given the sheer size of the reserves, either the CCP is preparing for something or it is in unadulterated panic mode, fearing not enough foodstuffs to feed the population and subsequently facing social unrest. The simplest explanation is the latter, as it would fit with their modus operandi on the matter. 

3.2 China claims victory in battle for British lithium miner – The Telegraph

The Chinese takeover of a British lithium miner is on the verge of success after a major investor backed the deal. Jiangxi-headquarted Ganfeng Lithium needs 75pc support for its £285m takeover of Bacanora to succeed, at which point it would delist the firm from the stock market. 

It has already had approval from shareholders with 45pc of the stock, and owns 28.9pc of the shares itself, bringing the total to 73.9pc. However, The Telegraph understands a major shareholder controlling about 5pc of the shares, and who had been holding out, will now back the deal.

The takeover comes despite fears that it will put even more of the world’s lithium supplies under Chinese control. MPs have claimed the deal raises security concerns, while a group of retail investors accuse Ganfeng of undervaluing the company.

Chinese companies already control about 90pc of rare earth mines globally and make 80pc of lithium ion batteries.

Comment: If successful, it would make this increasingly important industry even more concentrated than it already is. Eventually, the Western governments should reflect on whether it is wise, in light of their green mandates, to grant so much leverage to companies which are inevitably bound to the CCP wishes. 


4.1 China Evergrande Says State-Backed Risk Team Will Engage With Creditors – WSJ

Debt-laden China Evergrande EGRNF 14.74% Group said the committee helping steer its massive restructuring is deploying extensive resources to help contain risks and will engage with creditors.

The reassurance echoes a pledge earlier this month to work with holders of offshore debt and follows a sustained selloff in the company’s stock and bonds, with Evergrande shares recently hitting a series of record lows.

“In view of the risks the group is currently facing, the risk management committee of China Evergrande Group is utilizing its extensive resources and will actively engage with the group’s creditors,” the company said in a filing to the Hong Kong exchange Wednesday.

Comment: Given the run on its assets already started by provincial governments, it is debatable that a committee made of SoEs would provide any meaningful insurance to offshore creditors. Moreover, offshore creditors are still kept in the dark regarding Evergrande’s current finances but most likely very few people have an actual idea, given the complexity and size of the group. 

This is however one of the multiple problems Evergrande is facing, as it is pressured by the authorities to pay workers on time (same goes for the property sector as a whole). In total, Nomura estimates developers and their contractors need to pay 1.1 trillion yuan ($173 billion) in deferred wages to migrant construction workers by the end of the Lunar Year, which falls on January 31.

Another category taken into consideration by the authorities are suppliers, once again showing that offshore creditors will most likely get the short end of the creditor stick, together with shareholders, who have already been pounded.

  1. TECH

5.1 China gaming crackdown: Baidu to lay off over 100 from its gaming unit amid regulatory crackdown and heavy losses – SCMP

Chinese online search engine Baidu is laying off at least 100 employees from its video games unit as the company moves to trim losses amid Beijing’s ongoing crackdown on the sector, according to two sources briefed on the matter.

The Beijing-based company will significantly downsize its core games development team and terminate services to games developed by outside studios, two separate sources, who requested anonymity as they were not authorised to discuss the matter publicly, told the South China Morning Post.

[…] The move by the Nasdaq and Hong Kong-listed firm is the latest sign that Beijing’s crackdown on video gaming has started to take a toll on the industry. China restricts gaming time for teenagers under the age of 18 at a maximum of three hours per week, and the Chinese government has suspended new gaming licenses since the end of July.

Comment: I wonder whether the people getting fired appreciate this overt sign of the clampdown on ‘disordered growth of capital’. Obviously 100 or so people would not have a major impact in the grand scheme of things, but the more people lose their jobs for this CCP nonsense and the more they may start resenting them for it. 

This of course is tied to a broader issue, namely that the CCP sees tech companies as a danger and wants them subservient, in the name of ‘common prosperity’.

The risk is to create a self fulfilling prophecy: without the tech companies, the censorship apparatus would have a hard time policing information and would be a shame if something happened to it during a potential property sector meltdown.

5.2 Tencent divests $16bn of in first move to unwind portfolio – FT

Tencent is distributing $16bn of shares in ecommerce group to shareholders, in the tech group’s first big move to unlock the value of its vast investment portfolio as Beijing steps up regulatory scrutiny of the sector.

The Shenzhen-based tech conglomerate will start handing out the 460m ordinary shares of to shareholders in March, cutting its stake from about 17 per cent to 2.3 per cent. Tencent president Martin Lau also resigned from’s board on Thursday as part of the announcement.

Shenzhen-based Tencent is cutting its stake after Chinese authorities this year cracked down on the country’s tech firms, especially the largest groups such as Tencent and rival Alibaba, which are involved in multiple industries. China’s antitrust regulator in recent months has repeatedly fined both companies over their past dealmaking activities.

Tencent was “not empire building” nor “trying to amass influence”, and reducing its stake in helped to make that clear, said one person close to the company. The move was not triggered by any specific request from regulators, the person added.

Comment: This is a sign of further escalation in the crackdown, as Tencent has $180bn in stakes in a wide range of companies including Tesla, Spotify, Universal Music and Snap. The ones to watch, however, are shareholdings in local companies that have a big market share in their respective industries.

There are three potential future cases: Pinduoduo, where Tencent has a 16% stake, Meituan, with a 17% stake, and Kuaishou, with a 22% stake. While there is no indication of such an unwind happening to these three companies, it remains entirely plausible, given they were previously targeted by the crackdown (especially Meituan). 

If that were the case there could be more pain for Chinese tech companies, as JD fell about 7% following the news. The reason is that it has benefited from a strategic partnership with Tencent, which has about 40 per cent of the market for electronic consumer payments through its WeChat Pay and QQ Wallet platforms. Same would be true for the others.

5.3 Intel apologies after Xinjiang policy sparks China backlash – Nikkei Asia

Intel apologized to China on Thursday for telling its suppliers not to source from the country’s Xinjiang region, where the U.S. alleges human rights violations are taking place against the ethnic Uyghur Muslim population.

In a statement in Chinese posted on microblogging site Weibo, the American chipmaker clarified that the instruction to suppliers was given to ensure compliance with U.S. laws, and did not represent the company’s own position.

“We apologize for the distress caused to our esteemed Chinese customers, partners and the general public,” the statement said.

The U.S. Senate passed legislation last week banning imports from Xinjiang, the latest move in response to Beijing’s alleged abuses against the Uyghurs. The Chinese government has repeatedly denied accusations of mistreatment.

China’s state-controlled Global Times called Intel’s instruction to suppliers “absurd,” saying the U.S. semiconductor manufacturer earned 26% of its revenue from China and Hong Kong last year.

Comment: Intel is becoming a sort of a joke: all fiery at home when it comes to subsidies, with the CEO’s comment about TSMC, and then so subservient when it comes to China as this is a literal kowtow. Sure, the Chinese market is large and all but it should make people think to see a Taiwanese company be more responsible than a US one (notwithstanding that TSMC has been trouncing Intel in most measurable metrics).

  1. TRADE

6.1 China to fall short on promises to US as trade deal ends – Bloomberg Quint

When the trade deal between China and the US was signed in January 2020, there was some hope it would lead to a reduction in bilateral tensions and restore some balance to trade, but those goals are proving elusive as 2021 comes to a close.

In these 23 months since then-President Donald Trump signed the Phase One Agreement, Chinese imports from the US have indeed hit a new record. However, as of the end of last month Beijing was well behind on promises made – buying little more than 59% of the extra $200 billion in manufactured, agricultural and energy goods it said it would by the end of 2021. 

The increase in imports was overwhelmed by the pandemic-induced surge in exports going the other way, undermining the attempt to secure more balanced trade between the world’s two biggest economies. That puts China on track for a record trade surplus with the US this year – selling $358 billion more in goods than it bought in the first 11 months of this year. 

Comment: Another reason for the imbalance is the fact that the Chinese economy relies on exports, especially now that the property sector (another key contributor to GDP) is in very rough waters. 

The question now is whether there would be an attempt to address this situation or not, especially given yet another case of overpromise but underdelivery from the CCP (with all the necessary caveats but then again the whole situation is also on them and the WHO for not having taken seriously the Covid issue when time was of the essence).