Asia Pacific Macro – January 7, 2022

| January 7th, 2022

Today’s main theme is stability and how several policymakers are trying to get there. The two primary examples are India, with both the monetary and fiscal policymakers reacting to the current wave of Covid cases, and China, whose stock market had a start too shocking for the CCP’s liking. Another important theme is disruption, with the current event in Kazakhstan and the previous coal export ban from Indonesia putting a strain in energy.

1. CENTRAL BANKS

1.1 WeChat offers digital yuan payments ahead of Beijing Olympics – Nikkei Asia

Tencent Holdings has made WeChat, the world’s largest chat app, compatible with payments using the digital yuan ahead of the Beijing Winter Olympics, the Chinese tech giant said Thursday.

The government plans to test its digital yuan around Olympic venues when the Games start next month. Making the popular WeChat app compatible with the currency significantly boosts user convenience.

Users download the e-CNY app provided by the People’s Bank of China, the central bank. They use the app to create a digital yuan wallet with WeBank, the virtual bank backed by Tencent. The WeBank wallet then must be linked to the WeChat account to enable payments.

But questions remain whether the central bank’s digital yuan will compete, or coexist, with other smartphone payment platforms. The digital yuan is available in only certain cities, and a limited roster of merchants and services accept the novel currency.

Pilot tests conducted across China find no difference between the digital yuan and major smartphone payment platforms in terms of user experience.

Comment: This news is interesting, because it provides nothing for the users. Not only is the digital yuan use very limited, but it does not offer anything over WeChat Pay and Alipay, the two primary apps used.

While it may be premature and speculative, this may signal a co-opting of already established platform to eventually force the use of the e-CNY, as Tencent and Alibaba have already been battered into submission. 

1.2 Economists see Omicron forcing RBI to delay policy normalisation – Economic Times

As COVID-19 infections spike in the country resulting in restrictions in various states and impacting the fragile recovery, many economists are expecting RBI to delay the policy normalisation move, which is expected in the February review.

The country has reported a single-day rise of 58,097 new COVID-19 cases as of Wednesday morning–the highest in around 199 days– of which 2,135 are Omicron cases and later in the day, the first confirmed Omicron-related death has also been reported.

[…] HDFC Bank chief economist Abheek Barua does not see the RBI-monetary policy committee (MPC) going ahead with the policy normalisaiton drive anytime soon, at least not in the next review in February as he expects the rising Omicron cases to shave 30 basis points off the March quarter GDP.

“Rate hike expectations will moderate as the growth gets impacted and the reverse repo hike expected in February is also uncertain now,” Barua said in a note, adding the central bank will continue with its focus on liquidity normalisation and capping yields.

Similarly, Tanvee Gupta-Jain, the chief economist at UBS Securities India also expects the central bank to remain in “wait-and-see mode” for some more time.

“If the risks surrounding the new Omicron variant remain, adding to near-term uncertainty, we think the MPC could remain in “wait-and-see” mode at the February policy meeting and can delay policy normalization to the April policy meeting,” she said.

Echoing similar views, Icra Ratings chief economist Aditi Nayar said the Reserve Bank will remain in a hold mode for an extended time given the rising risks to fragile growth.

“Given the surge in COVID-19 cases and the widening of restrictions leading to heightened uncertainty, it is increasingly unlikely that the RBI will commence the much-delayed policy normalisation next month itself, unless inflation provides an acutely negative surprise, which looks all the more unlikely” Nayar told PTI.

Nayar also revised down the Q4 growth forecast by 40 basis points to 4.5-5 per cent due to the third wave but has retained full year GDP forecast at 9 per cent, with moderate downside risks, saying anyways Icra’s forecast was the lowest among the consensus numbers which vary from 8.5-10 per cent, with the RBI pegging it at 9.5 per cent.

These economists also think the rupee will be under increased pressure this year given the fluid situation that the global economy is in and the US Fed’s already announced tapering.

Comment: It is plausible for Omicron and the related wave of cases to play a role in the RBI’s decision, although there is still some time before the next meeting in February and a potential Fed decision in between. 

At the same time, the Indian government is rumoured to relax the deficit target to 6.3/6.5%, given the effects of the new wave of Covid. 

2. REAL ESTATE

2.1 Shimao’s debt woes deepen concerns over cash crunch in Chinese property – FT

The Shanghai Stock Exchange suspended trading in several bonds of Chinese property developer Shimao, a day after the company’s failure to make a loan payment increased fears that a cash crunch will spread more widely across the country’s embattled real estate industry. 

Trading in three renminbi-denominated bonds from the residential developer, which unlike many of its struggling peers recently held an investment-grade credit rating, was temporarily suspended after sharp falls followed reports on Thursday of the missed payment. 

The problems at Shimao suggested that China’s real estate sector woes, which have mainly affected companies with riskier credit ratings such as Evergrande and Kaisa Group, could spread to more highly rated developers as they grapple with a slump in housing sales and a loss of investor confidence. 

The country’s economically important property sector has slowed markedly over recent months after construction delays and default fears at heavily indebted Evergrande starved it of financing and fuelled a wider cash crunch. Evergrande and several of its peers have already defaulted on international markets. 

Chinese authorities have responded by installing government figures in a risk committee to manage Evergrande’s restructuring and announcing stimulus measures to support the economy. But Shimao’s troubles suggested those developments have not resolved the liquidity issues afflicting the sector. 

3. MARKETS

3.1 China’s shocking start to 2022 pressures Beijing to calm markets – Bloomberg

Beijing’s pledge to ensure economic stability is being tested by renewed turbulence in the nation’s financial markets, prompting officials to take more conspicuous measures in what is a politically crucial year.

Investors have had a lot to digest this week. Tencent Holdings Ltd.’s partial divestment of a listed company exacerbated a $1.2 trillion selloff in Chinese tech shares. One of the country’s largest bad-debt managers lost more than half its value in the equity market after a $6.6 billion bailout.

China Evergrande Group suspended trading after it was ordered to demolish dozens of apartment blocks. Another developer defaulted on a little-known loan, sending the nation’s junk dollar bonds tumbling. A hawkish Federal Reserve knocked the ever-resilient yuan, prompting a warning from state media.

China’s securities watchdog will adopt multiple measures to “firmly” prevent market volatility, Chairman Yi Huiman told state TV in an interview aired Thursday, without elaborating. On the property front, Chinese regulators have asked banks to increase lending to the sector this quarter and eased a key restriction that’s held back acquisition activity.

The moves appear to be having the intended effect. The Hang Seng China Enterprises Index of stocks listed in Hong Kong rallied the most in a month on Friday, with property developers and tech shares leading the advance.

Turmoil in financial markets risks overshadowing this year’s carefully stage-managed events. The Beijing Winter Olympics — already the target of a diplomatic boycott led by the U.S. — takes place from Feb. 4-20. In the autumn, the Communist Party will announce a twice-a-decade leadership reshuffle. 

President Xi Jinping is widely expected to extend his rule as party chief and install allies in key positions, while Premier Li Keqiang is expected to retire. The party’s top decision makers vowed last month to ensure stability in the economy in 2022.

Comment: It will be difficult for the CCP to calm the markets, as most of the trouble are of their own making. They will however try their best to calm them, as they cannot afford further problems during an already delicate political period. 

4. TECH

4.1 China bans most exclusive copyright deals for digital music platforms – Reuters

China’s copyright authority said on Thursday digital music platforms are not allowed to sign exclusive copyright agreements except in special circumstances, amid a regulatory crackdown on monopolistic behaviour in the country’s private sector.

The National Copyright Administration of China (NCAC) gave the order on Thursday at a meeting in Beijing with influential digital music platforms, as well as record and songwriting copyright companies, according to a statement published on the NCAC’s official WeChat account.

The order comes amid a widening crackdown by Chinese regulators on the country’s technology sector, which has focused on issues such as monopolistic behaviour, unfair competition and consumer rights.

Last year, Tencent Holdings announced it had ended all exclusive music copyright agreements after it was ordered by China’s market regulator to do so. The regulator had said the firm held more than 80% of exclusive music library resources which increased its leverage over upstream copyright parties and allowed it to restrict new entrants.

The NCAC did not mention which companies were called in on Thursday. Besides Tencent, smartphone maker Xiaomi, telecommunications provider China Mobile, and Internet tech giant Netease all own popular streaming services in China. Globally popular streaming services like Spotify are banned in mainland China.

The NCAC said that while copyright practices had improved since 2015, when the authority banned unlicensed music streaming and ordered platforms to remove millions of songs, the industry still needed to be further standardized.

Comment: While there is a kernel of real concern here, it is plausible, if not likely, for the CCP to use this as an excuse to police content, or rather police it even further. 

4.2 Walmart in China’s Spotlight Again as Regulator Cites Infractions – WSJ

Chinese authorities turned a spotlight on Walmart Inc. WMT -0.28% for the second time in less than a week, as a media outlet backed by the country’s market regulator highlighted administrative action against the U.S. retailer for alleged cybersecurity infractions.

China Quality News, the news website supported by the State Administration for Market Regulation, reported Wednesday that the police in the southern Chinese city of Shenzhen cited Walmart for allegedly violating the country’s cybersecurity law. Police had found 19 vulnerabilities in the company’s network system in November, and the company was slow to fix the loopholes, the media outlet reported, citing people familiar with the matter.

The Bentonville, Ark.-based company had no immediate comment.

The report came as Walmart in recent days has faced a backlash on social media as well as criticism from China’s anticorruption watchdog for supposedly stopping sales of products from Xinjiang, where the Chinese government has conducted a campaign of forcible assimilation against religious minorities.

Comment: This reminds me of a phrase from the Stalin era: ‘show me the man and I will show you the crime.’ While this resulted only in warnings and no fines, it looks like a taste of the the retaliations promised by the Chinese authorities. 

4.3 Arm investigates suspicious payments at Chinese joint venture – The Telegraph

One of Britain’s biggest technology companies is investigating suspicious payments to senior executives at its Chinese joint venture, presenting a potential complication to its $40bn (£30bn) takeover by a US rival.

Cambridge-based microchip maker Arm said that “allegations related to the appropriateness of payments” had been made against senior management at Arm China, which it co-owns with a Chinese investment firm.

It has been locked in a lengthy dispute with Allen Wu, the head of the joint venture, after failing to fire him two years ago.

The row has cast a cloud over Arm’s $40bn (£30bn) sale to the American behemoth Nvidia, which has also been thrown into doubt by competition and national security investigations.

Chinese regulators are among those investigating the deal, making the status of the joint venture more delicate.

Annual accounts for Arm Limited said: “The board of directors of Arm China is in the process of resolving certain disputes with a member of the senior management… which remain unresolved.

Comment: The following quote sums up the problem perfectly:

“We were unable to obtain access to the financial information or management of [Arm China]… we were also unable to obtain sufficient appropriate audit evidence in relation to the carrying amount of the group’s investment in Arm China.”

It is further evidence of the fact that Arm China, for all intents and purposes, went rogue, which is arguably a bigger problem than Nvidia buying up Arm. 

5. ENERGY/COMMODITIES

5.1 Oil, Bitcoin Mining, and Uranium: Why Russia’s Kazakhstan Intervention Matters – Barron’s

[…] Kazakhstan is a major oil producer, with output currently at about 1.6 billion barrels a day, but the country’s three major oil operations seemed to be working Thursday. Tengizchevroil, a Chevron-led consortium operating the country’s highest-producing oil field in Tengiz, said that operations had not been “impacted” by the fact that workers had gathered in support of the demonstrations.

Kazakhstan had also become in recent months a favored destination of Bitcoin miners who chose to leave China after Beijing’s recent crackdown on crypto assets. According to Cambridge University, it is only second to the U.S. for the amount of energy dedicated to crypto mining. The shutdown of the internet on government orders means that operations will have to cease for now, contributing to the fall in Bitcoin prices Thursday.

The situation has also triggered a steep rise in the price of uranium, of which Kazakhstan is the world’s leading producer. Uranium jumped 8.5% on Wednesday, according to data quoted by Bloomberg. Shares in Cameco (ticker: CCJ), a Canada-based major uranium producer, were down 4.7% Thursday in New York.

The unrest started earlier this week after a reform removed caps for car fuel prices. It has since turned into a widespread protest against the 30-year authoritarian regime of Nursultan Nazarbayev, the 81-year old Kazakhstan strongman and former president. The situation is creating a new headache for the Kremlin, which has already massed around 100,000 troops at the Ukrainian border.

Comment: This article highlights why what has been happening in Kazakhstan is important, given the relevance of the country in key commodities. Also, given how prices have been going, especially fertilisers, this may only be a taste of what is to come – food inflation. 

5.2 How Indonesia, the world’s top thermal coal exporter, hit a supply crunch – Reuters

[…] Coal makes up around 60% of Indonesia’s energy mix and its energy ministry said by the start of 2022 only 35,000 tonnes of coal had been delivered to state power firm PLN. PLN had secured 13.9 million tonnes by Wednesday but needs another six million tonnes to ensure a 20-day stock level of 20 million tonnes.

[…] The State-Owned Enterprises Ministry said it is pushing for PLN to improve supply management and increase long-term procurement contracts. As a short-term fix, the Indonesia Coal Miners Association said ten of its biggest members would provide extra supply to PLN. read more

Coordinating Minister for Maritime and Investment Affairs, Luhut Pandjaitan, after meeting with coal miners and other authorities on Thursday, told local media the emergency was over and his ministry will review a new “formula” for the domestic market obligation (DMO) and come to a decision at a meeting on Friday. read more 

6. TRADE

6.1 Vietnam to extract long-term gains from world’s largest trade pact – VnExpress

The world’s largest trade pact RCEP will boost Vietnam’s trade in the long run as the country becomes part of a bigger supply chain, experts say.

With the Regional Comprehensive Economic Partnership (RCEP) coming into effect on January 1, Thuan Phuoc Seafoods and Trading Corp in Da Nang City will focus its business on two members of the pact this year – China and Japan, said CEO Tran Van Linh.

He said told local media that the RCEP will help fisheries companies extract greater advantages from these two markets and encourage them to develop a sustainable industry with a larger production scale that plays by international rules.

The mega trade agreement has been signed by 15 countries which collectively cover about one-third of the world’s population, allows businesses to enjoy up to 92 percent in terms of tariff reduction.

The RCEP includes 10 ASEAN country members and five trading partners: China, Japan, South Korea, Australia and New Zealand.

It forms a market of 2.2 billion consumers, which is the largest free trade area in the world.