Asia Pacific Macro – December 13, 2021

Alessandro Ponzetto | December 13th, 2021

Today’s main theme is once again China and its potential future moves in terms of economic policy. To start with, there are the actions of the PBOC in fixing the yuan and the focus, both in monetary and fiscal policy, to support growth while “prioritising stability”. With this is mind there is   criticism from a former high official to the country’s statistics, which does not bode well for the actual status of the economy. This is important because top policymakers have warned about “grey rhinos”. Finally, there is a piece from Nikkei Asia regarding the 20th anniversary of China at the WTO, which has been one of the major issues between China and the US.

1.  CENTRAL BANKS

1.1 China urged to ease economic policy, cut exposure to US assets ahead of impending Fed rate hike – SCMP

China should waste no time in diversifying from US dollar assets and easing its economic policy, according to analysts, as the world’s second largest economy is increasingly wary of its vulnerability to changes in US monetary policy.

Yu Yongding, a prominent Chinese economist and former central bank adviser, said it was regretful that China’s own monetary policy is facing constraints as a result of monetary shifts in the United States and Europe.

“If the US Federal Reserve raises rates, there are many measures available but it’s more difficult [to implement] in this environment and the costs will be high,” Yu said at a virtual seminar organised by Renmin University of China on Thursday.

Comment: As expressed by Pettis here, these suggestions are somewhat baffling. He agrees on the underlying worry, as a hawkish Fed could cause outflows from the world (China included) to the US, but everything would be affected regardless of the kind of assets being held. 

As long as the USD is the reserve currency, and there is no alternative to it in the foreseeable future, the Fed and its policies would dominate the monetary system, whether other countries’ authorities like it or not. Besides, as suggested by Pettis, holding dollar assets would be the best thing to do if the dollar were to rise in response to a more hawkish Fed. 

1.2 UK spy chief raises fears over China’s digital renminbi – FT

China’s digital renminbi, which is being heavily promoted ahead of the Beijing winter Olympics, risks becoming a tool to surveil users and exert control over global currency transactions, the director of UK signals intelligence agency GCHQ has warned.

In an interview with the Financial Times, Sir Jeremy Fleming said that while digital currencies present a “great opportunity” to democratise payment systems, the development of this new technology also poses a threat.

“If wrongly implemented, it gives a hostile state the ability to surveil transactions,” he said. “It gives them the ability . . . to be able to exercise control over what is conducted on those digital currencies.”

Comment: As previously reported, the authorities are having difficulties in convincing their own people to use it, as in the mainland the majority of people use Alipay and/or WeChat Pay, from Alibaba and Tencent respectively, for payments. 

Also, as highlighted by Pettis in this tweet, Beijing would have to make several substantial reforms before the RMB could in theory challenge the USD but said reforms would force the CCP to relinquish control. Considering that the recent developments point in the opposite direction, it will not happen anytime soon (if at all). 

1.3 China seeks to rein in yuan rally with nudge on fixing again – Bloomberg

China’s central bank signaled it’s seeking to strike a balance between slowing a surge in the yuan and limiting aggressive intervention by setting its reference rate at a slightly weaker-than-expected level. 

The People’s Bank of China set the fixing for its currency at 6.3669 per dollar on Monday. While that was weaker than the average forecast in a Bloomberg survey, the discount to the estimate narrowed from Friday. The yuan strengthened for a second day in both onshore and overseas markets.

The central bank clamped down on speculation in the strengthening yuan last week by asking lenders to hold more foreign exchange in reserve and setting a reference rate far below market expectations. That’s helping to check the rally even as traders pile into Chinese assets on signs policy makers will pivot toward supporting economic growth in 2022.

1.4 Beijing to moderate monetary policy to support growth – FT

Chinese policymakers have signalled they will moderate monetary and fiscal policy to support growth in the world’s second-largest economy, but remain committed to their larger goals of reining in debt levels and cooling the country’s property sector. 

The Chinese Communist party’s annual year-end economic planning meeting, which closed on Friday in Beijing, said it would “prioritise stability”, according to the official Xinhua agency. It added that China’s economy faced “triple pressure” from shrinking demand, supply shocks and weakening expectations. 

The three-day meeting has been overshadowed by the ongoing debt crisis at developer China Evergrande Group and a downturn in the broader property market, which has raised fears that economic growth could slow sharply next year. 

Consumption has remained sluggish since the government successfully contained the Covid-19 pandemic, in part because its adherence to a “zero Covid” policy that involves regular shutdowns of large urban areas and regional travel whenever there is a small outbreak. 

The Chinese government has also had to contend with coal and power shortages over recent months, which contributed to soaring producer prices. China’s producer price index hit a 26-year high in October, rising 13.5 per cent over the same month last year. Consumer price inflation was up just 1.5 per cent.

Comment: Stability was highly emphasised by Mr Han Wenxiu, executive vice-minister of the party’s central financial and economic affairs commission, while explaining the economic plans for 2022. 

He focused on the property sector, stating it holds key significance in the economy and for financial stability and risk prevention, and China needs to explore a new development model for industry, without elaborating.

In response to this news, economists predict China will start adding fiscal stimulus in early 2022, in order to counter the slowing momentum in its economy, caused by the property market slump, weak consumption growth and outbreaks of Covid.

However, it is difficult to say how the authorities would be able to support growth while at the same time reining in debt levels and cooling the property sector, since previous experience suggests that accommodating policies bring the opposite. 

Whilst on this subject, there is the following op-ed, as it focused on the Fed and other central banks which seem to be moving towards more hawkish positions (or have already done so). 

1.5 Have central banks moved to break the monetary policy vicious cycle? – Nikkei Asia

[…] Financial imbalances such as rising debt, asset price increases, rising maturity and currency mismatches, and the growing similarity of the asset portfolios held by market participants could destabilize the financial system and eventually the entire macroeconomy. If that happens, price stability will be threatened in the long run. Overall, I am not comfortable with an “inflation-centric monetary policy view.”

As the recent debate shows, we tend to focus on marginal adjustments in monetary policy, but what is far more important is the perceived monetary policy regime — the underlying thinking governing a central bank’s monetary policy. In the eyes of market participants, monetary policy asymmetry has been a notable feature of the past three decades.

Central banks were aggressive about monetary easing when the inflation rate went down and emphasized the transitory nature of inflation when prices started to rise. The same asymmetric tendency has been observed in central bank responses to movements in asset prices, and the expansion and bursting of price bubbles.

If the main mechanism of monetary easing is to bring forward future demand to the present, this asymmetric response inevitably tends to lead to prolonged monetary easing, so-called QE forever. Viewed in this way, the recent move of central banks might break this vicious cycle.

Comment: Since Lehman, most of the central banks have enacted increasingly dovish policies, which can be better described by how much their balance sheets have grown over the years. That has had a profound impact on asset prices, which have grown substantially in the same period.

It may very well be a point in the agenda of the upcoming meeting between the US Fed, ECB, BoE and BoJ, coupled with inflation and concerns over the Omicron variant. In any case, there is no easy way out from this situation.

2.  ECONOMIC DATA

2.1 China’s Stats Accentuate Positive, Play Down Negatives, Lou Says – Bloomberg

A former Chinese finance minister criticized the country’s statistics for not properly reporting negative economic changes, with the rare harsh public statement from a senior figure highlighting long-standing concerns about the accuracy and reliability of national data.

A key meeting of top leaders this week said China’s growth next year will be weighed down by a “triple” whammy of contracting demand, a supply shock, and weakening expectations. However, none of those are visible in the statistical indicators, which have all been “very good,” Lou Jiwei, a former minister of finance, said at an online event Saturday.

“There are insufficient figures reflecting negative changes” in the economy, Lou said, adding the one-sided data make it harder to assess the government’s current judgment on the “triple forces” overshadowing the economy. “In contrast, the U.S. has both positive and negative numbers.”

While the government touts the increase in the number of companies and other market entities despite the pandemic, it hasn’t publicized the fact that a large number of these are inactive due to business woes and the difficulty of canceling official registrations, Lou claimed. Similarly, government statistics count new jobs created but don’t follow up on whether those people are then laid off after six months or more, according to Lou.

Comment: This issue is not particularly new, as such behaviour played a role in the Great Leap Forward and the subsequent disaster. The surprising aspect of the news is that a former official is criticising this practice which means that the practice became excessive enough to warrant such criticism from a prominent Party member. 

3.  REAL ESTATE

3.1 Evergrande bondholders settle in for lengthy restructuring process – FT

Evergrande’s international bondholders are bracing themselves for a prolonged restructuring process as investors attempt to recoup funds loaned to China’s most indebted property group.

Fitch on Thursday (Friday AEDT) placed the real estate developer into “restrictive default” after Evergrande failed to make a crucial interest payment by the time a 30-day grace period expired. The missed instalment has dashed the hopes of some investors, who were expecting the sprawling company to make a last-minute payment.

[…] “Beijing has made it clear that the first priority in the restructurings will be to protect homebuyers,” said Paul Lukaszewski, head of corporate debt for Asia-Pacific at Abrdn. But he added that this priority was “not necessarily against the interests of creditors”.

Evergrande has sought for months to keep its real estate projects running in order to maintain the flow of cash through its business – often with government involvement – which is critical to creditor hopes of a recovery. But it has also sought to raise cash through the sale of assets, raising concerns among debt investors that value remaining in the business could be directed elsewhere.

Comment: It may follow a similar procedure to that of HNA, although due to its sheer size there could also be variations (especially given the delicate nature of the case, as highlighted by the repeated focus on “stability” showcased previously.

4.  TECH

4.1 TSMC in Early-Stage Contact With Germany About Potential Plant – Bloomberg

Taiwan Semiconductor Manufacturing Co. is in early talks with the German government about potentially establishing a plant in the European country, a senior executive said Saturday.

Various factors including government subsidies, customer demand and the talent pool will influence TSMC’s final decision, Senior Vice President of Europe and Asia Sales Lora Ho told reporters on the sidelines of a technology forum in Taipei.

Comment: Another factor not mentioned is geopolitics, as the relationship between EU countries and Taiwan has been a topic of contention within China. As of now, the new German government seems more confrontational but there has not been any meaningful action just yet. 

An example of government subsidies is Japan, which in total will invest $5.2 billion and about two thirds of that on the new TSMC factory. 

5.  MARKETS

5.1 China’s SenseTime Postpones IPO After U.S. Blacklisting – WSJ

Chinese artificial-intelligence company SenseTime Group Inc. said it would postpone its Hong Kong initial public offering, days after it was added to an investment blacklist of companies that the U.S. government says are supporting Chinese military development.

In a statement to Hong Kong’s stock exchange, the company said the halt was meant to help investors consider the potential impact of the U.S. blacklisting, adding that it remains committed to completing the listing soon. The postponement comes after the company held off from pricing its IPO as planned on Friday.

SenseTime, whose products are used in smart cities, police surveillance and autonomous driving, had planned to raise as much as $767 million in an initial share sale on the Hong Kong stock exchange this month.

Comment: This seems to be an escalation of what has been happening between the US and China regarding companies. From the outside, it seems that the US treasury have taken a page from the Chinese authorities’ book, as there are several similarities with what happened to Ant Group.

6.  ENERGY/COMMODITIES

6.1 China must beware ‘grey rhino’ of primary commodities shortage, top policymaker warns – SCMP

China should be on guard about a “grey rhino” crisis caused by shortages of primary commodities such as agricultural products, minerals and fuel, the country’s senior economic policymaker has warned.

Han Wenxiu, a deputy director of the Communist Party’s Central Committee for Financial and Economic Affairs, made the warning as he elaborated on decisions made in the three-day central economic work conference, which ended on Friday.

He said the shortages of these commodities faced by some countries this year highlighted that they could represent a “grey rhino” – an obvious yet ignored threat – to China, too.

Comment: The energy shortage has provided an example as to what happens in case of a shortage and that is probably what Han Wenxiu is referring to. A repeat of a similar shortage would be extremely detrimental to China and its leadership, at a time when they can ill afford one. This is precisely why ‘stability’ has been mentioned several times.

7.  TRADE/SUPPLY CHAIN

7.1 China’s 20 years at WTO: A boon for Beijing, a beef for critics – Nikkei Asia

When China joined the World Trade Organization 20 years ago Saturday, American hopes were high that economic development would encourage Beijing to move toward democracy. But while China has become an economic force to rival America in the decades since, little headway has been made there on the democratic process and human rights, Beijing’s critics say.

After a trade war between the world’s two biggest economies, and with the WTO’s top dispute settlement body gutted, the very idea of free trade faces increasing headwinds. Before China joined in 2001, the WTO lacked the world’s most populous nation as a member.

“For the WTO, welcoming China marked a significant step towards becoming a truly world organization,” WTO Director-General Ngozi Okonjo-Iweala said in a virtual forum Friday to celebrate the 20th anniversary of China’s membership.

Li Chenggang, the Chinese ambassador to the WTO, said China’s opening up and economic development greatly benefited the global economy. For all these celebratory words, attitudes toward global trade and China’s role in it have hardened in Washington.

“For too long, China’s lack of adherence to global trading norms has undercut the prosperity of Americans and others around the world,” U.S. Trade Representative Katherine Tai said in October, outlining President Joe Biden’s new approach to the U.S.-China trade relationship.

Comment: China joined the WTO after making certain promises which were then not honoured, which is the crux of the problem. Sure, its inclusion may the WTO a truly world organization, but its main beneficiary was China: they enjoyed the upsides of the preferential treatment reserved for developing nations, while at the same time not making efforts into honouring their promises.

Now we have the remarkable, and somewhat amusing, coexistence of a China who tries to challenge the US, including economically, while at the same time clinging on to the preferential treatment of a developing nation. 

Speaking of preferential treatment, China’s ambassador to the World Trade Organization said to Reuters on Friday that Beijing would remain a “developing” country at the global trade body but would forego many of the benefits, signalling an important shift to trading partners. Whether they will actually do it is debatable however, as it sounds like one of their many empty promises. 

7.2 China in Africa: no more hard cash as debt-hit nations battle Covid-19 disruptions – SCMP

China’s funding model for the Belt and Road Initiative in Africa is changing, as the worsened debt situation for many countries due to the coronavirus pandemic prompts Beijing to explore “innovative ways of financing”.

China has traditionally made large financial commitments during the Forum on China-Africa Cooperation (FOCAC) meetings over the past two decades, with the money going into mega infrastructure projects, including ports, railways, highways and power dams.

But, at this year’s forum in the Senegalese capital Dakar, it became evident that that financing model was set to change.

Comment: Pettis argues in this thread that it is about experience, as China is not the first country facing this kind of problem. On the one hand there is some truth to this, as the Chinese have not faced such problems before and they were bound to make mistakes. 

On the other, however, I suspect there is more to this than merely a rethink in strategy. The last couple of years has shown us that China is not as solid as it may seem and the Chinese authorities may be more worried about what is happening in their own backyard instead of something as distant as Africa. 

7.3 U.S., Australia, others to push for human rights-tied export controls – Kyodo News

The United States said Friday it has agreed to work with Australia, Denmark and Norway to establish a “code of conduct” for applying export control tools to prevent technologies from being misused by authoritarian governments.

The launch of the Export Controls and Human Rights Initiative, for which Britain and France have also expressed support, was announced during a two-day virtual summit hosted by U.S. President Joe Biden to advance democracy in the face of challenges posed by what he views as autocratic countries such as China.

According to the White House, the initiative aims to establish guidance for the application of human rights criteria to export licensing and build policy alignment with like-minded partners toward “common action.”

The move comes amid growing concerns that authoritarian governments are using surveillance tools and other technologies in ways resulting in serious human rights abuses, such as by censoring political opposition, tracking dissidents, intimidating minority communities and undermining free expression.

Comment: The proposal has merits, although more is definitely needed to address these issues more broadly. After all, the pandemic has been used to enact policies which are not that far off from censoring political opposition, tracking dissidents, intimidating minority communities and undermining free expression.

This specific point could potentially be brought up by China, which even if not mentioned seems to be the primary target, as a sign of hypocrisy and as an ad hominem attack on them.

7.4 Toy sellers ponder reliance on China as supply problems bite – FT

The colourful piñatas that usually hang from the ceiling of Jennie Hogg’s Cachao Toys store in London’s Muswell Hill have been impossible to source this Christmas. “My suppliers said it’s too expensive bringing them over,” Hogg said. Though supply chain disruptions and higher transport costs have put piñatas out of reach, “customers will still get what they need, they just need to keep an open mind,” she added. 

The global supply chain crunch has led retailers from grocers to toy stores to warn of product shortages and higher prices. Recent manufacturing delays in China have added to the pressure, leading some in the $95bn global toy market to reconsider their reliance on the country. 

Lego, the world’s largest toymaker, said its geographical spread of manufacturing had helped it shrug off the disruption and it posted a record first-half profit this year. The company coped with high demand in lockdowns and pandemic supply pressures thanks to its manufacturing facilities in Europe and Mexico. This week, the Danish group announced a $1bn investment in Vietnam to provide local production for neighbouring Asian markets. 

China accounts for roughly 80 per cent of global toy exports but Alain Joly, founder of Doudou et Compagnie, France’s leading seller of teddy bears, said problems caused by the pandemic had given a “financial reason” to increase local production.

Comment: Yet another sector pondering reshoring after what has been happening with China since the pandemic. As stated, it would be a lengthy and expensive process to do so but there are increasing reasons to do so, as the ones who already did not rely on China for their production proved to be better suited to take advantage of the increased demand. 

As to further demonstrate the point, more than a dozen Chinese-listed companies said they had suspended production in coronavirus-hit parts of China’s eastern Zhejiang province in response to local government’s tightened COVID-19 curbs, causing their share prices to plunge.

These suspensions are the result of the Zero-Covid-policy held by the Chinese, as in the filing the companies stated they were due to the local government’s anti-virus measures. They also vowed to fully cooperate with the local government, which will decide when production can be resumed. 

7.5 South Korea takes step to join CPTPP, following China and Taiwan – Nikkei Asia

South Korea will start the process for joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, seeking to not be left behind on a key economic treaty in the region. Finance Minister Hong Nam-ki said on Monday that the government will kick off discussions with a wide range of stakeholders in society as a step toward applying for CPTPP membership.

“We cannot keep [CPTPP] talks inside the government anymore, as the economic order is changing quickly in the Asia-Pacific region,” Hong said in a meeting with economic ministers. “We should consider our status as an open trade country, as well as the economic and strategic value of the expansion of trade and investment.”

Hong’s remarks come after China and Taiwan applied for the CPTPP and just weeks before the Regional Comprehensive Economic Partnership — the world’s biggest free trade agreement, which will include China — becomes effective at the start of 2022.

The finance minister said the government will now launch public discussions on CPTPP membership, as it has already set up domestic regulations related to the agreement, such as moving to abolish fishing industry subsidies, revising regulations benefiting state companies and adopting international food quarantine standards.

Comment: This could be a positive development for South Korea, which already has seen record-breaking numbers in exports. 

According to data compiled by the Trade Ministry and Korea Customs Service, total outbound shipments surpassed $604.9 billion (the current record, registered in 2018) as of 11:36 p.m. Monday (local time), despite economic woes stemming from the COVID-19 pandemic. It is projected to surpass $640 billion on current trends, the Trade Ministry noted.