David Fuller and Eoin Treacy's Comment of the Day
Category - China

    Biden Says U.S. Will Ban Russian Fuels to Pressure Putin on War

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    President Joe Biden said the U.S. will ban imports of Russian fossil fuels including oil, a major escalation of Western efforts to hobble Russia’s economy that will further strain global crude markets.

    “We’re banning all imports of Russian oil and gas and energy,” Biden said Tuesday at the White House. “We will not be part of subsidizing Putin’s war.”

    The U.S. move will be matched in part by the U.K., which will announce a ban on Russian oil imports on Tuesday, though it will continue to allow natural gas and coal from the country. Other European nations that rely more heavily on Russian fuels will not participate. The scope of Biden’s action was not immediately clear, including exceptions and the impact on shipments already in transit.

    Biden’s move is a significant step in his sanctions campaign against Russia after its invasion of Ukraine. While so-called self-sanctioning by the oil industry has limited some purchases of Russian barrels, an outright U.S. ban would further weigh on the market and increase volatility.

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    China's Ambitious GDP Goal a Boost to Slowing World Economy

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    “What China publishes as a target and what they actually aim to achieve are two separate things,” said Freya Beamish, head of macro research at TS Lombard. “The actual number will be published close to the target. But the reality could be significantly weaker.”

    China’s economic links with Russia and Ukraine are a small part of its overall foreign trade and investment, so Beijing may calculate that it can largely insulate its economy from global instability, as it did during the global financial crisis and coronavirus pandemic.

    “China has tended to capture larger shares of global trade when there are global problems,” Huang said. “They may have been lulled into a feeling that the Ukraine situation won’t hurt them.”

    Beijing has pledged to accelerate fiscal spending without increasing debt by using unspent funds from previous years and state-owned enterprise profits. The funding from such sources mean the stimulus will be relatively small-scale.

    “The government’s growth target is probably the upper edge of what China can reasonably achieve without large-scale stimulus,” said Adam Wolfe, an economist at Absolute Strategy Research in London. “It’s much more of a stretch target than last year’s.”

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    Tencent Quashes Talk of New Crackdown as Tech Wipeout Deepens

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    Chinese technology shares had their worst two-day drop since July due to renewed fears Beijing may roll out more restrictions for private enterprise. Traders pointed to everything from regulatory warnings over the weekend about scams in the metaverse -- a virtual-reality based social media concept -- to unsubstantiated talk about more curbs on the gaming industry. Tencent is a leader in metaverse development.

    On Monday, a screenshot detailing the alleged new gaming curbs made waves on China’s internet. But Wang Guanran, an analyst with Citic Securities, clarified that the content was originally posted by him last year when regulators hosted study sessions on gaming regulations.

    “I didn’t post anything today,” he said on his WeChat. The screenshot flagged more oversight of violent genres and concepts like anime and religion and limits on player spending on loot boxes.

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    China's Challenges

    This article from Project Syndicate by George Soros may be of interest to subscribers. Here is a section:

    The Winter Games are of course Xi’s prestige project, so the administration is going to incredible lengths to make the event a success. While the competitors will be isolated from the local population, continuing the effort after the Games are over makes little sense. City-wide lockdowns are unlikely to work against a variant as infectious as Omicron. This is evident in Hong Kong, where the outbreak looks increasingly serious. Yet the cost of zero-COVID is rising every day as the city is cut off from the rest of the world, and even from China.

    Hong Kong highlights the wider challenge Omicron represents for Xi. He tried to impose total control but failed. As Omicron spreads, opposition within the CPC will grow stronger. Xi’s carefully choreographed elevation to the level of Mao and Deng may never occur.

    It is to be hoped that Xi may be replaced by someone less repressive at home and more peaceful abroad. This would remove the greatest threat that open societies face today. Their task is to do everything within their power to encourage China to move in the desired direction.

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    PBOC Pumps in More Liquidity, Spurring Gains in Chinese Stocks

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    The People’s Bank of China is catching its breath after it cut the one-year medium-term lending facility rate last month -- the pause won’t last long. The central bank has signaled it’s ready to deliver more support to prop up growth. We expect the next cut as soon as the second quarter, and see the PBOC delivering another one in 3Q -- part of a broader array of easing measures to counter the slowdown.--David Qu and Chang Shu, China economists

    Despite the decision to hold the one-year policy loan rate steady Tuesday, the PBOC’s easing stance has set it apart from other major central banks including the Federal Reserve, which are tightening monetary policy to tame soaring inflation. The possibility that the Fed will accelerate the pace of rate hikes could restrict China’s room for further easing later this year as it could accelerate outflows. 

    Global demand for Chinese bonds has already slipped amid their shrinking yield premium. The yield gap on China’s 10-year sovereign bonds over similar-maturity Treasuries narrowed to 73 basis points last week, the least since 2019.

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    Iron Ore Smashes $150 After Beijing Eases Steel's Green Targets

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    China offered its huge steel industry five extra years of rising carbon emissions, sending iron ore soaring as investors saw the move as a renewed focus on propping up the economy.

    Steelmaking accounts for about 15% of China’s carbon emissions. On Monday, the government set 2030 as the new deadline for peak-emissions for the sector, against an earlier target of 2025. That adds to signs that Beijing is recalibrating its climate strategy in light of last year’s commodity price spikes, and priming the economy for a more powerful, carbon-intensive stimulus. 
    “This is a big adjustment to the timetable, which gives more room for the steel sector to reach peak emissions in an orderly way,” said Xu Xiangchun, an analyst with researcher Mysteel. A rush to meet carbon goals could lead to “unbearable economic costs”, he said.

    The policy pivot is another sign that Beijing is changing the trajectory of its decarbonization plans to ensure industrial changes don’t result in damaging inflation or shortages. President Xi Jinping said last month that climate targets shouldn’t compromise supplies of commodities that “ensure the normal life of the masses.”

    Iron ore surged past $150 a ton, with expectations rising for more infrastructure to soften China’s economic slowdown. More construction activity tends to means higher steel output, which in turn raises iron ore demand but means more greenhouse gases.

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    China Rushes to Deliver Stimulus as Fed Pulls Back in New Era

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    And having avoided the all-out stimulus of Western peers when the Coronavirus first struck in early 2020, the PBOC finds itself with dormant consumer prices and room to “open the monetary policy tool-box.”

    For China, that sets the stage for a triple dose of support from increased lending, lower borrowing costs and — potentially — a weaker yuan that would boost exports. The PBOC has already made a down payment on rate cuts and most economists expect more to come.

    By China’s normal standards, the prize for successful stimulus will be small — more preventing a continued slide in growth than driving a fresh acceleration. And past policy errors — allowing a debt bubble to expand to enormous size — add risk to the outlook and a constraint on the PBOC’s freedom of maneuver.

    If Yi and his team can pull it off, though, the boost from PBOC stimulus should offset at least some of the drag on global growth from Fed tightening. International Monetary Fund projections show China is set to contribute more than one-quarter of the total increase in global gross domestic product in the five years through 2026, exceeding the U.S.’s roughly 19% share.

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    China's Massive Current Account, Capital Surpluses Underpin Yuan

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    Overseas investors boosted their holdings of Chinese sovereign bonds by 575.6 billion yuan ($90.9 billion) in 2021, the fastest pace on record compared with previous years, according to Bloomberg calculations of Chinabond data. 

    Foreign exchange settlement under securities investment in the capital account, which reflects offshore investors’ buying of onshore equities and bonds, surged to $23 billion in December, the highest since records began in 2010.

    Ken Cheung, chief Asian FX strategist at Mizuho Bank Ltd., said the high returns of yuan-denominated assets and the stability of the yuan exchange rate are attractive to foreign capital. 

    However, the narrowing U.S.-China yield spread will lead to slower inflows into the onshore bond market, and direct investment next year could ease, considering multiple factors, including regulations, U.S.-China relations and China’s slowing economy, Cheung said.

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