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

    The Macro Case for Precious Metals

    Thanks to a subscriber for this chart-laden article from Crescat Capital. Here is a section:

    As inflation continues to develop in the economy, see below the incredible link between gold and CPI since the GFC.

    Note how after the pandemic lows, gold front ran the potential risk of a rise in consumer prices and the entire precious metals market appreciated sharply.

    It is important to remember that before recently peaking, gold had been going on a streak for two years already.

    The metal was up more than 75% from August 2018 to August 2020 and even reached historical highs during this period.

    Back then, with CPI around 1%, very few investors foresaw inflation as a risk to the economy. Now it is a real problem.

    We think gold likely appreciated too quick and too fast becoming what some thought as an obvious trade.

    Extreme sentiment probably explains the reason for its recent weakness after signaling way earlier than any other asset the possibility that an inflationary environment could be ahead of us.
    We are now on the other side of this extreme.

     

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    China Urges Evergrande's Hui to Pay Debt With His Own Wealth

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

    Chinese authorities told billionaire Hui Ka Yan to use his personal wealth to alleviate China Evergrande
    Group’s deepening debt crisis, according to people familiar with the matter.

    Beijing’s directive to the Evergrande founder came after his company missed an initial Sept. 23 deadline for a coupon payment on a dollar bond, said the people, asking not to be identified discussing a private matter. Local governments across China are monitoring Evergrande’s bank accounts to ensure company cash is used to complete unfinished housing projects and not diverted to pay creditors, the people said.

    The demand that Hui tap his own fortune to pay Evergrande’s debt adds to signs that Beijing is reluctant to orchestrate a government rescue, even as the property giant’s crisis spreads to other developers and sours sentiment in the real estate market. Chinese President Xi Jinping has been cracking down on the billionaire class as part of his “common prosperity” campaign to reduce the country’s yawning wealth gap.

    It’s unclear whether Hui’s fortune is big and liquid enough to make a sizable dent in Evergrande’s liabilities, which swelled to more than $300 billion as of June. The developer’s dollar bonds are trading at deep discounts to par value as investors brace for what could be one of China’s largest-ever
    debt restructurings.

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    China Vows to Keep Property Curbs, Evergrande Risk Seen Limited

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

    The property controls have achieved good results and the government will refrain from using the real estate sector as a short-term economic stimulus measure, Liu Zhongrui, an official at the China Banking and Insurance Regulatory Commission, said at a briefing in Beijing on Thursday. Evergrande is an “individual” case and won’t hurt the overall credibility of Chinese firms, which is backed by the country’s economic stability, he said.

    Property controls to stamp out speculation in the housing market have weighed on the country’s indebted developers, which are now seeing sales plunge and home prices snapping a years-long streak of increases. While officials have told banks to speed up mortgage lending again, the central bank has indicated that contagion risks from Evergrande are “controllable” and unlikely to spread.

    Property lending growth at Chinese banks slowed to 8.6% this year through September, Wang Zhaodi, a spokesman at the CBIRC, said. That’s down from 12% in the first quarter, which was the slowest pace in eight years.

    New-home prices in 70 cities fell 0.08% in September, the first drop in six years, official data showed this week, posing a potentially big blow for an economy that counts on property-related industries for almost a quarter of its output.

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    China's Falling Home Prices Cast Another Shadow Over Economy

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

    There are “individual problems” in the real estate market, but the risks are controllable overall, Vice Premier Liu He said at the same event, according to the official Xinhua News Agency. Reasonable funding needs in the sector are being met, Liu was quoted as saying.

    Some analysts expect the current real estate slump to be less harsh than previous ones because inventories remain relatively small. Developers have been more rational about building projects in coastal cities where demand is higher, said Chen Long, a partner at Beijing-based consultancy Plenum.

    “The relatively low stock of unsold housing limits the risk of a major downturn,” Oxford Economics said in a note on Wednesday. “We think the most likely scenario is a contained short-term downturn.”

    Still, any recovery will be difficult until home values resume rising. 

    “If property prices stop growing, we won’t buy,” said Jack, a tech worker in Shenzhen who didn’t want to be identified by his surname for fear of reprisals from his company. “Right now, I’ll sit and watch.”

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    Quarterly Global Outlook 4Q 2021

    Thanks to a subscriber for this report from UOB which may be of interest. Here is a section:

    China Breaks Silence on Evergrande, Says Risks Controllable

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

    Zou also said:

    China’s government has insisted that property not be used as a short-term stimulus for the economy
    Cities have seen an excessive surge in property prices, which mortgage restrictions helped to curtail
    Property investment has slumped recently after some developers faced credit problems, but this is a normal market phenomenon
    Some banks have misunderstood macroprudential policies regarding the property sector.

    “This is the strongest signal yet that authorities won’t come to the rescue of creditors of Evergrande and other developers,” said Travis Lundy, a special situations analyst who publishes on Smartkarma. They are sticking to the stance that there won’t be any property-boosting measures, aside from small steps such as faster home-loan processing and efforts to alleviate mortgage limits at banks, he added. 

    Financial regulators have told some major banks to accelerate approval of mortgages in the last quarter, Bloomberg reported earlier Friday. Lenders were also permitted to apply to sell securities backed by residential mortgages to free up loan quotas, easing a ban imposed early this year, according to people familiar with the matter.

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    China Bonds Slide Most Since August as Bets on Easing Unravel

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

    Bonds fell after the central bank withdrew a net 190 billion yuan ($29.5 billion) of short-term funds from the banking system Monday after draining the most since January on Friday. The likelihood of a rate cut in the near term is low and the timing of a reduction in the reserve requirement ratio is uncertain, state-backed China Securities Journal said.

    China’s benchmark 10-year yields climbed five basis points to 2.95% on Monday, the highest close since July. 

    The jump in 10-year yields sent them out of the 10-basis-point range where they had been since the start of August, suggesting traders are giving up bets on aggressive monetary easing. The selloff also followed losses in other global bond markets amid a surge in inflation expectations due to rising energy prices and central-bank progress toward normalization.

    The selloff is far from over, analysts at Guotai Junan Securities Co. led by Qin Han in Shanghai wrote in a research note. “All the factors, apart from weak economic growth, are negative for the bond market. The adjustment in China’s bond yields in the fourth quarter may be more drastic than expected.”

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    Lumber prices have risen 50% since August, and 2 experts say the resurgence will continue through early 2022

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

    A reason for the price increase in lumber is a modest increase in renovation demand after price-sensitive buyers proceeded with home improvement projects now that wood prices have seen a substantial correction, Dustin Jalbert, senior economist at Fastmarkets, told Insider.

    Though Jalbert does not expect the kind of runup in lumber prices seen earlier this year - a period when there was a backlog of homes waiting to be built and a shortage of key construction supplies - as pandemic-related supply constraints continued to ease.

    "The market has finally transitioned to a more balanced state compared with being severely oversupplied in the summer months, which ultimately drove the massive correction in prices from record-high levels set in May," Jalbert told Insider.

    And even if Americans wanted to build and renovate homes, the field consumption of lumber is being bogged down by shortages of other complementary materials such as windows, siding, cabinet appliances, and garage doors, he added.

    The supply side, meanwhile, continues to face challenges, Jalbert said. Log costs in British Columbia, which accounts for about 16% of North American lumber capacity, remain elevated.

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    Alibaba, Didi, and Other Chinese Tech Stocks Surge as U.S.-China Relations Brighten

    This article from Barron’s may be of interest to subscribers. Here is a section: 

    The U.S. and China agreed Wednesday that President Joe Biden and President Xi Jinping would meet before the end of the year. It will be a virtual meeting and follows a call between the two leaders that was held in September -- that was their first in seven months.

    The virtual summit was announced shortly after White House national security adviser Jake Sullivan met a senior Chinese foreign policy advisor, Yang Jiechi, in Zurich, according to The Wall Street Journal.

    "While we expect minimal material improvement in the tone or substance of their relationship in the coming months, we still see investment opportunities on both sides, especially in the areas of capital markets, technology, cybersecurity, and climate change," said strategists led by Mark Haefele, the chief investment officer at UBS Global Wealth Management.

    "In our view, investors should avoid taking sides. The best long-term approach is to seek exposure to the different economic cycles, growth opportunities, and sectoral trends offered by both countries," the team at UBS said.

    Strategists at the Swiss bank noted speculation around possible topics for discussion included trade, Taiwan, and climate issues.

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    Beijing Blinked First in China's Energy Crisis

    This article by David Fickling for Bloomberg may be of interest to subscribers. Here is a section:

    It looks like the government has blinked first. Miners, after months of being ordered to stick closely to capacity limits, are now being ordered to produce as much as they can, people familiar with the matter told Bloomberg News. That should help to take the wind out of surging thermal coal prices and prevent the current crisis from extending into the winter, when sufficient energy supply can be a life-or-death matter.

    There is, to be sure, an attempt to make this retreat look like a withdrawal. The latest advice from Beijing’s economic planners last week focuses on protecting individuals but continuing the crackdown on industry, especially when it’s most energy-intensive and polluting. Allowing generators to raise prices to end-users, as is happening in Guangdong province, will also help create a more commercial power market. Electricity consumption controls have even been loosened in a way that would permit potentially unlimited volumes of cheaper renewable power into the market.

    The risk, as with the rapidly fading fears over Evergrande, is that Beijing has simply deferred a pressing problem again. If China doesn’t reform a system that refuses to face up to its internal contradictions, the problems of an economy fed by credit and carbon will only fester and grow. 

     

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