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

    China Keeps Cash Engine Running in Ninth Day of Injections

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

    The central bank has added a total net 750 billion yuan via open market operations since Sept. 17. When onshore markets reopen on Oct. 8, 340 billion yuan of 14-day reverse repurchase agreements will fall due. Later in the month, 500 billion yuan of medium-term lending facility is set to expire. 

    Overnight interbank funding costs slid 43 basis points to 1.48%, the lowest since May, after the cash infusion. The seven-day repurchase rate, which covers the week-long break, rose 36 basis points to 2.55%, a level last reached at end-June. 

    The injection is also expected to allay fears of a contagion stemming from Evergrande’s debt problems. In a bid to contain the fallout from the property developer’s woes, China has stepped in to buy a stake in a struggling regional bank from Evergrande.

    “The purpose of liquidity injection is mainly to give market confidence amid the Evergrande crisis,” said Tommy Ong, managing director for treasury and markets at DBS Hong Kong Ltd. “Having said that, there is still a possibility of a RRR cut in October due to a slowdown in economic activities caused by supply constraints and slower export growth.”

    Speculation of an easing comes after recent data indicated that the pace of expansion in the world’s second-largest economy is slowing. A power crisis is adding to the strain and economists from Goldman Sachs Group Inc. are among those who have slashed their growth projections for this year.

    China’s 10-year sovereign bond yield fell one basis point to 2.86% on Wednesday. It sank to a 14-month low after the PBOC unleashed 1 trillion yuan of liquidity into the system via a reduction in the RRR in July. 

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    Dollar Tree to Add Products Above $1 in Dollar Tree Plus Stores

    This article from Bloomberg may be of interest. Here it is in full: 

    Dollar Tree said it plans to begin adding new price points above $1 across all Dollar Tree Plus stores.

    To test additional price points above $1 in selected legacy Dollar Tree stores
    On track in 2021 to have 500 Dollar Tree Plus stores by fiscal year-end
    Another 1,500 stores are planned for fiscal 2022; at least 5,000 Dollar Tree Plus stores are expected by the end of fiscal 2024
    Currently has 105 Combo Stores; expects to add 400 Combo Stores in fiscal 2022
    Sees potential for up to 3,000 Combo Stores over the next several years

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    Solar ETF Drops Most in Four Months as China Rattles Sector

    This note by Michael Bellusci for Bloomberg may be of interest to subscribers. Here it is in full:

    Invesco Solar ETF (TAN) falls as much as 6.5% intraday, the most since May 4, amid growing investor jitters about China’s real estate crackdown potentially sparking a financial contagion. 

    Among individual stocks, JinkoSolar down as much as 10.6% during the session, Beam Global -9%, Daqo New Energy -10%, First Solar-9.3%, Canadian Solar -7.8%

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    Email of the day on slower Chinese growth:

    Think, you may find interesting this Financial Times story that looks into the longer-term consequences of Evergrande saga - https://on.ft.com/3io45gH (open link). It seems that the Chinese real estate market finally (at long, long last) is crumbling, not without help of the country leaders. If it is so and given the fact that the property market accounts for 29% of the Chinese GDP (and land sales to developers, for the third of local governments’ revenues), the economic growth seems to slow dramatically in the coming years. What could be implications, in your view? We all remember that China and its industrialization were the major drivers of the global commodities supercycle in the 21st century. Also, every time China has got into trouble, the Communist party used the same recipe “more investments in infrastructure and construction, more leverage. If now China and its property sector grow much more slowly, not to mention possible contraction of the latter, it will need much less metals and materials, and also possibly less gas (to power plants and send it to homes) and even oil (fewer working trucks and construction equipment). What do you think?

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    Evergrande marks the end of China's economic miracle

    Thanks to a subscriber for this article from Ambrose Evans Pritchard for The Telegraph. Here is a section:

    Harvard Professor Ken Rogoff and Yuanchen Yang (now at the IMF), say Chinese property and construction amount to 29pc of GDP when all ancillary sectors are included. Housing makes up four fifths of personal wealth and land sales make 40pc of local government revenues.

    They argue that this extreme dependence on the property nexus has not been tested because super-charged growth rates hide all sins. But China is no longer growing fast. Xi Jinping’s neo-Maoist ideology of “common prosperity” marks a profound break with the Deng Xiaoping catch-up model.

    “We find that a 20pc fall in real estate activity could lead to a 5-10pc fall in GDP, even without amplification from a banking crisis, or accounting for the importance of real estate as collateral,” they said.

    The US Federal Reserve’s Ben Bernanke once famously said “we’ve never had a decline in house prices on a nationwide basis” and nothing had substantially changed. But it had changed. The national Case-Shiller index would soon fall by 36pc.

    The Rogoff-Yang paper said nothing should be assumed in the case of China either. “Even the very cautious pragmatic Chinese regulators may not yet be fully anticipating the depth of the possible fall in China’s housing prices,” it said.

    Deflating an economy that is so hyper-leveraged to property is going to take years and will be untidy. China will almost certainly avert a Minsky crisis but it may not avert a long grinding semi-slump that profoundly changes the world’s perception of the country.

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    Global Traders Given Evergrande Reprieve as PBOC Adds Liquidity

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

    China’s central bank boosted its gross injection of short-term cash into the financial system after concern over a debt crisis at China Evergrande Group roiled global markets. 

    The People’s Bank of China pumped 120 billion yuan ($18.6 billion) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan. That matches the amount seen on Friday, and was just below that of Saturday. Sentiment was also boosted after Evergrande’s onshore property unit said it plans to repay interest due Thursday on its local bonds. 

    “The PBOC’s net injection is probably aimed at soothing nerves as the market worries about Evergrande,” said Eugene Leow, a senior rates strategist at DBS Bank Ltd. in Singapore. “While the aim may be to instill discipline, there is also a need to prevent contagion into the real economy or to other sectors.”

    The need to calm market jitters is pressing amid losses in China-related equities worldwide over recent days amid concern over Evergrande’s debt woes. The benchmark CSI 300 Index fell as much as 1.9% Wednesday after the Hang Seng China Enterprises Index -- a gauge of Chinese shares traded in Hong Kong -- slid the most in two months on Monday. Losses came even as Wall Street analysts sought to reassure investors that Evergrande won’t lead to a Lehman moment.

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    Is Evergrande a risk for global financial markets?

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

    Market Contagion Tests Xi's Resolve on Evergrande, Property Curbs

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

    The response so far has been largely limited to the People’s Bank of China, which injected a net 90 billion yuan into the banking system on Friday. It added another 100 billion yuan on Saturday.

    Evergrande has around $300 billion worth of liabilities, more than any other property developer in the world. It’s a whale in China’s high-yield dollar bond market, accounting for about 16% of outstanding notes. Some $83.5 million of interest on a five-year dollar bond comes due Thursday, and failure to pay within 30 days may constitute a default. Evergrande also needs to pay a 232 million yuan ($36 million) coupon on an onshore bond the same day.

    Evergrande’s shares lost as much as 19% on Monday, briefly taking its market value to the lowest on record. The stock closed 10% lower.

    “With policy makers showing no signs of wavering on property market deleveraging, the latest headlines regarding Evergrande likely suggest that housing activity may deteriorate further in the absence of the government providing a clear path toward an eventual resolution,” Goldman economists led by Hui Shan wrote in a Sunday note.

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    How China's Pollution Fight Is Roiling Commodities

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

    The growing importance of the environment in Beijing’s policy mix has left commodities markets caught between decelerations in both supply and demand. Iron ore prices more than halved between mid-May and mid-September as the steel production limits slashed demand for the steel-making ingredient. Aluminum, meanwhile, has jumped 46% so far this year as Chinese production -- more than half the world’s total --  of the energy-intensive metal is cut. The curbs on coal are particularly eye-catching because China has been wrestling with an unprecedented spike in the cost of the fuel. Coal futures in Zhengzhou hit a record in September, defying what should be a seasonal slowdown in demand. Any further cutbacks on output would run counter to the government’s pledges to stabilize prices by encouraging more domestic supply. It also would make another round of power rationing for industry more likely. Since coal is the major energy source in China for the production of fertilizer, its price has also soared.

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