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

    China's Fifth Plenum: Reading the Initial Tea Leaves

    This article from the Center for Strategic & International Studies may be of interest to subscribers. Here is a section:

    As expected, the plenum declared that China had met the critical political goal of becoming a “moderately prosperous society” in 2020. By the end of the year, China’s GDP is expected to reach nearly 100 trillion yuan (RMB)—equivalent to $14.3 trillion—a figure higher than the plan’s forecast of RMB 92.7 trillion, which makes China’s economy in nominal terms about 66.7 percent the size of that of the United States in 2019 ($21.4 trillion), up from 40.6 percent the size of the United States in 2010. China reportedly lifted 55.75 million people out of poverty and created 60 million jobs in urban areas over the past half-decade. By the end of 2020, there will be basic medical insurance coverage for 1.3 billion and basic pension support for nearly 1 billion citizens.

    Looking ahead, the plenum emphasized that the 14th Five-Year Plan will build on the 13th Five-Year Plan’s principles of innovation, regional coordination, green development, international openness, and social equity. That said, there was a distinct emphasis on strengthening the domestic economy. There was no mention of a growth rate target; instead, the country will focus on improving quality and raising productivity. The plan will highlight China’s need to gain technological independence; become a powerhouse in manufacturing, cyber, and the digital economy; and raise China’s international competitiveness. At the same time, China will need to expand domestic consumption as a share of the economy, which will be dependent on raising wages, building a more complete social safety net, and expanding economic opportunities in rural China.

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    The Great Reset

    This edition of Tim Price’s always enjoyable missive may be of interest to subscribers. Here is a section:

    Markets were born free but are now everywhere in chains. Cash deposit rates are now derisory, but with added bail-in risk. Bond yields are likely to remain squashed indefinitely, helped by governmental funny money. So, cash and bonds are largely out of the question. The one market too big for even the world’s central banks collectively to kick around is the currency market. So, we would not be surprised to see some kind of reset develop there. Our way of anticipating that reset is to own precious metals and the shares of sensibly priced mining concerns in “safer” jurisdictions. Because we anticipate an ultimately inflationary outcome due to those aforementioned torrents of funny money, we value claims on the real economy in the form of equity ownership of cash-flow generative businesses run by principled, shareholder-friendly management with an excellent track record of capital allocation, especially when such stocks can be bought at a discount to their inherent worth. And because we frankly have no clue how the Great Suppression will necessarily play out, we hold uncorrelated (systematic trend-following) funds that offer the potential to zig when the markets finally and conclusively zag. Our watchword: if in doubt, diversify.

    Not the sort of commentary we would prefer to be sending out into the world. But sometimes spades must be identified as such. On a more positive note, some wisdom from the ages: this too shall pass. It just better gets a bloody move on.

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    RBA Inflation Twist Suggests Economy Can Run Hotter on Low Rates

    This article by Michael Heath Bloomberg may be of interest to subscribers. Here is a section:

    Australian central bank chief Philip Lowe’s move to emphasize current inflation rates rather than projections suggests the economy will be allowed to run hotter with interest rates staying lower for longer.

    Lowe conceded that assessing the outlook is problematic when inflation dynamics aren’t well understood and the world is so uncertain.

    “We will now be putting a greater weight on actual, not forecast, inflation in our decision-making,” Lowe said, outlining the RBA’s latest thinking on prices in a speech on Thursday that hinted at further easing to come.

    Annual inflation has averaged 1.7% since Lowe took the helm at the Reserve Bank of Australia in 2016, versus a target of 2%-3% over time, and has now dropped below zero.

     

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    ECB Warns Against Complacency on Depressed Prices, Euro Gain

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

    European Central Bank officials agreed at their latest policy meeting to avoid any complacency in their battle against the recession, and to counter investors’ perception that the euro would inevitably strengthen.

    The account of the Governing Council’s Sept. 9-10 meeting showed officials fretting that currency gains had offset some of their monetary stimulus, with a “material impact” on the outlook for consumer prices. Chief economist Philip Lane said inflation expectations were at “very depressed” levels and at risk of falling further.

    “In the prevailing environment of high uncertainty, keeping a steady hand with respect to monetary policy was seen as most appropriate,” according to the document published Thursday. “At the same time, the case was made for keeping a ‘free hand’ in view of the elevated uncertainty.”
     

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    The Road Ahead

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

    In fact, China is responding to these changes in corporate behavior using a variety of techniques, including becoming a larger and more powerful domestic economy that relies on its own production (what President Xi Jinping calls “domestic circulation”). In the current environment China may also better leverage its higher interest rate curve (both real and nominal) to try to attract capital to support this more permanent shift towards a consumption economy. A more stable currency outlook is also helping. Our bottom line: Expect a heightened rivalry across multiple facets of the relationship, including some decoupling. However, given the absolute size of the opportunity in China, now is actually the time to think through different ways to harness China’s growth in thoughtful, risk-adjusted fashion, particularly investments that reward long-term, patient capital. Specifically, we think that further implementation of domestic circulation as a policy will lead to the rise of more domestic corporate leaders, and as a result, more – not less – corporations will look to find ways to serve this emerging consumption base.

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    U.S. Boosts Crude Sales to China, Forcing Saudis to Find Other Markets

    This article from Dow Jones Newswire may be of interest to subscribers. Here is a section:

    Earlier this year, China agreed to buy U.S. crude as part of a broader deal meant to ease rising trade tensions between the two world powers. The Trump administration agreed to cut some tariffs on Chinese goods in exchange for purchases of American farm, energy and manufacturing exports. ~

    China's buying so far is a long way from fulfilling commitments made in that deal, and to some extent it is simply restoring crude flows that were cut off amid the earlier U.S.-China trade tensions. As part of a deal, Beijing agreed in January to buy $52.4 billion worth of oil and liquefied-natural-gas from the U.S. by the end of 2021. The buying was delayed by the outbreak of the Covid-19 pandemic, but has ratcheted up more recently.

    “The Chinese had to catch up," said Petro-Logistics Chief Executive Daniel Gerber. That is now upending traditional oil-trade routes world-wide and further depressing some prices. Global prices have been hammered by falling demand caused by the pandemic.

    Amid the new U.S. shipments to China, Saudi Arabia recently cut prices for its crude for buyers in Asia, a move that could make that oil more attractive to other regional buyers. It is also now resorting to storing unsold oil at home and overseas, including at depots in Egypt, Singapore and China. Saudi Arabia's domestic crude-oil inventories rose 7% to 81 million barrels in the two weeks to Sept. 20, a level not seen since June, said Paris-based commodities-analysis company Kayrros.

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    Email of the day on journalistic independence.

    Dear Eoin, I suppose you are doing well since I’ve been following your research through all these months. Pandemic changed a lot of things, but we had the crisis of our own. We built the leading Russian business daily but this year, after more than 20 years of our efforts, it was effectively taken from us through machinations brought about by forces close to Kremlin. You can have a look, this is the early July statement by Reporters Without Borders 

    By now, almost all members of the newsroom have left, Vedomosti degraded very quickly and stopped being independent, honest and objective. But a group of journalists and editors including myself have launched the new online publication VTimes - https://vtimes.io . The full-fledged launch including new web-site is scheduled for October but we’ve been active with our articles and podcasts on social platforms, such as Telegram, Facebook etc., since August and feel tremendous support from readers many of whom switched from Vedomosti to VTimes. Last week we began crowdfunding campaign that can be supported from anywhere. I have already used your most valuable comments in my stories for VTimes and will continue to do so.

    I am writing now about rather quick rebound of the global trade. In particular, according to calculations by the Kiel Institute for the World Economy, the trade volumes recovered about half of this year’s historic loss in four months while it took 13 months after 2008 crisis had begun. Some other information on the issue can be found in the WSJ story - 

    And major exporters of goods, such as China, Korea, Germany, now recover quicker than economies more depending on services. You several times wrote about US-China trade from your personal point of view, or rather your wife’s business. I also remember you describing situation in Los Angeles port. Can you tell, what is the situation now, for me to get first-hand experience?

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    Chapter 6: The Big Cycle of China and Its Currency

    This chapter of Ray Dalio’s evolving book “The Changing World Order” will be of interest to anyone monitoring China’s evolution. Here is a section:

    As a result of their longer history and their more intensive studying of it, the Chinese are much more interested in evolving well over much longer time frames than Americans, who are much more interested in making quick hits—i.e., the Chinese are more strategic than Americans, who are more tactical.  The arc that Chinese leaders pay the most attention to is well over a hundred years long (because that’s how long good dynasties last) and they understand that the typical arc of development has different multidecade phases in it, and they plan for them.  For example, the first phase, which occurred under Mao, was when the revolution took place, control of the country was won, and power and institutions were solidified.  The second phase of building wealth, power, and cohesiveness without threatening the leading world power (i.e., the United States) occurred under Deng and his successors up to Xi.  The third phase of building on these accomplishments and moving China toward where it has set out to be on the 100th anniversary of the People’s Republic of China (PRC) in 2049—which is to be “a modern socialist country that is prosperous, strong, democratic, culturally advanced, and harmonious,” which would make the Chinese economy about twice the size of the US economy[4]—is occurring under Xi and his successors.  Nearer-term goals and ways for getting toward these goals are set out in nearer-term plans like the Made in China 2025 plan,[5] Xi’s new China Standards 2035 plan, and the usual five-year plans.[6] 

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    China Gives Markets Just Enough Support, Lets Yuan Strengthen

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

    “The PBOC is sending a signal that it will not tighten monetary policy quickly, but also it’s less likely to use broad easing measures such as a reserve ratio cut,” said Xia Le, chief economist at PingAn Digital Economic Research Center. “This will benefit government bonds in the short term. But in the longer run, the performance of the debt is more dependent on China’s economy and the U.S. election.”

    The yield on 10-year government bonds dropped 4 basis points to 3.11% as of 4:15 p.m. in Shanghai. The yuan last traded at 6.7815.

    The PBOC offered 600 billion yuan ($88.1 billion) of one-year funding with the medium-term lending facility, according to a statement. That will more than offset the 200 billion yuan in loans that come due on Thursday, implying a net injection of 400 billion yuan, the largest monthly addition since July 2018. It kept the interest rate on the funds unchanged at 2.95%.

    Chinese lenders -- the main buyers of government debt -- are compelled to buy 1.13 trillion yuan of new debt this month and repay 1.7 trillion yuan of short-term interbank debt. Financial institutions are also hoarding funds for quarter-end regulatory checks. Adding to the liquidity strain is the authorities’ crackdown on high-yielding financial products, which has limited their ability to attract deposits.
     

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    The Age of Disorder

    Thanks to a subscriber for this report by Jim Reid from Deutsche bank. Here is a section: