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

    China Armed With Powerful Market Weapons in Duel With Trump

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

    Chinese policy makers could devalue the yuan to offset the impact of U.S. duties on China’s economy. The offshore yuan weakened 5.5% against the dollar in 2018, drawing Trump’s ire and fueling speculation that the country was deliberately weakening its currency. While it has fallen 1.8% this week, the currency rose on Friday after the People’s Bank of China set its daily fixing at a stronger-than-expected level.

    However, China’s painful experience with devaluing the yuan in 2015, which prompted capital to flee the nation, is likely to dissuade a similar move, according to Tao Wang, UBS Group AG’s chief China economist and head of Asia economic research. “China doesn’t like the self-fulfilling outflows that come as a result of depreciation, which tend to diminish domestic confidence,” she said. “In addition, yuan depreciation last year angered the Trump administration and led to higher U.S. tariffs.”

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    Trump, China Signal Harder Stands Ahead of High-Stakes Talks

    This article by Shawn Donnan, Jenny Leonard and Miao Han for Bloomberg may be of interest to subscribers. Here is a section:

    But the mood on both sides going into the talks appears to be hardening with Lighthizer calling members of Congress ahead of the discussions to warn that a deal this week is unlikely, according to people familiar with the conversations. While Trump on Wednesday insisted that Liu was coming to make a deal and dubbed him a "good man," he later told a rally of supporters that China "broke the deal" by backsliding on prior commitments, leading him to order higher tariffs.

    China has disputed Trump’s characterization that the country reneged. But it has also sent its own signals that a deal could take time.

    Unlike in some of his previous visits to Washington, Liu is not traveling with the designation "special envoy" of Xi Jinping, according to people briefed on his trip. Chinese officials’ public statements have also hardened in recent days with Beijing vowing to retaliate against Trump’s tariff increase and rejecting the idea that it has reneged on any commitments made during the months of tough negotiations that have led to this week’s showdown.

    “China is credible and honors its word and that has never changed,” Commerce Ministry Spokesman Gao Feng told reporters on Thursday.

    The Ministry of Commerce also announced it would soon publish details of new retaliatory tariffs.

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    China Defaults Hit Record in 2018. 2019 Pace Is Triple That

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

    China continues to press banks to extend credit to the private sector, and small and medium-sized companies especially. The latest move came Monday, when the central bank loosened some reserve-requirement rules for lenders. But President Xi Jinping’s team has also focused on shrinking the shadow-banking system, where credit decisions were made with less regulatory oversight and where it was easier to build up unsustainable leverage.

    It’s that funding squeeze that explains the default surge that began in late 2017 and continues today. By contrast, 2016 was more a story of China’s push to shrink excess industrial capacity having reverberating effects in credit markets. “Short bond tenors mean the companies need to refinance frequently,” and weaker ones will likely have difficulty, analysts including Hong Kong-based Nino Siu at Moody’s Investors Service wrote in a note last month. “Banks are reluctant to lend to weaker companies. Additionally, shadow banking, on which weaker Chinese companies rely, continues to contract as the government tightens regulation,” she and her colleagues wrote.

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    Wall Street Asks Whether Trump's Tariff Is a Tactic. Or Not

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

    Goldman believes a tariff increase may be “narrowly avoided,” putting odds that tariffs rise on Friday at 40 percent, Phillips wrote in a note.

    Will be watching whether a large delegation of Chinese officials comes to Washington on May 8, as scheduled; canceling would mean an agreement in the coming week would “seem very unlikely,” and would make an increase in the tariff rate to 25 percent “the base case.”

    China trade issues have “negative implications for the outlook for auto tariffs and passage of the USMCA [U.S.-Mexico-Canada Agreement].” Trump’s “willingness to risk a market disruption by threatening an unexpected tariff hike suggests that he might also be willing to risk the disruption that formally proposing auto tariffs or announcing the intent to withdraw from NAFTA might cause.” Phillips raised the probability that auto tariffs will be implemented later this year to 20 percent from 10 percent, and lowered the probability that USMCA will pass to 60 percent from 70 percent.

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    Trump Stirs Alarm That He May Be Giving China a New Trade Weapon

    This article by Shawn Donnan and Jenny Leonard for Bloomberg may be of interest to subscribers. Here is a section: 

    Details of the U.S. commitments and how the enforcement mechanism will operate remain scant. But Mnuchin’s comments have caused plenty of raised eyebrows from legal scholars to the business community and Congress.

    If the U.S. allows China reciprocal enforcement powers, it would make China “judge, jury and executioner as to whether we have honored our obligations,’’ said Daniel Price, who served as a senior economic adviser to President George W. Bush and is now at Rock Creek Global Advisors in Washington. “I don’t think the U.S. business community is sufficiently alert to the risk of constantly being exposed to unilateral enforcement action by China.”

    Details of the U.S. commitments and how the enforcement mechanism will operate remain scant. But Mnuchin’s comments have caused plenty of raised eyebrows from legal scholars to the business community and Congress.

    If the U.S. allows China reciprocal enforcement powers, it would make China “judge, jury and executioner as to whether we have honored our obligations,’’ said Daniel Price, who served as a senior economic adviser to President George W. Bush and is now at Rock Creek Global Advisors in Washington. “I don’t think the U.S. business community is sufficiently alert to the risk of constantly being exposed to unilateral enforcement action by China.”
     

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    On Target

    Thanks to Martin Spring for this edition of his ever-interesting letter. Here is a section on the coal market which I found particularly illuminating: 

    While climate-change activists make a lot of fuss about the US, where emission of greenhouse gases has been in decline, they aren’t demonstrating loudly about China -- which attacks developed countries for not doing enough, while itself doing most to worsen it,

    The New York Times reports that China, the world’s leading emitter of greenhouse gases from coal, now admits it’s burning up to 17 per cent more coal than its government previously claimed when it signed up for the Paris accord.

    And it’s making things worse. Across China the government is building a fleet of new coal-fired stations with 259 gigawatts of capacity, while outside the country it’s financing even more new coal plants, providing $36 billion for 399 gigawatts.

    “Chinese bankers and project planners like coal-backed projects because they are cheap,” says the energy consultancy IEEFA. “While they are restricted by Chinese pollution and emissions targets at home, they are free to fund coal-backed projects abroad.”

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    The World's Biggest Electric Vehicle Company Looks Nothing Like Tesla

    This article by Matthew Campbell and Ying Tian for Bloomberg may be of interest to subscribers. Here is a section:

    In automotive circles, Wang’s predictions of the combustion engine’s imminent demise often meet profound skepticism. Chinese sales of new-energy vehicles, a category comprising plug-in hybrids, pure EVs, and fuel-cell cars, more than tripled from 2015 to 2018, but they still account for only 4.5 percent of the total. The doubters, he argues, underestimate the country’s capacity for reinvention. “The Chinese way is to replace everything at once,” Wang says. “When we switched from black-and-white to color TVs, it took three years. In the West it was 10. Going from feature phones to smartphones took about one year. In Europe it was three. Cars will be the same. It will go very fast.”

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    China Stocks Fall as Better Data Dim Prospects of More Stimulus

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

    "The credit data lifted expectations on market liquidity and economic fundamentals," said Wang Jianhui, a Beijing-based analyst with Capital Securities Co. "It provided an excuse for investors who wanted to bottom fish stocks after last week’s correction. But it’s more likely a technical rebound as there hasn’t been any substantial change in fundamentals."

    The decline in mainland shares came after some companies issued profit warnings. In Shenzhen, Jiangling Motors Corp. sank by the 10 percent daily limit after it predicted an 84 percent decline in first-quarter net income from a year earlier.

    Shandong Chenming Paper Holdings Ltd. slid 8.9 percent after saying its first-quarter profit may plunge 94 percent to 96 percent.

    "While the macro numbers suggest a recovering trend, things are still looking weak in the micro segments including corporate profits," said Shen Zhangyang, a Shanghai-based strategist with
    Northeast Securities Co.

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    PBOC Support to Stay Even Amid Credit Upswing

    This article by Chang Shu and David Qu from Bloomberg Economics may be of interest to subscribers. Here is a section:

    The robust rate of credit expansion this year doesn’t rule out continued monetary easing. We think that’s still needed to help the economy find a solid footing, though the focus should increasingly shift to targeted measures.

    Broad-based easing is still needed to provide liquidity to the banking sector so it can sustain the expansion in credit. The need is higher in 1H and we continue to see the possibility of reductions in the reserve requirement ratio, with the first potentially coming as early as in April.

    There’s less of a necessity for an interest rate cut, in our view.

    Targeted measures are important for channeling funding to sectors in greater need of funding -- small, private firms -- to lower their effective borrowing costs.

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    Economic Think Tank Says Korea Now in Recession

    This article by Choi Hyun-mook and Shin Su-ji for ChosunMedia may be of interest to subscribers. Here is a section:  

    The state-run Korea Development Institute on Sunday said Korea is slowly going into recession. The KDI said Sunday that the economy is "in a phase of gradual slowdown" as demand both overseas and at home shrinks.

    Until last October, the institute had said Korea's economy was improving.

    According to market researcher CEO Score, investment at 855 subsidiaries of Korea's top 60 businesses fell 3.1 percent last year to W98.5 trillion (US$1=W1,139).

    Some 35 of them slashed spending last year. Samsung's cutbacks were particularly drastic with 46 subsidiaries reducing investment by 25.7 percent to W28.5 trillion.

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