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

    Taipei blasts 'provocative' Chinese fighter jet incursion across Taiwan Strait line

    This article by Jesse Johnson may be of interest to subscribers. Here is a section:

    However, Glaser said that the Chinese “haven’t done so for at least a decade, likely longer.”

    “I’ve been told that Chinese jets approach the midline, but then veer off,” she said.

    The flight came just after Taiwan President Tsai Ing-wen capped off a tour of several Pacific nations with a visit last week to Hawaii, where she said she had formally submitted new requests to the United States for F-16B fighter jets.

    The U.S. has no formal ties with Taiwan but is bound by law to help it defend itself and is the island’s main source of arms. The Pentagon says Washington has sold Taipei more than $15 billion in weaponry since 2010.

    China is suspicious of Tsai and her pro-independence Democratic Progressive Party and any push for the island’s formal independence.

    Chinese President Xi Jinping said in January that Beijing reserves the right to use force to bring Taiwan under its control, but would strive to achieve peaceful “reunification.”

    Beijing has called Taiwan “the most important and sensitive issue in China-U.S. relations” and has bolstered its military presence near the island, sailing its sole operating aircraft carrier through the Taiwan Strait in January and March of last year and holding large-scale “encirclement” exercises and bomber training throughout 2018.

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    Chinese Stocks Wrap Up Best Quarter Since 2014 With a Huge Rally

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

    Friday’s surge in Chinese stocks rounds up a winning quarter for the country’s investors. China’s equities have outrun every other national market in the world in the three-month period. The CSI 300 Index’s 29 percent rally is its best since the end of 2014, when the nation’s equity bubble was forming. Apart from a Taiwanese chipmaker, a Brazilian steel producer and Latin America’s largest utility, all the top 30 performers on MSCI Inc.’s emerging-market benchmark are Chinese companies.

    Managing a momentum-driven investor base, where turnover is in the hands of almost 150 million retail traders, has always been a challenge for the government. China’s experienced two massive bubbles in the past decade, with a tight-grip approach to tame the rally backfiring in 2015, drawing the ire of foreign investors. Analysts predict Beijing will be more successful this time in engineering a slow bull market.

    “It’s a critical time for the market,” said Liao Zongkui, an analyst at Lianxun Securities Co. “Investors are keeping a close eye on earnings from heavyweight companies. A good results season will be a big confidence boost, and will ensure the stock-market rally can continue.”

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    Italy set to formally endorse China's Belt and Road Initiative

    This article from the Financial Times may be of interest to subscribers. Here is a section:

    Chinese investments have become increasingly contentious in the EU. Diplomats in Brussels and influential western European capitals have long worried the 16+1 grouping of China and central and eastern European states, including 11 EU members, is a Trojan horse to divide the bloc. Beijing has denied this suggestion.  EU member states such as Germany and France have pushed for tougher screening criteria for Chinese investments. They want the bloc to develop a more unified strategy amid rising tensions over the security implications of using Chinese technology from companies such as Huawei, the telecoms group. Other countries including Greece and Portugal, where Chinese groups have invested billions of euros since the financial crisis, have adopted a more lenient approach.

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    China Wants Its Stock, Bond Markets to Step Up Funding Role

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

    “We need to create a strong capital market,” Guo Shuqing, the country’s chief financial regulator, said at the National People’s Congress, China’s top legislative session which wrapped up last week. “We could do more work especially in the capital market -- stock market, bond market -- for direct financing.”

    China is trying to transform how it funds its economy after decades of relying on state-run banks that benefit from the implicit backing of the nation’s treasury -- but tend to direct most loans to other government-owned companies. The difficulty that small and private firms have in securing funding was one reason for an explosion of shadow-banking, and the rapid increase in debt and risk that came with it.

    Spurred to act by a record $34 trillion debt pile, authorities in recent years have cracked down on risky loans, squeezing businesses that relied on such funding. While leaders including Guo have called on the banks to do more to finance private companies, lenders are grappling with their own concerns about loan quality and default rates. Even so, outstanding banks loans in China have increased by about 27 percent since 2016, while capital-market funding rose by around 15 percent.

    “We shouldn’t put all the pressure on banks,” Xu Kuijun, an NPC delegate and vice president at Bank of China Ltd. In Shanghai said in an interview at the sidelines of the gathering. “We have to rely more on direct financing, and capital markets should do more.”

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    China's economy is 12% smaller than official data say, study finds

    This article by Gabriel Wildau for the Financial Times may be of interest to subscribers. Here is a section:

    For years, the sum of China’s provincial GDP has exceeded the national figure, a clear sign of statistical inflation at the local level. The National Bureau of Statistics (NBS) has previously acknowledged that “some local statistics are falsified”, and in 2017 the central government accused three provinces in China’s north-east rust belt of fabricating data. 

    The Brookings paper highlights how the NBS in Beijing struggles to make adjustments to the inflated data it receives from local officials. The analysis finds that the central government’s adjustments to local data are mostly accurate before 2007-08 but “after this date no longer appear to be accurate”. 

    The NBS said last year that it would assert greater control over provincial data collection beginning in 2019 to eliminate discrepancies between local and national data. 

    “NBS has done a lot of work to weed out the fake numbers added by local government, but it just doesn’t have enough power and capacity, nor the right incentives,” Michael Zheng Song, economics professor at the Chinese University of Hong Kong and a co-author of the paper, told the FT. “It would be unfair to blame NBS for fabricating GDP numbers.”

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    Email of the day on differences between the performance of the FTSE A50 Index and the Shanghai A-Shares Index.

    Would you care to comment on the different behaviour of the China A-50 future and the A-Share indices themselves?  It has been ironic, and frustrating, that while you and all the media talk of surging A-Share prices, the A-50 future, which is the one one can actually trade, has come down very sharply in the last few days.

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    China Sees Tough Battle in Boosting Growth Without Debt Blowout

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

    In all, Li rolled out tax cuts worth almost 2 trillion yuan ($298 billion) and pledged further stimulus ahead. While that emphasis on stronger fiscal policy can be seen as a loosening from last year’s vow to curb financial risks and trim the budget, the overall goal is still to buffer the economy without letting debt accelerate once more. That’s a balancing act that will be severely tested should any new threats to growth appear.

    “It’s a big fiscal push,” said Michael Spencer, global head of economics at Deutsche Bank AG in Hong Kong. “There’s a reluctance to just turn on the infrastructure tap if they don’t need to.”

    Li warned that China faces a graver and more complicated environment this year. He’s trying to rekindle lending to the private sector, mindful that the total debt pile is approaching 300 percent of GDP. “China must be fully prepared for a tough struggle,” he said.

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    Chinese Shares Gain Global Sway Thanks to Index Firm's Move

    This article by Shen Hong and Michael Wursthorn for the Wall Street Journal may be of interest to subscribers. Here is a section:

    Analysts say managers of funds that track MSCI’s emerging-markets index, such as the iShares MSCI Emerging Markets exchange-traded fund, are expected to make the necessary changes to bring their vehicles in line with the new weightings.

    BlackRock Inc.’s global head of markets and investments for iShares and index investing, Manish Mehta, welcomed MSCI’s move, saying “the gradual addition of onshore Chinese securities deepens the investment opportunity for global investors, and we look forward to continued development in the market and regulatory environment to facilitate this increased access.”

    Morgan Stanley analysts estimate that foreign inflows into mainland Chinese stocks could reach $100 billion to $220 billion a year over the next decade, with foreign ownership of the market rising to as much as 10%, from 2.6% now.

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    In China, Distressed Debt Can Be AAA

    This article by Chris Anstey and Lianting Tu for Bloomberg may be of interest to subscribers. 

    Enter the Foreign Raters! authorities have a record of pulling out the stops to aid some corporate debtors, including pressuring creditors into providing funding even after a company has defaulted. So it’s hard to imagine they’d be patient with downgrades by a foreign ratings company that could make it difficult for a troubled borrower to refinance.

    Yet regulators in Beijing recognize that allowing credit to be priced based on the risk of the borrower could make investment across the economy more efficient. The People’s Bank of China says a certain amount of defaults can be healthy. And it sees foreign investors as a catalyst for reform. Given that those investors would prefer ratings akin to what they’re used to elsewhere, China in 2017 opened the door to the big three global ratings companies to operate wholly owned units.

    S&P has hired at least 30 analysts for its Beijing office, preparing to open for business soon, says Simon Jin, chief executive officer of the company’s new China unit. The question on the minds of observers is just how S&P, along with Moody’s Investors Service and Fitch Ratings—if and when they follow—will manage to produce ratings that enjoy the confidence of international investors while also expanding business in a market that may not welcome hard truths about creditworthiness. Jin says “there is genuine demand for objective and reliable ratings in China” and that S&P plans “to provide Chinese market participants the same standards of transparency and independent analysis as we do anywhere else in the world.”

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    Wild Week Ahead for Trump, Kim, Brexit, Cohen and Fed's Powell

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

    After days of buildup, Trump kicked off the week by delaying a threatened increase in U.S. tariffs on Chinese imports and dangling a summit with President Xi Jinping at Mar-a-Lago, his Florida retreat, if “both sides make additional progress.” Along the way, he slapped down Lighthizer on a semantic point. Earlier, the two sides were haggling over how to ensure Beijing lives up to its promise to not weaken the yuan. Trump then reported substantial progress, including on currency.

    And

    Look for Powell to offer signals on what’s next for the Fed during two days of congressional testimony. When they last met, policy makers broadly backed ending the runoff of the central bank’s balance sheet. Lighthizer, who testifies Wednesday, may give a sense of how likely the U.S. is to impose tariffs on auto imports. The European Union is threatening to hit back. U.S. fourth-quarter gross domestic product, due Thursday, is expected to show 2.5 percent expansion last year, short of the Trump administration’s ambitious goal.

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