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

    China Rebound's Gone Within a Day as Even Biggest Stocks Crumble

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

    The list of negatives facing the $6.6 trillion stock market is growing. The economy is already showing signs of vulnerability to a U.S. trade war before new taxes are levied at the end of this week. Analysts and investors alike are struggling to keep up with the yuan’s descent, while there’s been little sign of heavy state intervention to stem the slump in either stocks or the currency. Concern is also growing over the health of the country’s massive property market.

    "Sentiment will remain bad in the near term," said David Qu, economist at Australia & New Zealand Banking Group Ltd. in Shanghai. "The market doesn’t hold high hopes that China and the U.S. will find a way out before the tariffs are imposed."

    The Shanghai Composite has only risen on four days out of the past 15, and on each occasion the gauge has closed lower the following trading session. A momentum indicator is near a five- year low, while losses in Chinese bourses have topped $2 trillion since January’s peak. In percent terms, the Shanghai measure is the world’s worst after Argentina with a 22 percent retreat in the period.

    "It would be a bad time to buy right now as pessimism prevails," said Liang Jinxin, Shanghai-based strategist with Tianfeng Securities Co.

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    Kevin Rudd on Xi Jinping, China and the Global Order

    I view this transcript of a speech delivered at the Lee Kuan Yew School of Public Policy in Singapore on Tuesday as required reading for anyone interested in China. Here is a section:

    It is deeply significant that at the 2018 Work Conference, Xi Jinping states boldly that a core component of his new ideology of a “diplomacy of socialism with Chinese characteristics” would be for China to: “lead the reform of the global governance system with the concepts of fairness and justice.” This is by far the most direct, unqualified and expansive statement on China’s intentions on this important question we have seen.

    China, like the rest of the international community, is acutely conscious of the dysfunctionality of much of the current multilateral system. It also sees the US walking away from much of the system as well: from the JCPOA which was agreed to by the UN Security Council; from the UN’s Paris Agreement on Climate Change; its withdrawal from the UN Human Rights Commission; its open defiance of the Refugees Convention; and its challenging of the underlying fabric of the WTO.

    Nature, as we know, abhors a vacuum. International relations even more so. And we all saw Xi Jinping’s riposte to President Trump on climate change and trade at Davos 18 months ago just after President Trump’s election. If China is indeed serious about leading the reform of global governance, its attitude to various of these multilateral institutions will be radically different to the historical posture of the US. Take for example the Human Rights Council in Geneva, which China would like to see emasculated. Mind you, so too now, apparently, does the current US administration!

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    China's Baidu Approves a Share Buyback of Up To $1 Billion

    This note by Edwin Chan may be of interest.

    Chinese search giant Baidu Inc. has approved a plan to buy back as much as $1 billion of its own shares over the next 12 months, a move that may help prop up its stock as global market volatility grows.

    Its board has green-lit a program to use existing cash to buy shares in the open market at prevailing prices, the Beijing- based company said in a statement Wednesday. It will review that program periodically and may adjust its terms and size.

    Baidu’s shares are up more than 7 percent this year, just underperforming the Nasdaq Composite’s gain but outstripping larger rival Tencent Holdings Ltd., which is down 7 percent in 2018.

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    China, Europe Warn Trade War Could Trigger Global Recession

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

    Later this week, the U.S. Treasury Department is expected to release fresh rules on Chinese investment in technology companies, Bloomberg reported on Monday, putting additional pressure on China -- which hit back against the plans. Chinese investment has provided jobs and tax income for the U.S., and it should view commercial activities “objectively,” Foreign Ministry spokesman Geng Shuang told reporters in Beijing on Monday.

    The U.S. is due to impose tariffs on $34 billion of Chinese imports from July 6, and Trump has threatened to impose levies on another $200 billion of Chinese goods. If that threat is realized, it could cut as much as half a percentage point off China’s economic growth, and also hit the American economy, economists have said.

    Anxiety over the economic fallout is cutting deep in financial markets, with China’s yuan sliding to a six-month low Monday. The S&P 500 Index fell to the lowest since May and the Dow Jones Industrial Average sank for the ninth time in 10 sessions.

    As if to reinforce concerns about the economic outlook, the Dutch Bureau for Economic Policy Analysis on Monday published its latest trade monitor, showing world trade momentum dropped in April to the lowest since 2015. The measure has fallen sharply since hitting a seven-year high at the start of 2018.

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    Xi Can Make Life Difficult for U.S. Companies After Trump Threat

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

    Pressuring companies through bureaucratic means “is a practice that the Chinese have used for a long time and our companies are on guard,” William Zarit, chairman of the American Chamber of Commerce in the People’s Republic of China, said on Bloomberg Television. “This is definitely a concern.”

    South Korean and Japanese companies have all felt this effect, with their businesses in China hurt as part of a dispute between states.

    In 2017, following the Seoul government’s decision to deploy an anti-missile system that China opposed, China forced South Korean retailer Lotte Shopping Co. to suspend operations at many of its hypermarkets in the country for alleged violations of fire-safety rules. The company eventually decided to pull out of China, but still can’t sell all its units and continues to rack up losses. In total due to the dispute, Lotte Group lost an estimated 2 trillion won ($1.8 billion) in the year from March 2017, according to Yonhap News Agency.

    The backlash also led to boycotts, with consumers shunning cars from Hyundai Motor Co. and cosmetics from Amorepacific Group. Chinese tourists cancelled Korean vacations, forcing airlines to scrap flights and hotels to slash rates. The Bank of Korea estimated that 0.4 percentage point was cut from 2017’s gross domestic product.

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    China's Economy Is Slowing Just as Trump Readies a Trade Beating

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

     

    China’s economy fell short of expectations and its central bank chose not to follow the Federal Reserve in raising borrowing costs, adding fresh caution on the outlook for global growth as trade tensions with the U.S. escalate.

    With President Donald Trump renewing threats to impose tariffs on the world’s second-largest economy, May data for industrial output, retail sales and investment all came in beneath economist forecasts on Thursday. The People’s Bank of China kept the cost of reverse-repurchase agreements steady, defying predictions it would track the Fed’s hike of Wednesday.

    Investors now face greater uncertainty over what had been the strongest global upswing since 2011. That doubt is set to fester after Trump said on Wednesday that he’ll confront China "very strongly" over commerce in coming weeks. His administration is scheduled to announce a new list of duties on Friday.

    "A slowing China will add to the challenges for the global economy," said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong and a former International Monetary Fund researcher. "Until recently, the resilience of growth in China was an important buffer for the global economy in the face of headwinds from trade friction, slower growth in Europe, higher oil prices and issues in various emerging markets."

    Both industrial output and retail sales rose less than expected in May compared to a year ago. Fixed-asset investment growth in the first five months was the slowest since the data began in 1999, as was the investment in the services sector. The decade-long decline in investment has intensified this year, as policy-makers act to reduce leverage at state-owned companies and local governments. While that’s a deliberate policy, officials risk a worse-than-desired deceleration in growth.

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    Shadow Lending Slump Shows Deleveraging Picking Up

    This note from Fielding Chen at Bloomberg may be of interest to subscribers. Here is a section:

    Looking at the details, the composition of lending continued to shift toward on-balance-sheet lending from off-balance sheet:

    New bank loans denominated in yuan totaled 1.14 trillion, up slightly from 1.1 trillion in April. The 41.3 billion yuan rise was slightly below the average increase of 98.1 billion yuan recorded in the same month over the past five years.

    The stock of shadow bank lending -- entrusted loans, trust loans, and back acceptances -- dropped across the board. The total fell 421.5 billion yuan, the steepest monthly drop in data available back to 2016.

    Net financing of corporate bonds contracted by 43.4 billion yuan, after an increase of 377.6 billion yuan in April. Rising defaults have hit sentiment in the bond market. Equity financing was more stable, falling moderately to 43.8 billion yuan from 53.3 billion yuan.

    Recent policy moves have been tilted toward support for bank lending. In April, the PBOC cut the reserve requirement ratio for banks. In June, it broadened the types of collateral that could be used against central bank loans.

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    Amazon vs. Alibaba: The Next Decade of Disruption

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

    In Gold We Trust

    Thanks to a subscriber for this report from the team at Incrementum which may be of interest. Here is a section:

     

    A

    Also most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

    In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). 

    lso most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

    In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). Also most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

    In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). 

    Also most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

     

    In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). 

     

    My view – Rather than think so much about a risk to the dollar’s position as the reserve currency, perhaps the bigger point is that China has a well-telegraphed decision intention to internationalise the renminbi. That holds out the long-term prospect of a true bi-polar world where competing economic bloc compete against one another.

     

    If one were to think about a truly bullish case for gold that kind of scenario is definitely high in the realm of possibilities to drive investor demand. The gold price is currently holding in the region of $1300 but the medium-term pattern is one of a saucering pattern similar to the base put in during the early 2000s. However, a sustained move above $1400 will be required to confirm a return to medium-term demand dominance.

     

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