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

    China will scrap limit on presidential terms, meaning Xi Jinping can stay on

    Thanks to a subscriber this article from the South China Morning Post which may be of interest. Here is a section:  

    The party has in recent decades largely observed an unwritten retirement age of 68 for its top leaders, but its charter does not have any limit on terms. That means there are no restrictions on the general secretary position, but the Chinese constitution does limit presidents to a maximum of two five-year terms. 

    Analysts said ending the two-term limit gives the strongest indication yet that Xi will stay in power longer than his recent predecessors at a time when the leadership was “fixated on stability”.

    There was intense speculation in the lead-up to the party’s five-yearly congress in October over whether Xi would continue to lead the party beyond two terms, with some questioning whether his ambitious plans to “rejuvenate” China could be achieved within 10 years.

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    Mapping shadow banking in China: structure and dynamics

    Thanks to a subscriber for this report from the Bank for International Settlements. Here is a section: 

    Understanding the structure of China’s shadow banking system is crucial for analysing China’s financial system. We provide a stylised map of shadow banking in China, which highlights the main forms of shadow banking and the resulting financial system interlinkages. Shadow banking in China takes a markedly different form compared to that in the United States. A key characteristic is that commercial banks are the dominant players in China’s shadow banking system. The system is effectively a “shadow of the banks”, while securitisation and market-based instruments still play only a limited role.

    We show that the structure of shadow banking in China is evolving. Its size and dynamics have changed rapidly in recent years. The main area of growth has shifted from shadow credit provision to private firms with less privileged access to formal bank credit, towards offering alternative savings instruments (e.g. WMPs and trust products). Similarly, at the intermediate stage, new and more complex “structured” shadow credit intermediation has emerged and quickly has reached a large scale. This is driven by banks trying to alleviate regulatory burdens (e.g. NPL provisions or LTD ratio ceilings) through a reclassification of existing bank assets into investment receivables. Tight and growing financial sector linkages further raise the potential for the transmission of financial shocks among savers, banks and the bond market. In addition, new forms of internet-based credit intermediation, such as P2P lending, have been expanding at an extraordinary pace. As a result, shadow banking in China is growing more complex and thereby becoming slightly more similar to the US shadow banking.

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    Post 19th Party Congress: Xi the King of China

    Thanks to a subscriber for this report from APS Insights which focuses on the political machinations that brought Xi Jinping to power. Here is a section: 

    US dollar policy. It really matters

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

    China H Share Euphoria Enters New Stage as Laggards Surge

    This article by Sofia Horta e Costa for Bloomberg may be of interest to subscribers. Here is a section:

    As a bull market in the China H-share gauge extends into the 715th day, one of the longest in its 23-year history, investors are finding plenty of reasons to buy and few to sell.


    While technical measures suggest a pullback is overdue, growing confidence around China’s economy and earnings will support the gains for now, according to JPMorgan Asset Management’s Marcella Chow.


    “It’s been a very rapid rally but only a change in fundamentals will trigger a correction and people are still quite confident,” said Chow, a Hong Kong-based global market strategist for JPMorgan Asset Management, which oversees $2 trillion worldwide. "It’s all about finding bargains.”


    In such a market, any decline is seen as an opportunity to buy. When the gauge finally snapped a record 19-day winning streak on Thursday with a 1.7 percent retreat, it rebounded 2.5 percent the next day as investors pounced on the biggest losers such as banks. At the same time, persistent favorites such as China Vanke Co. and Ping An Insurance (Group) Co. show no signs of slowing down.


    As a perennial underperformer itself, due to the index’s dominance by sprawling state-owned enterprises, there’s little for investors to worry about in terms of valuations. Even after an 85 percent bull run, the Hang Seng China Enterprises trades at 8.9 times its members’ projected earnings. That’s a 39 percent discount to the tech-heavy MSCI China Index, while a gauge of global equities is about twice as expensive.

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    Asia Bank Primer 2018

    This heavyweight 246-page report from Bank of America/Merrill Lynch may be of interest to subscribers. Here is a section:

    China Posts First Full-Year Pickup Since 2010 on Global Tailwind

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

    "There’s still a mountain of debt and major structural challenges to address. But compared to hard-landing fears in early 2016, and expectations of a pronounced slowdown at the start of the year, China’s economy outperformed in 2017."

    In a year that began with fears of a trade war with a newly elected Donald Trump, exports turned back into a growth engine for the world’s factory floor. The contribution of net external trade to growth improved by around 0.4 percentage point in real terms last year, “more than fully explaining the pick-up” in GDP growth, said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong.

    Reflation was also key to boosting company profits and raising their ability to service debt. The GDP deflator for the full year, a gauge of economy-wide inflation, came in at 4.33 percentage points, while nominal growth accelerated to 11.2 percent. GDP in those terms grew to 82.7 trillion yuan ($12.9 trillion) -- up 8.4 trillion yuan in the year.

    "Another Indonesia created in one year!" said Jim O’Neill, former chief economist at Goldman Sachs Group Inc. "The nominal GDP size confirms China has diminished the previous deflation risk and silly comparisons with 1980s Japan were just that, silly."

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    A deep-dive into demographics; healthy demand ahead

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

    Chinese Consumers Now Rule the World. Get Used to It

    This article by Tracy Chen may be of interest to subscribers. Here is a section: 

    According to the latest official data, China’s final consumption accounted for 63.4 percent of gross domestic product (Chart 2). Household consumption experienced exponential growth and climbed to $4.5 trillion (Chart 3). Retails sales have been growing at healthy pace of about 10 percent. Spending on Singles’ Day this year (Nov. 11), is impressive, registering $25 billion, almost double U.S. Black Friday online sales of $14 billion (Chart 4).

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    A $4 Trillion Reason for China's Smaller Banks to Worry

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

    But two things look clear: The WMP market's years of torrid growth have ended; and in an environment of higher risk, investors will prefer products sold by large state-owned lenders that are seen to be safer and of better quality. 

    That will put pressure on smaller banks, which have limited scope to increase lending. Minsheng, China CITIC Bank Corp., Ping An Bank Co. and China Everbright Bank Co. all had loan-to- deposit ratios exceeding 90 percent as of the third quarter, according to Francis Chan of Bloomberg Intelligence -- much higher than their bigger rivals. Shares of Minsheng and CITIC Bank have fallen in Hong Kong this year, while ICBC has jumped 27 percent.  

    A reckoning is approaching. As with all measures to rein in China's debt, the WMP clampdown is likely to be a stop-go process. But smaller banks will need to start looking for another source of growth, and fast.

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