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Category - China

Navigating China's post-congress landscape

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

Over the past five years, the Chinese leadership’s top priorities have proven extremely consistent, reflecting a consensus on broad goals. The leadership has remained steadfastly focused on strengthening the Communist Party, safeguarding stability, and enhancing China’s regional leadership and global standing. There have been changes to the manner in which Xi has centralized power and the party has headed off domestic and external challenges. But on the top priorities, the party has followed consistent north stars to guide policy.

To this end, the Chinese leadership will continue to emphasize financial and economic stability and guard against financial shocks. Particularly with the much-anticipated centenary of the founding of the Communist Party in 2021, Beijing will be determined to achieve its goal of becoming a “moderately well-off society,” which in practical terms means doubling per capita income and national gross domestic product from 2010 levels.

Over the past five years, when confronted with choices between greater control and greater openness to innovation, China’s leaders consistently have opted for the former. Expect economic policies to continue favoring state control and stability, even at the cost of some economic growth. This bias is likely to extend to policies related to the internet and social media, where heightened censorship over the past five years has demonstrated the leadership’s wariness of losing control of information in the digital age.

 



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Chinese automakers covet FCA

This article by Larry Vellquette for Automotive News may be of interest to subscribers. Here is a section:

Why, after two years on the block, is FCA apparently drawing interest from at least one potential Chinese buyer now?
The answer: FCA's global network and product — specifically Jeep and Ram — fit the requirements the Chinese government has set for attractive acquisitions.

Quality gap
Chinese automakers have openly dreamed of cracking lucrative North America for a decade, spending millions to display their vehicles at high-profile U.S. auto shows. Early efforts showed that Chinese automakers had a long way to go before they were ready to compete here.

But in more recent years — through knowledge and expertise gained via joint ventures with the world's largest and most successful automakers — Chinese companies have closed the quality gap.

And the automakers feel like they finally have closed that gap enough to start selling their products in the U.S., said Michael Dunne, president of Dunne Automotive, a Hong Kong investment advisory company and an expert on the Chinese auto industry.

They also are under pressure from the government to expand beyond China, Dunne said. A government directive dubbed China Outbound pushes Chinese businesses to acquire international assets from their industries and operate them "to make their mark," much as Geely has done since acquiring Volvo in 2010. Bloomberg reported last week that Chinese companies plan to spend $1.5 trillion acquiring overseas companies over the next decade — a 70 percent increase from current levels.

 



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Currency-Manipulating China Gives Trump What He Wants -- A Cheap Dollar

This article by Bradley Keoun for The Street may be of interest to subscribers. Here is a section:

While China still keeps an iron grip on its exchange rate, 2017 has thus far brought a reversal of a three-year stretch in which the dollar weakened against the yuan, also known as the renminbi or by its trading symbol RMB.

Some of the Chinese currency's strength stems from appreciation in major currencies like the euro and yen against the dollar, putting upward pressure on the yuan on a trade-weighted basis. But the gains versus the dollar show a willingness on the part of China to cede a marginal advantage to the U.S., its biggest single destination for exports.

"We do expect that the RMB should continue to gradually strengthen versus the weakening dollar over the next few years," said Jan Dehn, head of research at London-based Ashmore, which specializes in emerging-market stocks and bonds.

The exchange-rate reversal comes amid increased tensions between Trump and Xi, who has taken steps to improve his country's standing as a powerhouse in international trade even as the U.S. president pledges to renegotiate trade deals he considers unfair -- in order to protect American manufacturers and workers.



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Hong Kong Stocks Advance to Two-Year High Amid Mainland Inflows

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

Inflows from the mainland have helped Hong Kong’s benchmark equity gauge climb 22 percent this year to outperform most global peers. Onshore shares have largely been left behind amid concerns about rising funding costs, corporate governance issues, liquidity pressures and tougher regulatory oversight.

Chinese investors have bought about 35 billion yuan ($5.18 billion) worth of Hong Kong stocks in July as of Friday, surpassing June’s total monthly net purchases according to Bloomberg calculations.

“Mainland investors are buying Hong Kong stocks to diversify their portfolios and hedge risks, thanks to the weak performance of mainland equities, especially the ones listed in Shenzhen," said Banny Lam, managing director and head of research at CEB International Investment Corp.

The ChiNext, cowed by an official battle against speculators, is on the verge of becoming cheaper than the Nasdaq Composite Index for the first time on record. Its valuation based on reported earnings is now at 36.2, compared with 34.3 for the Nasdaq, leaving the narrowest gap since the Chinese board started in 2010.



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Copper price jumps on gangbusters China growth

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

Copper futures trading on the Comex market in New York jumped on Monday on renewed optimism about economic strength in top commodity consumer China.

Copper for delivery in September jumped to a high of 2.7375 a pound (just over $6,000 a tonne) in lunchtime trade, up 1.7% on the day to the highest level since end-March. LME copper's 2017 year to date gains in percentage terms are now within shouting distance of 10%.

Commodity-intensive sectors continue to expand at a faster rate than the broader measure of industrial production

The economy of China, responsible for nearly half the world's consumption of copper, expanded at an annual rate of 6.9% in the second quarter against expectations of a slight decline and at a quicker pace than Beijing's own target of 6.5% growth for 2017.

In seasonally-adjusted quarter on quarter terms, growth was even more significant, picking up from 1.3% to 1.7%. If the trend continues, this year would be the first time since 2010 that the Chinese economy grew faster than the year before.

Industrial production data for June released today also pointed to a significant improvement. Growth in industrial output picked up from 6.5% year on year to 7.6% led by greater electricity and steel production. Bloomberg consensus forecasts pointed to no acceleration for Chinese industrial output.

 



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Bitcoin Split Risks Increase

This article by Andrew Quentson for Bloomberg may be of interest to subscriber subscribers. Here is a section:

As such, we are likely to have at least two bitcoins on August the 1st, but there may be even more. Bitcoiners, therefore, are strongly advised to not transact on that day until the situation becomes more clear.

Once the chain does split, BitcoinABC will probably be listed in at least one exchange, thus a period of high volatility and perhaps even trading frenzy should be expected as the market passes judgment on the value of the bitcoins.

Eventually, the dust will likely settle with one coin probably gaining some 80% or so of the current bitcoin value, while the minority coin can continue operating in their own network, free to follow their own roadmap and vision.

Which one will be which only the free market can tell us sometime next month as bitcoin finally makes a monumental and probably highly historical decision, at least for this space.

 



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China shares get MSCI nod in landmark moment for Beijing

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

Inclusion in the index marks a key victory for the Chinese government, which has been working steadily over the past few years to open up its capital markets, investors said.

"Given the size and importance of China as an economic superpower, I think this is a historic moment," Kevin Anderson, senior managing director of State Street Global Advisors and head of investments in the Asia Pacific region told Reuters.

"It's a long-awaited and much-debated decision in the past, and I think it's more than symbolic as it will create additional flow of capital and potentially a new segment of institutional investors in the China market."

Traders said MSCI's widely expected "Yes" decision had been largely priced in, with the announcement triggering some profit-taking in blue chips, which are no longer cheap after strong rallies this year.



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China Banks Endure Record Costs as Squeeze Leaves No Choice

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

When cash supply tightens, small- and medium-sized lenders are usually among the hardest-hit because they lack the retail deposit arsenal of larger banks, said Yulia Wan, a Shanghai- based banking analyst at Moody’s Investors Service. They also may not have enough bonds to use as collateral to borrow money in the repo market. The banks need the money to finance longer- term and less liquid assets, such as debt and investment in loans and receivables, she added.

The PBOC has begun to take note of the stress on the financial system.

The monetary authority has injected a net 160 billion yuan through open-market operations this week, the most since the five days through May 19. The central bank-run Financial News said on June 10 that the “abnormal market swings” of June 2013 won’t happen again -- a reference to a record cash crunch four years ago.

Still, China’s seven-day repurchase rate -- the money- market benchmark -- has averaged 2.74 percent so far in 2017, compared with 2.32 percent a year ago. The gauge climbed four basis points this week to 2.95 percent, while the one-day rate rose three basis points to 2.86 percent.

“Some lenders don’t have better sources of funding to replace NCDs,” said Moody’s Wan. “Issuing such debt at such a high price will have a negative impact on their profitability.”



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Demographically challenged

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

A deep dive into demographics suggests a dire outlook for property prices
Following an in-depth demographic study for Hong Kong, we have turned more negative on housing demand. Taking into account weaker demand and rising supply (we published a FITT report on supply in Sept-16) we have cut our medium-term (2018E-21E) residential price forecasts significantly. We now expect vacancy to surge to 9% (4% now) and ASP to slide 48% by 2026 from current levels. We reiterate our view that developers will be forced to change their business model from land-banking to asset turnover. Hence, we overhaul our valuation methodology from discount-to-NAV to SOTP, using P/E to value development businesses. We downgrade HLD, Kerry and NWD to Hold.

Several negative demographic trends
In this report, we identify several notable demographic trends in Hong Kong, with the most significant being: 1) natural population growth has already peaked and is likely to turn negative by around 2027; 2) reduced immigration; 3) the quick shrinkage of the 25-44 years age group to 26% of the total population by 2025, from 38% in 1995 (vs. 29% now); 4) the rise in people aged over 60 years to 30% of the total population, from the current 22%. Hong Kong already has the second-highest over-60 population in Asia, as a percentage of total population, behind Japan.

Aging population constrains financing, translating into lower affordability
In our view, housing affordability will be severely affected by an aging population. We believe affordability (debt servicing) is a function of property prices, mortgage rates, loan tenures and income. As the population ages, fewer households will be able stretch their mortgages to the maximum tenure of 30 years. On our new estimates, we expect only 11.5% of total households will be able to afford an average private housing unit by 2019. Moreover, by factoring in upcoming rate hikes, we expect overall affordability to worsen and ASP to decline by 48% over 2017-26 to restore the supply/demand equilibrium.

A new valuation methodology for property development – P/E approach 
With improving supply and a bleak outlook for the physical market, we expect land-banking to fade as a business strategy, and we anticipate a growing focus on asset turnover. As a result, we believe a discount-to-NAV valuation methodology will become less relevant in valuing the developers, and we advocate adopting a P/E approach for the development businesses. For the investment properties owned by the HK Property companies, we continue to estimate NAVs based on cap rates. We then apply a discount to the investment property NAV of 34% (the average discount over the past 25 years).

 



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China's Markets Get a Double Dose of Caution From Moody's, MSCI

This article by Chris Ansley and Enda Curran for Bloomberg may be of interest to subscribers. Here is a section: 

Moody’s Investors Service unveiled a surprise downgrade of China’s sovereign credit rating, citing concerns about its continued buildup of debt. Earlier, the head of one of the world’s top stock-index compilers suggested China had more work to do to get its onshore stocks into emerging-market gauges. With a June 20 deadline looming, “there’s still a lot of issues to resolve,” MSCI Inc. Chief Executive Officer Henry Fernandez said.

Underlying the critique from both: issues stemming from the Chinese leadership’s preoccupation with control. Few analysts expect painful reforms to be unleashed ahead of the Communist Party’s leadership reshuffle due later this year. While officials preach the need to rein in credit, ensuring the economy hits a 6.5 percent growth target remains the top priority.

Moody’s highlighted that policy makers’ are fixated on economic growth targets, meaning already-high leverage will continue to build. For MSCI, concerns include authorities placing restrictions on financial products abroad that would incorporate Chinese stocks.

 



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