Email of the day on Hong Kong listed Chinese shares
Most mainland China Indices are very strong; however, H-Shares continue to lag. Doesn't add up in my book; H-Shares should be going gangbusters. Any thoughts?
David Fuller and Eoin Treacy's Comment of the Day
Category - China
China's Yuan Tumbles to Eight-Year Low as Banks Weaken Forecasts
This article from Bloomberg News may be of interest to subscribers. Here is a section:
“The pressure for the yuan to decline could be stronger next year as Trump’s policies could lead to a dollar rally and amid concerns about China-U.S. trade relations," said Harrison Hu, chief greater China economist at Royal Bank of Scotland Group Plc in Singapore. "The People’s Bank of China can curb high volatility with stronger fixings and intervention, but it won’t do so unless outflows surge, as such measures could add great pressures to the foreign reserves."
A record $44.7 billion left China in September in yuan payments, while the nation’s foreign-exchange stockpile shrank the most since January last month. Chinese officials have taken a series of steps to plug capital control loopholes, such as a potential plan to curb transactions that use the bitcoin digital currency to take funds out of the country. UnionPay Co. late last month limited mainlanders from using its cards to buy insurance in Hong Kong.
HSBC Holdings Plc, UBS Group AG and Australia & New Zealand Banking Group Ltd. lowered their yuan forecasts on Tuesday, predicting that the currency will end this year at 6.9 per dollar, compared with earlier estimates of 6.8 for the first two lenders and 6.75 for the third. BMI Research, a unit of Fitch Group, downgraded its year-end forecast to 6.85 from 6.8, while Norddeutsche Landesbank said it has revised its view to 7 from 6.8.
China Ousts Finance Minister Lou Jiwei as Xi Jinping Turns to Allies in Surprise Reshuffle
This article by Lingling Wei and Jeremy Page for the Wall Street Journal may be of interest to subscribers. Here is a section:
“Lou Jiwei’s abrupt ouster sends a strong signal that any prospects of even limited economic reforms are falling prey to President Xi’s focus on consolidating his power,” said Eswar Prasad, a Cornell University professor and former China head of the International Monetary Fund.
Since coming to power in late 2012, Mr. Xi has been moving away from the party’s decadeslong collective leadership model and centralized decision-making within a number of small committees he heads. Last month, he was named the “core” of the party’s leadership—a designation giving him an even stronger perch to influence the outcome of the congress in late 2017.
At that time, up to five of the seven current members of the Politburo Standing Committee, the top leadership body, are due to retire. In addition, more than 60% of the 376-seat Central Committee—which includes ministers, state industry chiefs and army generals—are expected to be replaced. Still, despite his consolidation of power, party insiders say Mr. Xi still has to vie with departing and retired leaders seeking to promote their own favorites.
What drove the October ferrous rally?
Thanks to a subscriber for this report from Goldman Sachs covering the iron-ore market. Here is a section:
$/CNY was one of the most important market drivers of 2H 2015. When China weakened its currency in August 2015, it sent shockwaves around the globe with the S&P 500 index falling 10%. In the third quarter of 2016, $/CNY stayed range-bound between 6.6 and 6.7. In October, however, the depreciation resumed and $/CNY is now approaching 6.8.
The recent CNY depreciation is different from previous rounds of $/CNY moving higher. It has not generated the same international spillover effects as it did back in 2015. This implies further room for the Chinese government to weaken its currency against the US Dollar without negatively affecting global demand for its exports. On the other hand, the link between $/CNY and capital outflows remains strong. Our China Economics team estimated that FX outflows from China rose to US$78 billion in September and are likely to be even higher in October (Exhibit 7). This implies that there is an underlying desire among onshore investors to move into dollar-linked assets. Such desire may become particularly strong whenever the pace of CNY depreciation picks up. In fact, onshore commodities prices increased across the board on October 25 after the $/CNY moved higher for three consecutive days.
There are reasons why iron ore may be the first in line to benefit from onshore investment flows into commodities amidst renewed CNY depreciation. For example, the iron ore futures curve is almost always backwardated, making long iron ore a positive-carry trade. To the extent that a higher $/CNY also leads to a weaker local currency on a trade-weighted basis, iron ore may benefit from potentially higher Chinese steel exports. Additionally, rebar and iron ore are the most traded commodities in the onshore futures exchanges. Exhibit 8 shows the positive correlation between iron ore futures trading volumes and the $/CNY in recent months. By our estimates, about 60% of the iron ore price rally in October can be explained by the CNY depreciation.
China's Factory to the World Mulls the Unthinkable: Price Hikes
This article from Bloomberg may be of interest to subscribers. Here is a section:
China’s factories may be on the cusp of delivering a new shock to the global economy after years of undercutting rivals with cheaper costs. This time, increases in prices could reverberate around the world.
To understand why, consider the dilemma facing Jiangmen Luck Tissue Mfy Ltd., now caught in a squeeze between surging wages and tepid demand. The company has already slashed staff by half, shaved prices and automated production to survive. Now, with margins razor thin, it’s weighing the first price increases since 2010.
"There’s just no possibility for me to cut prices any more," says deputy director Roger Zhao, 52, whose company is based in the city of Jiangmen in southern Guangdong province.
"Because costs are already pretty high and I don’t see any possibility they’ll go down, I’m seeking opportunities to raise prices a little bit."
That push to recover lost margins -- even as demand remains muted -- was shared by exporters of everything from clocks to jacuzzis interviewed in Guangzhou last week at the Canton Fair, a biannual gathering where 25,000 exhibitors and 180,000 mostly foreign buyers ink export deals in booths spanning exhibition space equivalent to about 3,400 tennis courts.
For the world economy, decisions from companies like Jiangmen Tissue to stop cutting prices -- and even raise them where demand allows -- removes a source of disinflationary pressure. To be decided is whether China, the factory to the world, swings from becoming a drag on consumer prices to a source of pressure nudging them higher.
Rio Gives Away Giant Iron Ore Field Once Worth Fighting For
This article by Thomas Biesheuvel for Bloomberg may be of interest to subscribers. Here is a section:
The writing has been on the wall for a while. The company took a $1.1 billion writedown on Simandou in February. New Rio Chief Executive Officer Jean-Sebastien Jacques said in August “there is no obvious way to take Simandou to the next phase,” and the company hasn’t been able to find a way to finance it.
“It cleans another dead asset off the portfolio,” said Hillcoat, who added that the market doesn’t apply any value to the asset. “In the brave new world we’re in now, you just can’t develop these projects.”
Guinea will want the new owner, also known as Chinalco, to fare better than Rio. The country is counting on the project to double the size of its $6.5 billion economy and turn it into the third-biggest exporter of iron ore. Earlier this year, Guinea blamed project delays on the “ramblings of the technical team in London,” a reference to Rio.
The parties should finalize the deal quickly to establish a new plan for Simandou’s development, Minister of Mines and Geology Abdoulaye Magassouba said in an e-mailed statement.
“This is a very positive event for the project, but we still have many months of work and major challenges ahead,” Magassouba said.
Before the deal was signed on Friday, Simandou was 46.6 percent owned by Rio, 41.3 percent by Chinalco, and 7.5 percent by the government.
Interesting charts October 5th 2016
China's Ambitious Plan to Make the Yuan the World's Go-To Currency
This article by Robin Ganguly and Cedric Sam for Bloomberg may be of interest to subscribers. Here is a section:
The world will only play along if China leaves the yuan alone
One of the basic definitions of a reserve currency is that it must be freely traded. And the yuan is not quite there yet. The People’s Bank of China is often suspected of intervening in the market to nudge its exchange rate one way or the other. The central bank also limits onshore daily moves to 2 percent on either side of a fixing that it sets. Then there are capital controls, which restrict the ability to move money out of the country.
Despite this, people have found ways to move money out to escape yuan depreciation pressures and a volatile stock market. An estimated $1 trillion has flowed out of China since September 2015.
The Federal Reserve Bank of Dallas suggested in July that the yuan failed a safe-haven test, finding that China’s currency underperforms as market volatility increases.
SDR inclusion is likely to prompt the Chinese government to push ahead with reforms to its
exchange-rate policy, as part of its efforts to bolster international usage of the currency. But challenging the dollar’s hegemony will take more than a while, with the memory of the shock August 2015 devaluation relatively fresh in investor minds. The greenback has maintained its dominance since the mid-20th century, fighting off competition from the yen and the euro.
After the IMF in 2010 rejected China’s request to include the yuan in the SDR basket, the nation took several steps to support its claim. It made the yuan’s fixing more market-based, allowed greater access to its bond market and closed the gap between the currency’s rates at home and abroad. In November last year, the IMF deemed that the yuan was freely tradable enough to become a global reserve currency.
In the long run, a stronger yuan could be a much-needed fix for the global economy as it would increase the purchasing power of China, the biggest consumer of commodities in the world.
China's Productivity Growth is the Worst Since the Asia Crisis
This article from Bloomberg News may be of interest to subscribers. Here is a section:
Labor productivity in the world's second-largest economy increased 6.6 percent last year to $7,318 per person, National Bureau of Statistics and International Labour Organization data show. The level, calculated as average inflation-adjusted gross domestic product per employed person per year, measures the efficiency of workers economy-wide.
China kicked off a big surge in efficiency in the early 2000s after entering the World Trade Organization, implementing aggressive reforms to streamline state corporations and allowing more of a private real estate market. But even after those gains it still lags far behind more productive economies in Europe, Japan and the U.S.
With a shrinking working-age population already hurting economic growth, China must boost the value created by each worker if it is to join the ranks of the world's wealthy economies. The hope is that upgraded machinery, services sector advances and a shift up the value chain will help make workers more efficient--and maybe even shorten the badminton lunches.
Yuan Bears Emerge From Hibernation as Fed Threatens G-20 Calm
This article by Justina Lee for Bloomberg may be of interest to subscribers. Here is a section:
Derivative markets are pointing to renewed bets on yuan depreciation, with a three-month measure of expected price swings poised for the biggest monthly increase since January. Other indicators, such as the premium on options to sell the yuan over those to buy and the discount of forward contracts over the spot rate, have also climbed, indicating rising expectations for declines.
The increased pessimism comes after a period of calm that sent the measures to the lowest in at least nine months as the Federal Reserve held off on raising interest rates and investors bet that China would steady the yuan before it hosts a Group of 20 meeting in September. Traders are probing the People’s Bank of China’s willingness to allow the yuan to fall between the G-20 gathering and the currency’s entry into the International Monetary Fund’s Special Drawing Rights on Oct. 1, especially with the chances of Fed action increasing.
"After G-20 ends next Monday, the market may want to test how much yuan depreciation the PBOC can tolerate," said Gao Qi, a strategist at Scotiabank in Singapore. "China doesn’t want the yuan to move too much during G-20 and become a topic of discussion. SDR’s impact will be smaller than G-20."