Wealthy Nations Daily Update - China CEEC’s

Today is a pretty quiet day for markets with the US out feasting on Thanksgiving turkeys. Meanwhile, China pushes ahead on its path to become the globe’s infrastructure lender; extending the “Silk Road and Economic Belt” further into Europe.

While addressing the heads of government of China and Central and Eastern European countries (CEECs) on Tuesday, China's Premier, Li Keqiang said that: while the world is in the doldrums, and certain regions and countries are in turmoil, he wishes to deepen cooperation with “Many European countries… Despite the ups and downs in the international situation”. Li regards CEECs as the “bridge to Europe” as they “enjoy a distinct advantage for enhancing connectivity.”

Li said that China is looking to invest over USD 1tn in overseas projects and import ~USD 10tn worth of commodities over the next five years; the country’s massive foreign exchange (fx) reserves (USD 3.5tn) will be deployed abroad to help boost China’s growth. Meanwhile CEECs are hopeful that Chinese investment in, for example, the Hungary-Serbia high-speed rail, and port upgrades across the Eastern Bloc will spur their own economies. As more Chinese companies (both state-owned and private) increase their outbound investment, the Chinese Ministry of Commerce (MoC) calculates that in the first ten months this year China’s overseas investment surged 16.3% yoy to ~USD 95bn, covering 5,553 companies in over 150 different countries and regions. Li believes that if China’s growth remains steady above 6.5% through the next couple years, China can achieve its target of becoming a high income country by 2020.

Rating agency Fitch today affirmed China’s A+ rating; the country is rated Aa- by Moody’s and S&P. A statement from Fitch states: “China's ratings balance a strong sovereign balance sheet and sustained high GDP growth against high sovereign contingent liabilities and a range of structural weaknesses and risks… Fitch thinks China has the administrative and financial resources to address these issues in a gradual and orderly way... China's economic growth over the past 20 years has been domestically and globally transformative... China's sovereign external balance sheet is a central rating strength. Official foreign reserves... still by far the world's largest... dwarf government foreign debt.”

The ratings agency expects the IMF to grant the renminbi global reserve currency status at the meeting on Monday, stating that “the emergence of the renminbi as a global reserve currency could support the credit profile.” Adding that large outflows post the “move to a more flexible setting of the exchange rate in August 2015 that led to a modest depreciation of the currency” appear to have settled in October. “Overall, Fitch does not view capital flows as systemically threatening given the depth of the foreign reserves buffer and China's enduring current account surplus.”

In preparation for SDR inclusion, The People’s Bank of China announced yesterday that an initial batch of overseas central banks, multinational financial institutions and sovereign wealth funds have been granted access to enter China’s interbank foreign exchange market. These seven institutions, having completed registration with China Foreign Exchange Trade System can now trade spot, forward, swap and option products, and the cap on size of transactions has been removed; a further push in the internationalisation of the currency.