"Cautiously optimistic" still seems to be the overall position of the latest IMF review on the Chinese economy and its reform towards a sustainable growth path. Typically annually, the IMF holds bilateral discussions with its members under Article IV and last Friday they published this 123 page report covering reforms, concerns, expectations and suggestions - summarising the ongoing top-level dialogue and three and a half week intense discussions that took place during May-June.
It must be spring as the 4th session of the 12th National People’s Congress (NPC) commences this weekend. The NPC is the highest organisation of state power and largest parliamentary body in the world with just under 3,000 delegates from across China attending the 10 to 14 day event. Members include the Party, government, military and groups of society. The NPC’s main objective is to provide a forum for debate on: past and present government policies, new laws, the budget and personnel changes. The NPC and the National Committee of the People’s Political Consultative Conference (CPPCC), the advisory body, are timed to occur together and are often jointly referred to as “Lianghui”, or two assemblies.
Over the last few months there has been a lot of negative press about the Chinese economy and we feel that it has been overly exaggerated. In 2015 Chinese GDP growth was 6.9%, and although this was the slowest annual rate in 25 years, it is still far greater than that of any major western economy, with the US coming in a distant second at 2.4%. Closer to home India did grow faster than China for the first time since 1999, with 7.5% GDP growth, however the Indian economy is less than 25% the size of China’s. To put this in perspective, the scale of the Chinese growth was the equivalent of adding an economy the size of South Africa’s to global GDP last year. To get the same results India would have to grow at 35% and the UK at over 20%. As Lord O’Neil, the UK’s commercial secretary, said in a speech a couple of weeks ago at the 48 Group’s New Year Gala dinner in London, “China’s growth is still the envy of any developed country”.
With China still out celebrating the new year, other Asian markets have reopened to a massive hangover. 2016 is the Year of the Red Monkey, we hope that is not a reflection of the markets going forward, although it has been a colour the equity markets have gotten used to in a flight-to-safety February. The red signifies fire, which in turn assumes spark and brilliance, while the monkey is clever and energetic; let’s hope this cheeky monkey does indeed bring some much needed brilliance to markets this year.
Marmite, wannabe Presidential candidate, you either love him or hate him, Donald Trump, is in the news again this time his target is Apple. Mr Trump wants to force manufacturing back to the US. “Make America great again”, “We’re going to get things coming. We’re gonna get Apple to start building their damn computers and things in this country instead of in other countries”, he said in a speech at Liberty University in Virginia.
“Let China sleep. For when she wakes, she will shake the world,” Napoleon Bonaparte apparently said. Well first thing this morning two of every five news items on the screens related to China and the impact a weakening economy will have on world growth and currency values. Indeed the People’s Bank of China (PBoC) has been aggressively intervening in the offshore currency, to crack down on speculators it is reported, and has fixed the onshore currency in a tight range for the third day running.
On Friday, the People’s Bank of China (PBoC) decided to disclose the components of their trade weighted index for the renminbi (RMB); the China Foreign Exchange Trade System (or CFETS RMB Index). The concept of a trade weighted basket is nothing new, just the disclosure of the composition and weightings. In fact in 2007 we wrote that, “We know from comments made by officials from the People’s Bank of China, that the central bank manages
Mauricio Macri is due to be inaugurated as Argentina’s next President on December 10 having won the November 22 election. This represents a vote for change as the Peronist candidate Daniel Scioli was seen as representing a continuation of the Cristina Fernandez administration’s mantra.
Monday’s announcement from the IMF to include the Chinese renminbi into the Special Drawing Rights (SDR) should be celebrated in China and recognised by the world as a sign of what is yet to come. The next five years should bring more successes and realisations from four decades of reform.
Another Chinese nuclear deal has been signed; at the G20 summit on the shores of Antalya, Turkey.
This time the deal is between China and Argentina and is worth an estimated USD 15bn. According to sources, Chinese banks and associated companies will provide investments and loans worth 85% of the project costs, and loans will be repaid at an annual rate of 6.5% over 18 years. Roughly 60% of materials will be locally manufactured; the remainder imported from China. State-owned China National Nuclear Corp. (CNNC) in co-operation with Nucleoeléctrica Argentina SA (NASA) will build both reactors, the first of which will cost circa USD 6bn and will utilise Canada Deuterium Uranium or “Candu” technology, while the second will be made using China’s own Hualong-1 reactor technology; something China has been keen to export.
As we have expected for some time, the renminbi (RMB) is now odds on favourite to be the next member of the IMF SDR basket. We believe the decision was, unofficially, made months ago and the delay to the vote was indeed just to allow time for the Chinese to put the required criteria in place.
The fact that the IMF delayed their decision until the end of this month, when the board of members vote, has also given members time to air their support, i.e. the UK, US and Europe. Japan has some domestic issues to resolve while they are in their second recession since Abenomics and his quiver full of economic arrows. We look for RMB inclusion as soon as September next year, effective 1st October.
Firstly, our condolences go out to all those affected by the terror attacks in Paris on Friday evening. Our thoughts are with you all.
In September of this year China eclipsed Canada to become the U.S.’s biggest trading partner for the first time in history. Trade between the U.S. and China hit USD 442 bln in the first nine months of the year while U.S.-Canada trade totalled USD 438 bln, according to U.S. government data. The main reason for the reversal is the drop in crude oil, now half what it was in 2014, which equates to a 32 per cent drop in the value of Canada's trade in energy products in September alone compared to the previous year. However this is not to dismiss the meteoric rise in trade between the economic superpowers since the mid 1980s. Since 1985, trade between the US and China has ballooned over 7,500%. Indeed globally China now accounts for about 15% of global GDP, however its contribution to global growth last year was in the region of 40%, one of the reasons economic leaders take such a close interest in the health of the Chinese economy.
In China’s new 5 year strategy covering 2016 – 2020 there is a proposal to start building over 100 nuclear power reactors over the next decade. According to the plan the Chinese government will on average construct 7 new reactors each year between now and 2030. By 2050 China wants to have approximately 400 nuclear power stations producing over 350GW of power. The final bill for this investment is expected to exceed USD 1tn.
At the moment China has 27 operating nuclear power stations, and 24 under construction, all told the plan is for these to be producing 150GW of power by 2030. By way of comparison the US has 99 and France has 58 operating at the moment. The medium and long term goal is for the Chinese to be building and operating the most technologically advanced nuclear reactors globally. Added to this as we have noted in a previous daily there will be a Chinese designed and built nuclear power plant in the UK in the coming years.
In the present era one might expect to pay a hefty premium to invest in technology companies, especially market leading household names such as Apple and Alibaba; each flagship innovators and consumer gravitons in their respective superpower nations. However bonds from both of these, over the course of the past 11 months, have seemed to offer relative value according to our models; Alibaba when they first issued in November last year (and more so following the negative China and EM sentiment in Q2) and Apple after their 2043 issue fell from a price of USD 108.7 in late January to May when we picked some up at USD 91.8.
Growth of wealth in China has been “fivefold… since the beginning of the century” meaning that China now has the largest middle-class in the world* according to the Global Wealth Report released this week by Credit Suisse. This is a comprehensive report widely used to evaluate trends in wealth creation and its implications on consumption and investment. It is of particular interest this year with its focus on middle-class wealth. A strong and growing middle-class is often a bedrock for financial stability within a country and can help spur new consumption and entrepreneurship. The world’s middle class comprises 664 million adults or 14% of the global adult population; 109 million are in China compared to only 92 million in the US.
Today is very quiet in the market with Japan out for Health-Sports day, the US out for Columbus Day and Canada out for Thanksgiving. The Chinese are getting back to work after their 1st to the 7th October Golden week holiday which marks the founding of the People’s Republic back in 1949 by the communist party and is one of the busiest times of the year for the Chinese.
The Xinhua news agency reports that 750 million trips were taken during the seven days of Golden Week with 639 million of them via cars according to the Ministry of Transport. Beijing received 11.5 million tourists during the week and 400 portable toilets were installed in Tiananmen Square to cope with the influx. Sales at restaurants amounted to 1,082 trillion yuan, about USD17 billion, the equivalent of Iceland’s GDP for the whole of 2014 and accounts for an 11% jump from 2014’s holiday week.
The article in yesterday’s FT was a good assessment of where China stands in its campaign to achieve reserve currency status for the renminbi (RMB). Of particular note is that the US has given conditional support for inclusion of the RMB in the SDR basket, with the conditions merely being that the currency meets the technical requirements.
The article correctly states that the essence of the technical issues is whether central banks around the world can get access to RMB in a timely and relatively costless manner. In simple terms, the point of the Special Drawing Rights (SDR) basket is for central banks to be able to access 'hard' currencies in times of stress. Think of emerging countries that need to have ready access to US dollars, or another of the hard currencies, so domestic companies can pay their debts. The SDR serves the same purpose, except that it is broader and includes currencies, namely the US dollar, Japanese yen, euro and sterling, which are freely exchangeable amongst themselves at minimal cost.
Fears for “financial Armageddon” in China may be alleviated by a report today which says that China’s total assets in 2013 were 900% of GDP with debt of just 220%. That is a big pick up from the last report which looked at the 2008 balance sheet showing total assets at around 700% of GDP. Corporations have assets of 550% of GDP but the interesting number comes from the household with assets of around 340%. Bank deposits and real estate are the largest household assets accounting for 24% and 70% respectively, while stocks accounted for only 2% and with a household debt level of just 17% of real estate assets, house prices would need to fall 80% to push households under water the report says.
For decades the financial community has often referred to copper as ‘Dr Copper’ because it’s reputed to have a PhD in economics, based on its ability to predict the health of the global economy and its uncanny knack of predicting turning points. With this in mind it is interesting to note copper’s trading range since the mid-2000’s. At the end of 2005 copper was trading at around USD 4,000 a metric ton. Within 2 years this price had doubled, only to fall to below USD 3,000 a metric ton in 2008. From 2008, after the financial crash, copper prices more than tripled in value to over USD 10,000 by March 2011. Today a metric ton of copper will cost you just over USD 5,050.
The boom in Chinese equities which ran for the last half of 2014 and the first half of this year moved the Shanghai Composite Index from 2k to 5k at an alarming pace. Following the past 2 months of drawdown and the 15.5% crash of the past 2 days the index has now dipped back below 3k; meaning ‘only’ a 50% return since mid-2014 as opposed to the 150% return had investors cashed out mid-June. Unlike yesterday, the wider reaction to China’s further losses were mostly sanguine with Europe and US markets retracing most of yesterday’s panic losses, however the Japanese major equity indices were off a further 3-4%.