This morning China announced its fourth-quarter GDP growth, coming in at 6.4%, matching market expectations, whilst adding the official economic growth for 2018 came in at 6.6%, the slowest pace of growth since 1990 (still a figure that the rest of the world would give their right arm for!). Although the headline figure may have been a little disappointing, there were bright spots included in the data release. These included retail sales, which rose 8.2%…
Tomorrow will see the Chinese President Xi deliver a speech commemorating 40 years of China’s ‘reform and opening’. The speech is being eagerly anticipated due to the recent developments within China and the external pressure that has been exerted, especially by the Trump administration. Both of these headwinds may force Xi to change course on both the substance and direction of macro policy reform going forward.
As the US warns of further ratcheting of tariffs up to 25% (from the originally threatened 10%) on $200bn of Chinese imports (beyond the $34bn already imposed and a further $16bn that may come into effect later today) it’s worth reviewing the US policy on FX manipulation, consider its impact on the global economy, and - as many will be worse-off in this brinkmanship - identify any that stand to gain from these escalating tariff threats.
Xi Jinping’s state visit to UAE has perhaps been overshadowed by media coverage of the Trump-Putin meetings in Helsinki earlier in the week: the visit is part of UAE-China week running from 17-24 July focusing on bilateral relations and enhancing the trading and cultural relationship between the countries. Importantly, we see the event as highlighting the importance of China’s Belt and Road Initiative (BRI) (also known as One Belt, One Road or OBOR) which also fits with a plan by Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi, to ‘Restore the Silk Road’ trading route.
According to sources, Chinese policymakers have been evaluating a number of policies including the potential risk of a renminbi devaluation; as concerns over a trade spat remain elevated. According to the article published on Bloomberg yesterday, “Senior Chinese officials are studying a two-pronged analysis of the yuan that was prepared by the government.” The one side examines the effect of using the currency as a trade negotiation tool, while the other evaluates the outcome of a RMB devaluation to counter any potential impact on exports resulting from proposed US trade tariffs. The obvious knee-jerk reactions followed the reports, which saw the RMB immediately depreciate against the dollar yesterday, but the offshore currency eventually closed 0.20% stronger.
In what is expected to be Russia’s most ambitious and pricey (USD 55bn) energy project in modern history, we heard this week that state-owned global energy giant Gazprom is 75.5% the way into completing the 3,000km Power of Siberia gas link to China. The project is expected to be completed “on time” with Russia supplying China with natural gas through the East-Route by December 20, 2019.
Yesterday Liu He, often considered a cornerstone of China’s recent economic policies, ascended to vice-premier, straddling responsibilities - that US counterparts Powell, Mnuchin and Cohn/Kudlow have - into one important role. Liu was the expected, preferred and better understood candidate for the role; this move should strengthen his capacity to apply his prescriptions for a resilient but debt laden and uncertain economy.
An exciting day for asset markets started with a risk-on tone as the UK woke up to the news that Trump and Kim Jong-Un are eager to meet in May; in what could be a milestone meeting where amongst many items, denuclearisation will be a hot topic. Ahead of that announcement, Trump officially went through with his “very flexible” 25% steel and 10% aluminium tariffs, highlighting regional allies, or as Trump refers, “real friends” Canada and Mexico as currently exempt; a change in tune then? The tariffs, which will take effect in the next couple weeks could “go up or down, depending on the country”, with Trump adding that countries could be dropped and added.
So far this year the offshore Chinese renminbi has appreciated just under 3% in spot terms against the dollar (3.5% total return); despite sceptics’ calls for a ‘devaluation of the currency in order for the country’s exports to remain competitive’. Although the dollar has remained on the back-foot this year, the RMB continues to trade stronger than its CFETS benchmark; which includes 24 currencies, expanded from 13 currencies in 2016.
A year ago the world woke up to the certain prospect of Trump as the 45th President of the United States. Since then, as the Independent put it, he has made “2,470 tweets and 0 major legislative achievements”. He has also made 13 trips to foreign countries and at least 34 trips to his favoured destination: the golf course.
President Trump has this week been on his latest trip, sweet-talking his way through Asia and has turned from recent meetings and negotiations with Japan and South Korea to focus now on China. Yesterday in Beijing the Trumps met Chinese President Xi Jinping and today they meet Premier Li Keqiang. Tomorrow they go on to Vietnam and then to the Philippines: all in one week (the trip 11 days in total).
Yesterday China’s 19th National Communist Party Congress closed, officially marking the beginning of President Xi Jinping’s second term as party general secretary (and points towards a likely third!). Furthermore Xi unanimously secured an eponymous amendment to their constitution furthering Deng Xiaoping’s reforms and ideology of the 1980s surrounding his “theory on socialism with Chinese characteristics”. How exactly “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” will look, only time will tell. But, further to Xi securing more influence for himself, there was the unavoidable rhetoric for the pursuit of “more balanced economic growth”.
This week the US Department of the Treasury issued a report to Congress on Foreign Exchange Policies of Major Trading Partners of the United States. Bilateral trade imbalances are a key concern for this US administration and the report monitors ‘where unfair currency practices may be emerging and encouraging policies and reforms to address large external surpluses’.
The Treasury looks at 3 criteria in compiling a ‘Monitoring List of major trading partners that merit close attention to their currency practices’:
The ‘petrodollar’ economy, set up in the 1970’s is coming under increasing pressure due to the expansion of the Chinese renminbi (yuan) usage in settling crude trades. The ‘petroyuan’ dates back only as far as 2012 when China signed a USD5.5bn currency swap agreement with the UAE whereby oil imports from Abu Dhabi would be settled in renminbi. Then in 2015, as a result of western sanctions, Russia began accepting yuan payments for all its oil exports to China; also considered an incentive to attract Chinese business away from Saudi Arabian oil imports which are priced in dollars. This trade works in both economies’ favour as Russia would rather purchase goods and services from China than go to the market and exchange the yuan.
President Xi Jinping recently called for China to open its market further by improving the investment and market environment for overseas companies at the Central Leading Group on Finance and Economic Affairs meeting. He went on to say that China should look to ‘create a stable, fair, transparent and predictable business environment, and speed up efforts to build an open economy in a bid to promote the sustainable and healthy development of the Chinese economy.’
As with most commodities, copper has had a bit of a rollercoaster year so far; trading within a ~11% range. 3-month futures in the popular red metal are now trading at near 5-month highs and above the psychological $6000pmt level, having gained just under 9% ytd. Better than expected economic expansion in China, the world’s largest consumer of copper, has helped support copper prices. As have recent labour disputes at mines, and shipping disruptions for example.
China’s Q2’17 economic data releases have remained robust, taking a number of market makers by surprise. China’s economy expanded by 6.9% yoy in the second quarter, against market expectations for 6.8% growth, industrial production and retail sales numbers also surprised to the upside. Stronger domestic demand coupled with the stable manufacturing sector, off the back of a marginal pick-up in global growth conditions, have helped maintain economic stability amid the government’s push to deleverage. This resilient data will no doubt allow policymakers further room to maintain the deleveraging programme, in support of the real economy.
Today is expected to be a relatively quiet day across markets with the US out celebrating the July 4th holiday. Elsewhere, yesterday marked the 20th anniversary of the handover of Hong Kong to China, and the launch of the China-Hong Kong ‘Bond Connect’ platform. Bloomberg expects this new platform to be ‘the world’s biggest-ever financial product offering’. It is designed to allow foreign investors access to the USD 9.4tn China-Hong Kong bond market without a quota, or other technical hurdles.
As was widely expected, MSCI Inc. announced that it is to include Chinese A-shares on the world's most followed Emerging Market Indices; a symbolic victory for China. According to the statement, 222 of China’s large-cap onshore stocks will be included in the MSCI Emerging Markets Index via a two phase process from May to August next year. MCSI stated: ‘This decision has broad support from international institutional investors ... primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements’.
On Friday the People’s Bank of China announced further technical fine tuning on the renminbi fixing mechanism; with the inclusion of a ‘counter-cyclical factor’. The reason for this additional tweak is off the back of continued dollar weakness, the DXY (dollar) Index has fallen almost 4.5% so far this year (at time of writing). If the dollar does weaken, the counter-cyclical factor should in fact limit daily renminbi volatility and according to China Foreign Exchange Trade System (CFETS) could lessen ‘herd effects’; in effect speculative bets against the renminbi.
This morning Moody’s downgraded China’s rating one notch from Aa3 to A1. This is still a high investment grade rating with Moody’s affirming, in their report, that China still has ‘very high’ ‘economic strength’ and ‘fiscal strength’ which in turn give the country a ‘high economic resiliency’ and ‘government financial strength’. The downgrade puts China’s rating in-line with Japan’s and aligns Moody’s assessment with Fitch’s (where China has never exceeded the current A+ level).