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.
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.
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.
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 week the who’s who of politics, economics, tech and business are gathered at the World Economic Forum in Davos. This year’s has so far been starkly different from previous summits, as the two biggest events of 2017 (so far), i.e. Brexit and the incoming less trade-friendly US administration, are against everything that Davos - the global problem-solving think-tank - stands for. This year the US shunned the annual global getaway, with no president-elect official representation.
Recent volatility across asset markets seems to have abated somewhat as befuddled markets appear to be finding their feet; although the future Trump administration policy stance still remains unknown. One thing that does appear to be ‘known’ is the future relationship between the US and Russia. After a phone call yesterday between Trump and Putin, expectations are that the two nations will look to work to normalise relationships, formalise trade agreements and work together to combat international terrorism and extremism. Our guess is that Putin will also look to Trump to ease western sanctions on Russia which are due to be reviewed in January; more recently we have heard that Italy, Hungary, Greece and Cyprus have questioned the effectiveness of the sanctions and are pushing for dilution. Although bonds within the region did sell-off post election announcement, holdings such as Russian Railways 7.487% 2031 and Gazprom 8.625% 2034 have recovered into the end of the US close and today’s trading session; up 2-3 points at time of writing. Both bonds remain attractive, yielding over 6.3%, with sufficient 2-3.5 notch protection and expected returns of 19.4% and 13.5% respectively.
Firstly … RIP Muhammad Ali, sportsman of the 20th century, who died over the weekend, aged 74, after a 32 year battle with Parkinson's disease. He did indeed float like a butterfly and sting like a bee.
Today in Beijing, government officials from the world’s two largest economies meet for the annual US-China Strategic and Economic Dialogue (S and ED), where they will address a wide range of global and economic issues as well as regional ones. Interestingly, this annual meeting was initially set up by the Bush administration when it was called the Senior Dialogue and Strategic Economic Dialogue.
The latest figures on China’s foreign exchange reserves showed a significant deceleration in their decline. Abating from an average outflow of $98bn per month in the prior 3 months, February’s smaller $28.6bn outflow raises questions on whether recent concerns were themselves overheated. One questions whether extrapolating the trend of recent months into multiple years aligns with the underlying causes of such flows and their likelihood of persisting - at such levels and for prolonged periods. Such assumptions are necessary for outflows to sufficiently dent China’s monumental reserves and ability to defend its long term goals. Such assumptions are proving ever more doubtful. This forthcoming month’s results should help evaluate the important factors and help affirm any possible trend changes.