Forensic Insights and Market Intelligence on Greater China
With the recent publication of the 2018 China trust industry data, we can examine the true extent of the shadow banking de-leveraging engineered by the Chinese government. In brief, through the course of 2018, shadow banking assets housed in insurance, trust products, and funds reduced from 47 trillion RMB to a little more than 41 trillion RMB.
The most noteworthy event over the weekend was Politburo Standing Committee member Wang Yang’s visit to Xinjiang, where he reaffirmed the Xinjiang Uyghur Autonomous Region (XUAR)’s hardline stance toward Uyghurs in a number of speeches.
While there is no question the growth of China’s $13 trillion economy is slowing, weighed down by leverage that may take years to pay, the nation will by no means collapse as so many Western pundits have predicted, or are hoping for.
As the world watches in great humor the dysfunctionality and total lack of coordination in the Trump White House, even in the midst of high stakes international negotiation, the market is increasingly pricing in a successful trade deal between the US and China.
Looking at the December FX flows data and new data points from January, we can safely say that China has maintained tight control over the onshore FX market in the past month and half. The December numbers show that year-end flows were largely balanced and, in contrast to 2015 and 2016, did not exhibit any unusual outflows. That was a remarkable achievement considering the consecutive U.S. Fed rate hikes in the last quarter of 2018. All looked good except for the onshore dollar market, which saw a late-year flash crash. This was a sign of the increasing linkage between China’s onshore debt bubble and the global financial market.
Amidst the gloom and pessimism about China currently saturating the media, there remains a bright spot in China’s economy going into the lunar new year, and an important one. As we will show below, China’s $2 trillion real estate industry continued to do well through December of 2018 and is not displaying any sign of cratering into the new year.
With the latest release in FX reserve data and the US Treasury International Capital (TIC) data, we are able to estimate the composition of China’s FX reserves for 3Q 2018.
For the past decades, Wall Street has believed in the story that Chinese consumers will move up the income ladder, allowing them to spend more and more on all kinds of goods and services. This to a large extent has fueled first the rise of traditional retail names in China, followed by the rise of e-commerce platforms such as Alibaba and JD.
The investment community has paid close attention to the recently concluded Central Economic Conference (CEC), which sets the tone for economic policies in the coming year. At Spectrum Analytica, we also will dissect the CEC press release, but unlike most of sell side analysts, we will cut through all the pleasantries and inform our readers what announced policies will be meaningful and how they will be implemented.
After a truce on the trade war has been reached at the G20, we take a hard look at the trajectory of US-China trade war in the coming months. The outcomes of the trade dispute may substantially redistribute the gains of global trade in both countries. As such, it is an important issue for the market. Since the outcome of the dispute will be driven by politicians on both sides, we begin our analysis with a political framework for both the US and China. We then derive a set of expected outcomes based on our political frameworks and interactions between the Chinese and the US frameworks.
We are once again hearing from policy makers that they want to jump-start the economy after a few months of “de-leveraging.” Banking Regulator Guo Shuqing even went as far as to say that one third of new loans will go toward helping private firms. Can the Chinese government just turn on the spigot again and jump-start the economy, and if so, by how much? In this note, we estimate that the spigot will need to be turned on much more to stabilize growth, to the tune of 450 billion RMB in additional credit per month.
It is clear that partly as a response to US tariffs, China — which has shown great ability to peg the RMB to the dollar at any given level — is opting to devalue its currency. On the face of it, it seems to be the perfect solution. When the US imposed a 10% tariff on Chinese export, China can devalue by roughly 10%, which should bring down the dollar prices of the goods affected by the tariffs and also all other exported goods. This should make Chinese goods even more attractive and widen China’s trade surplus.