David Fuller and Eoin Treacy's Comment of the Day
Category - China

    China's Inward Turn

    Thanks to a subscriber for this report from Citi which may be of interest. Here is a section:

    In some ways this represents an important generational change in the way China will interact with the rest of the world. As far as we know, the term “international circulation” originated in 1988 when a government researcher, Wang Jian, made the case that China should adopt an export-led growth strategy, making use of its huge surplus labor to plug the economy into the international manufacturing process. In that sense, the de-emphasis of international circulation is an important historical shift. In a People’s Daily article in November 2020, Vice Premier Liu He set out a number of objectives relating to the DCS including: (1) the priority of upgrading of China’s technological capacity, including an enhancement of China’s supply chain resilience (though referred to in this article as “optimizing the structure of supply”); (2) the need for finance to serve the needs of the real economy; and (3) the promotion of further urbanization. Any mention of external demand comes last

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    Email of the day on the rationale for China's COVID-zero

    Dear Eoin, I am one of your long term subscribers from Singapore from back when David started the service. I have been shared this hypothesis regarding the reason why China is keeping to the zero covid measures and it is less to do with the disease but something else. Firstly with the reason for covid, they have managed to track the movement of all individuals in China with the Green Code, which coupled with their country wide camera surveillance, allow the state to monitor constantly all citizens. This is especially important in the fight against corruption. Secondly and more importantly, China is still trying to deflate their large property bubble which is 30-40% of the countries economy. Besides Evergrande, there are systemic risk to the over investment in real estate which is a huge Ponzi scheme. Fortunately most of the debt are on-shore, and China needs to keep its borders closed. This is because if re-opened, the increased spending from in-bound and outbound tourism will cause inflation, and this will force The Central bank to raise interest rates. China Central Bank wants inflation to still be low so that the economy can be stimulated and the growth in local jobs help keep the confidence for the population to invest in the property market. If inflation rises, then interest rates have to increase and it will delay the clean up of the property market which has so far been very well controlled. China is doing far more in the real estate cleanup then the US did with Sub-Prime Crisis in 2007-2008. Due to the trade offs, the real estate recovery is more important that the risk to public health although China could simply mandate all citizens especially the elderly to be vaccinated which they have not. It cannot be due to the lack of vaccines or preparation for the hospital and ICU beds capacity as China could have allowed Moderna and Pfizer to be registered locally without asking for the IP to be disclosed. Hope to hear from you. Thanks 

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    China's Plunging Market Has Become a High-Risk Bet on Xi Jinping

    This article from Bloomberg may be of interest to subscribers. Here is a section:  

    Chinese stocks tumbled by the most since 2008 in Hong Kong and the yuan hit a 14-year-low after Sunday’s confirmation that Xi’s policies of stronger state control over the economy and markets will continue unchallenged for years.

    Unlike in places like the US or UK -- where dramatic market reactions can force policy pivots or even overthrow entire governments -- it’s becoming apparent that investors are only an afterthought for Xi. That narrative was reinforced by Beijing’s move to delay the release of a raft of economic data without explanation, and risks further alienating money managers who are already leery of Chinese assets.

    Investors have to decide if Xi’s policy objectives -- such as common prosperity and dual circulation -- are palatable, according to Hao Hong, chief economist at Grow Investment Group. “One has to examine whether these new sets of values align with your own” investment goals in the years ahead, he told Bloomberg TV on Monday.

    Monday’s market reaction -- especially offshore -- suggests international investors are becoming increasingly leery of Xi, who has implemented tough curbs on one-time market favorites from Alibaba Group Holding Ltd. to education firms. With a new leadership team packed with his allies, analysts also expect little dissent against Xi’s Covid Zero strategy.

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    China Seeks to Boost Stock Market as Xi Speech Disappoints

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Chinese regulators are ramping up efforts to support the stock market, which saw little reprieve from President Xi Jinping’s speech amid continued pressure from geopolitical tensions and the Covid Zero policy. 

    A series of market-supporting measures are in the pipeline, including proposals to encourage companies to buy back shares and to ease curbs on short-term transactions by overseas mutual funds. In a sign that private firms are heeding the government’s efforts, at least eight mutual funds announced plans on Monday to invest in their own equity products.  

    The benchmark CSI 300 Index ended up 0.1%, reversing earlier losses as investors weighed Xi’s speech against the prospect of measures. The Hang Seng Index climbed 0.2%, while a gauge of Chinese stocks trading in Hong Kong also eked out gains. 

    Stock investors have been looking for fresh market impetus after suffering losses that have been among the worst in the world. Xi’s renewed pledge for tech self-reliance trigged a rally in the sector’s stocks, but the overall market reaction was muted as he defended the Covid Zero policy and fell short of promising further support for the property sector.   

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    Hong Kong Buys HK$11.697 Billion to Defend Currency Peg System

    The Hong Kong Monetary Authority buys HK$11.697 billion ($1.5 billion) to manage the city’s currency peg for Oct. 14 settlement, according to the de facto central bank’s page on Bloomberg.

    Aggregate balance will decrease to about HK$106.6 billion on Oct. 14

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    China Offers Rare Tax Rebate to Spur Home Purchase in Crisis

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    China’s central government offered a rare tax incentive for residential purchases, ramping up support for the country’s embattled real estate sector. 

    Residents who buy new homes within one year after selling old homes will enjoy refunds for personal-income tax on the sale, according to a statement on the finance ministry website. The tax refunds will take effect from October till the end of 2023. 

    The novel tax policy comes after a yearlong slump in the housing market. To spark a turnaround, the central government is allowing nearly two dozen cities to lower mortgage rates for purchases of primary residences, while the central bank vowed to speed up delayed homes with more special loans. 

    “The measure may help restore some confidence,” said Xu Xiaole, a property analyst at Beike Research Institute. “It’s another demand-side policy targeting homebuyers after mortgage rate cuts.” 

    The tax break suggests the central government is ramping up support for people seeking to upgrade their homes. Previously, most incentives focused on first-time buyers, echoing President Xi Jinping’s mantra that “houses are for living in, not for speculation.”

    Unless the person has held on to the home for at least five years, most big cities charge personal tax income on property sales when there’s a gain in value, usually 1% of the full amount or 20% of the gain. 
    Under the new policy, people who buy more expensive apartments will enjoy a full refund in this area. The tax break only applies to home upgrades in the same city.  

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    Tycoon Running a Quarter of China's Copper Trade Is on the Ropes

    This article from Bloomberg may be of interest to subscribers. Here is a section:

     

    Much as He’s rise was a microcosm of China’s economic boom, his current woes may mark a turning point for commodity markets: the end of an era in which Chinese demand could only go up.

    “In some ways Maike’s story is the story of modern China,” said David Lilley, who started dealing with Maike in the 1990s, first as a trader at MG Plc and later as co-founder of trading house and hedge fund Red Kite. “He has skillfully ridden the dynamics of the Chinese economy, but no one was prepared for the Covid lockdowns.”

    This account of He’s rise to the pinnacle of China’s commodities industry is based on interviews with business associates, rivals and bankers, many of whom asked not to be named because of the sensitivity of the situation. 

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    China's Economy Shows Signs of Recovery as Stimulus Ramps Up

    This article from Bloomberg may be of interest to subscribers. Here is a section:  

    China’s economy showed signs of recovery in August as Beijing rolled out stimulus measures to counter a slowdown, although a property market slump and Covid outbreaks continue to weigh on the outlook.

    Industrial production, retail sales and fixed-asset investment all grew faster than economists expected last month. The urban jobless rate slid to 5.3%, while the youth unemployment rate fell from a record high.

    The boost to retail sales was partly due to a lower base of comparison from a year earlier and a surge in car sales after Beijing gave buyers subsidies on electric vehicles. Industrial output was also supported by a big spike in electricity production during August’s heatwave, a rebound that’s unlikely to be sustained. 

    Despite signs of improvement, the recovery remains fragile as Covid outbreaks spread to more parts of the country and the government tightens curbs to contain infections in the run-up to the Communist Party’s twice-in-a-decade leadership congress next month. A property market slump also shows no sign of easing, with separate data on Friday showing home prices have now declined every month in the past year, with the contraction in August bigger than in July. 

    “While today’s data are better than expected, it’s unlikely to change the prevailing pessimism toward China, given the multiple headwinds underway including zero-Covid, property rout and the lack of decisive policy moves before the Party Congress,” said Larry Hu, chief China economist at Macquarie Group Inc. 

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    The Future of Copper

    Thanks to a subscriber for this report from S&P Global which may be of interest. Here is a section from the conclusion:

    Notably, neither scenario assumes that the growth in new capacity—expansions and new mines—speeds up. Absent a major policy shift, however, regulatory, permitting, and legal challenges, combined with long timelines for new mines to come onstream, will continue to dampen the pace of supply increases. This supply-demand gap for copper will pose a significant challenge to the energy transition timeline targeting Net-Zero Emissions by 2050. The challenge will be compounded by increasingly complex geopolitical and country-level operating environments. These include

    The strategic rivalry between the United States and China—over a projected period in which China will remain the dominant global supplier of refined copper, while the United States depends on imports for well over half its copper.

    Russia’s invasion of Ukraine and its cascading effects on the commodities markets and energy security, which have highlighted the vulnerability of supply chains. “Supply chain resilience” policies aiming to secure reliable supplies of the materials needed for energy transition—and economies in general—are likely to be a central feature of the emerging geopolitics.

    A growing tension between energy transition, social license, and ESG objectives that dramatically increase the need for minerals like copper on one hand, while raising the compliance, legal, and operational costs of mining those minerals on the other.

    The risk of a significant, structural increase in copper prices as the supply-demand gap increases, with a potentially destabilizing impact on global markets and industry. While structurally higher prices incentivize international investment in new capacity, governments in sourcing countries are likely to seek to capture domestically a rising share of revenues.

    The fragmenting of globalization and a resurgence of resource nationalism. The resulting challenge for all actors involved with the energy transition will be to manage often competing and seemingly contradictory priorities. It is clear that technology and policy innovation will both be critical to reducing the supply-demand gap for copper in order to help enable the net-zero goals

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