Investment Themes - China

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June 19 2018

Commentary by Eoin Treacy

Xi Can Make Life Difficult for U.S. Companies After Trump Threat

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

Pressuring companies through bureaucratic means “is a practice that the Chinese have used for a long time and our companies are on guard,” William Zarit, chairman of the American Chamber of Commerce in the People’s Republic of China, said on Bloomberg Television. “This is definitely a concern.”

South Korean and Japanese companies have all felt this effect, with their businesses in China hurt as part of a dispute between states.

In 2017, following the Seoul government’s decision to deploy an anti-missile system that China opposed, China forced South Korean retailer Lotte Shopping Co. to suspend operations at many of its hypermarkets in the country for alleged violations of fire-safety rules. The company eventually decided to pull out of China, but still can’t sell all its units and continues to rack up losses. In total due to the dispute, Lotte Group lost an estimated 2 trillion won ($1.8 billion) in the year from March 2017, according to Yonhap News Agency.

The backlash also led to boycotts, with consumers shunning cars from Hyundai Motor Co. and cosmetics from Amorepacific Group. Chinese tourists cancelled Korean vacations, forcing airlines to scrap flights and hotels to slash rates. The Bank of Korea estimated that 0.4 percentage point was cut from 2017’s gross domestic product.

Eoin Treacy's view -

China has such a wide trade surplus with the USA that it is going to be hard to meet the increased level of tariffs the USA is proposing, without greatly increasing the levels on the goods it does import. However, there are additional measures the country can take to express its dissatisfaction.



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June 19 2018

Commentary by Eoin Treacy

Long-term themes review May 16th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a summary of my view at present:



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June 14 2018

Commentary by Eoin Treacy

China's Economy Is Slowing Just as Trump Readies a Trade Beating

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

 

China’s economy fell short of expectations and its central bank chose not to follow the Federal Reserve in raising borrowing costs, adding fresh caution on the outlook for global growth as trade tensions with the U.S. escalate.

With President Donald Trump renewing threats to impose tariffs on the world’s second-largest economy, May data for industrial output, retail sales and investment all came in beneath economist forecasts on Thursday. The People’s Bank of China kept the cost of reverse-repurchase agreements steady, defying predictions it would track the Fed’s hike of Wednesday.

Investors now face greater uncertainty over what had been the strongest global upswing since 2011. That doubt is set to fester after Trump said on Wednesday that he’ll confront China "very strongly" over commerce in coming weeks. His administration is scheduled to announce a new list of duties on Friday.

"A slowing China will add to the challenges for the global economy," said Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong and a former International Monetary Fund researcher. "Until recently, the resilience of growth in China was an important buffer for the global economy in the face of headwinds from trade friction, slower growth in Europe, higher oil prices and issues in various emerging markets."

Both industrial output and retail sales rose less than expected in May compared to a year ago. Fixed-asset investment growth in the first five months was the slowest since the data began in 1999, as was the investment in the services sector. The decade-long decline in investment has intensified this year, as policy-makers act to reduce leverage at state-owned companies and local governments. While that’s a deliberate policy, officials risk a worse-than-desired deceleration in growth.

Eoin Treacy's view -

China might not have raised interest rates but it is definitely leaning on the shadow banking sector which is the effectively withdrawing capital from regional banks. At the same time, it is allowing defaults to occur. There have been as many defaults so far in 2018 as in all of 2016, which was the previous peak level of 21.



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June 12 2018

Commentary by Eoin Treacy

Shadow Lending Slump Shows Deleveraging Picking Up

This note from Fielding Chen at Bloomberg may be of interest to subscribers. Here is a section:

Looking at the details, the composition of lending continued to shift toward on-balance-sheet lending from off-balance sheet:

New bank loans denominated in yuan totaled 1.14 trillion, up slightly from 1.1 trillion in April. The 41.3 billion yuan rise was slightly below the average increase of 98.1 billion yuan recorded in the same month over the past five years.

The stock of shadow bank lending -- entrusted loans, trust loans, and back acceptances -- dropped across the board. The total fell 421.5 billion yuan, the steepest monthly drop in data available back to 2016.

Net financing of corporate bonds contracted by 43.4 billion yuan, after an increase of 377.6 billion yuan in April. Rising defaults have hit sentiment in the bond market. Equity financing was more stable, falling moderately to 43.8 billion yuan from 53.3 billion yuan.

Recent policy moves have been tilted toward support for bank lending. In April, the PBOC cut the reserve requirement ratio for banks. In June, it broadened the types of collateral that could be used against central bank loans.

Eoin Treacy's view -

The Fed is raising interest rates and reducing the size of its balance sheet, the ECB is approaching the end of QE while the Bank of Japan is now yet ready for that step. Against that background the PBoC is engaged in an attempt to bring the shadow banking system out of the shadows.



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June 06 2018

Commentary by Eoin Treacy

Amazon vs. Alibaba: The Next Decade of Disruption

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

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The footprint of ecommerce is only likely to expand if for no other reason than it is easy to shop and browse online. That doesn’t mean people will stop going to malls. We are after all a social species but the nature of shopping with definitely change.

The new Westfield mall that opened up the street from me a couple of months ago is focusing on food offerings with Eataly, Ding Tai Fung and Meizhou DongPo as well as upper middle class/luxury brands. That might be a function of its location sandwiched between the affluent neighbourhoods of Beverly Hills and Holmby Hills but equally speaks to the spending habits of Chinese shoppers.  



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May 31 2018

Commentary by Eoin Treacy

In Gold We Trust

Thanks to a subscriber for this report from the team at Incrementum which may be of interest. Here is a section:

 

A

Also most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). 

lso most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). Also most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). 

Also most relevant for the price of gold is the turning of the tide in terms of monetary policy. We find it quite remarkable that the gold price (in USD terms) bottomed out exactly at the beginning of the current rate hike cycle. When it became clear in 2015 that administered US interest rates would soon be raised, many market participants and observers sotto voce predicted a precipitous slump in the gold price. In the same year, we pointed out to our readers that rising interest rates could actually prove to be positive for the gold price. Market developments in recent years are testifying to the fact that this assessment was correct.

 

In addition to hiking interest rates since late 2015, the Fed began reducing the size of its balance sheet starting in Q4 2017, a process that has been dubbed “quantitative tightening” (QT). From our perspective, most market participants are currently massively underestimating the likely consequences of the QT process. The “everything bubble” which we discussed at length in last year’s In Gold we Trust report6 is at grave risk of bursting as more and more liquidity is withdrawn. The monthly contraction in Fed assets is gradually ratcheted up and will reach USD 50bn per month from October 2018 onward. In total, the balance sheet is to be reduced by USD 420bn in 2018 and by USD 600bn in 2019. However, we believe this monetary normalization plan is unlikely to survive a significant decline in even one, let alone several asset classes (equities, bonds, real estate). 

 

My view – Rather than think so much about a risk to the dollar’s position as the reserve currency, perhaps the bigger point is that China has a well-telegraphed decision intention to internationalise the renminbi. That holds out the long-term prospect of a true bi-polar world where competing economic bloc compete against one another.

 

If one were to think about a truly bullish case for gold that kind of scenario is definitely high in the realm of possibilities to drive investor demand. The gold price is currently holding in the region of $1300 but the medium-term pattern is one of a saucering pattern similar to the base put in during the early 2000s. However, a sustained move above $1400 will be required to confirm a return to medium-term demand dominance.

 
Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Rather than think so much about a risk to the dollar’s position as the reserve currency, perhaps the bigger point is that China has a well-telegraphed intention to internationalise the renminbi. That holds out the long-term prospect of a true bi-polar world where competing economic bloc compete against one another.



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May 25 2018

Commentary by Eoin Treacy

China to use cornerstones to help Alibaba, Xiaomi list in mainland: sources

This article by Julie Zhu and Shu Zhang for Reuters may be of interest to subscribers. Here is a section:

Beijing could also rip up its unwritten rules on pricing caps to make way for these blockbuster deals, said the sources who have direct knowledge of the matter, adding that Alibaba and Xiaomi were furthest along the CDR planning path.

Selling CDRs equivalent to say about 1 percent of Alibaba’s market capitalization would mean raising $5 billion in Shanghai or Shenzhen, marking what would be China’s largest share sale on the open market since 2009, according to Thomson Reuters data.

While such deals would allow mainland investors to benefit from any further share price rally, the securities regulator is worried they “will take up too much liquidity in the secondary market, which may lead to a drop in the main indices”, one of the sources told Reuters.

Eoin Treacy's view -

The Chinese mainland market is underperforming at present amid concerns about deteriorating standards of governance, trade wars and debt. However, the introduction of new sources of supply is a more pressing issue in the short-term.

Many mainland investors have felt left out by the success of domestic companies on overseas bourses without being given the opportunity to participate. If they get the chance to investor via the mainland market they are likely to take it in preference to other domestic shares.

The Shanghai A-Share Index pulled back from the region of the trend mean today to confirm this year’s downward bias.

Meanwhile Alibaba is testing the upper side of its six-month range.



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May 17 2018

Commentary by Eoin Treacy

Tencent Gains $18 Billion as Record Profit Eases Margin Fear

This article by Lulu Yilun Chen for Bloomberg may be of interest to subscribers. Here is a section:

Revenue from Value Added Services, which includes online games and messaging, rose 34 percent to 46.9 billion yuan. The company has however been leery of barraging its users with ads - on Wednesday, it declared it had raised the maximum number of ads that customers see on WeChat Moments, a function similar to Facebook’s newsfeed, to just two a day from one previously.

“The results were good even without the one-time gains, but the gains made it even better,” said Bhavtosh Vajpayee, a Hong Kong-based research analyst at Bernstein.

But overall costs surged 51 percent. Tencent executives have signaled a willingness to sacrifice margins in favor of longer term growth in new businesses, though that would depend on growing and engaging a massive user base now primarily confined to China.

Profit was also helped by one-time gains of almost 7.6 billion yuan from its investments in arenas like video and news.

“The reason why analysts had been modeling down was because they did mention about subsidies on payments and also continued investments in content costs,” Citigroup Global Markets’s Head of Pan-Asia Internet Research Alicia Yap told Bloomberg Television. “All these years of investments in digital content, for example music and video, actually started to show some leverage” this quarter.

Eoin Treacy's view -

Tencent is a heavy weight in the Hong Kong, any Chinese equity index as well as the MSCI Emerging Markets Index. It needed a good earnings report to signal to investors that the company’s best growth days are not already behind it.
 



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May 15 2018

Commentary by Eoin Treacy

Long-term themes review April 10th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a summary of my view at present:



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May 11 2018

Commentary by Eoin Treacy

Boston Dynamics' Atlas robot can now chase you through the woods

This article by Rick Haridy for Gizmag may be of interest to subscribers. Here is a section:

A six-minute walk through an office and lab facility is chronicled in the video, and Boston Dynamics reports that before this recorded autonomous run, the robot was guided along the route manually by a human so a map of the space could be constructed. The video highlights SpotMini's obstacle avoidance systems and navigation map as it moves through the space, so it’s not entirely clear how much autonomy the robot has regarding its overall route, but it can clearly dynamically respond to obstacles in the space.

As with other subdued Boston Dynamics video reveals, not much more detail is offered outside of the actual footage. The company was acquired by Japanese company SoftBank from Google parent company Alphabet for an undisclosed sum in 2017.

Eoin Treacy's view -

These videos of Boston Dynamics impressive robots are always visually astounding but they seldom show the human operator with the remote control running around behind the robot. The big success for Boston Dynamics is that it has demonstrated that it is possible to develop a robot that can navigate the human environment with relative ease and grace. That is already a huge achievement.



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May 09 2018

Commentary by Eoin Treacy

China's About to Give Global Finance the Chance of a Lifetime

This article by Malcolm Scott and Hannah Dormido for Bloomberg may be of interest to subscribers. Here is a section:

To deliver on longstanding pledges and help stave off the threat of tariffs from U.S. President Donald Trump, Chinese officials have set a June 30 deadline to ease ownership and business restrictions for banks, securities firms, asset managers and life insurers.

Securities firms like Goldman Sachs Group Inc. and UBS Group AG have an opportunity to boost their share five-fold as they take more direct control of joint ventures, projections by Bloomberg Intelligence show. Insurers including AIA Group Ltd. are set to cash in on their already healthy presence, while banks like HSBC Holdings Plc and Citigroup Inc. face a steeper road ahead to build market share, but will reap juicy profits as they do so.

Much as World Trade Organization entry in 2001 revolutionized the manufacturing industry, opening the financial sector could transform how capital is allocated and wealth managed across China. The charts below show the state of play and estimates on how that’ll change.

Eoin Treacy's view -

China is a major emerging financial market but it is also one where there is already a great deal of debt and where regional governments as well as consumers are heavily leveraged to the property sector. That is a risk the Chinese government is only beginning to get to grips with.



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April 30 2018

Commentary by Eoin Treacy

US-China rivalry will shape the 21st century

This article by Martin Wolf for the Financial Times may be of interest to subscribers. I found the comments section to be particularly enlightening because it highlights just how emotive this topic is. Here is a section:

China is a rival of the US on two dimensions: power and ideology. This combination of attributes might remind one of the clash with the Axis powers during the second world war or the cold war against the Soviet Union. China is of course very different. But it is also potentially far more potent. China’s rising power, economic and political, is evident. According to the IMF, its gross domestic product per head in 2017 was 14 per cent of US levels at market prices and 28 per cent at purchasing power parity, up from 3 per cent and 8 per cent, respectively, in 2000. Yet, since China’s population is more than four times as big as that of the US, its GDP in 2017 was 62 per cent of US levels at market prices and 119 per cent at PPP. Assume that by 2040, China achieves a relative GDP per head of 34 per cent at market prices and 50 per cent at PPP. This would imply a dramatic slowdown of the rate it is catching up (a fall of around 70 per cent from the rate since 2000, starting in 2023). China’s economy would then be almost twice as big as that of the US at PPP and almost 30 per cent larger at market prices. (See charts.)

Eoin Treacy's view -

China is an increasingly confident ascendant power. The investments it is making in Europe, Africa and commodity producers are well reported upon while it is also a major holder of US Treasuries. It is also a middle-income country with a well telegraphed desire to become the world’s pre-eminent power over the course of the next few decades.



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April 24 2018

Commentary by Eoin Treacy

PBoC cuts RRR to avoid over-tightening

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

The PBoC announced it will cut reserve requirement ratio (RRR) by 1 ppts for most banks by next week. RRR will be reduced to 16% for big banks and 14% for mid and small banks (Figure 1). This will inject some 1.3tn new liquidity into the banking system. Banks are asked to pay off some 900bn balances from the medium-term lending facility (MLF) on the same day. Net liquidity injection of about 400bn will largely go to small city and rural banks. Lastly, the PBC asks these banks to use the new funding mainly for lending to small businesses.

We believe the RRR cut should not be seen as a change of monetary policy stance. The economy is doing well; growth stayed strong at 6.8% in Q1, supported by consumption and property investment (see our note here). Hence there is no need to loosen monetary policy. Indeed the OMO rates were raised just last month (Figure 2). We do not expect PBC to cut policy or OMO rates in the coming months. If anything, OMO rates may be raised further.

The main purpose of the RRR cut, in our view, is to avoid over-tightening on small banks and small businesses. The PBoC will continue to tighten financial regulations and deregulate interest rates under the leadership of the new government. This will lead to higher funding costs, particularly for smaller banks who do not have large deposit base and rely on wholesale funding. Meanwhile, tightening financial regulations, including the expected new regulation on asset management, will affect the shadow banking business. Banks are pressured to move their off-balance sheet lending back on balance sheet (Figure 3). Small businesses are more severely affected in this process, as they have limited access to regular bank loans and rely more on shadow banking. The RRR cut will mainly benefit smaller banks and, with the guidance on lending, will help relieve financing difficulties faced by small businesses.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

This statement is the first signal since Xi became dictator that the Chinese administration is paying attention to the market and role of investors in reflecting the outlook for the economy. The cut to the reserve requirement demanded of banks is a positive step for the sector since it has been in a corrective phase since the beginning of the year.



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April 23 2018

Commentary by Eoin Treacy

Email of the day on what to own in the latter stages of a bull market

Hello Eoin, Whatever age you happen to be, it is always salutary to lose a parent. A constant pillar in one's life has gone and no more questions can be asked. It brings into relief one's own fragility and mortality in a way that few, if any, other deaths will do. I hope your mother's passing was a comfortable one. My condolences to you and your family.

While it is probably improper to revert immediately to business, I am sure you will want to re-immerse yourself in the observation and interpretation of markets without delay. On this basis, I have a question:

Given that we believe we are heading for monetary contraction, a rise in interest rates and accelerating inflation how should we be positioning portfolios? Banks and resources should be well bid for the time being and Japan should benefit from inflation.

But how about India, China and the other economies of North and South East Asia? What sectors and markets are best avoided? At what point does one accumulate cash? Gold is much talked about as an inflation hedge but that will be a shooting star - it might soar in the near future but it will then weaken once more. It is to be regarded as a hedge or a trade, not as an investment - at least that's my view.

In my own portfolio, I've trimmed China and India, reduced or eliminated high flying 'big-tech' stocks (but not touched PCT), increased my Japan weighting and increased cash. I'm probably underweight gold. I plan to accumulate more cash but at this stage, I've no idea what holdings I shall reduce or sell over the coming months. Providing one is not losing money, investment is fun but over the next two or three years, I suspect there will be plenty of opportunities to lose money which we should try to avoid. It's a tough time for you and you have plenty on your plate but if you care to comment on these musings it would be much appreciated. All best.

Eoin Treacy's view -

Thank you for your condolences. The outpouring of warmth and compassion from subscribers has been enormously gratifying for my whole family and I. My mother’s passing leaves a hole in the wider family, since she was the matriarch in no uncertain terms, but it has also encouraged us all to work harder at communicating.

This is a detailed question and there is no one simple answer. I’ll attempt to more fully explore these issues over the course of the next few days and weeks but here are some of my current thoughts.



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April 17 2018

Commentary by Eoin Treacy

April 10 2018

Commentary by Eoin Treacy

Xi Warns Against Returning to a 'Cold War Mentality'

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

“Human society is facing a major choice to open or close, to go forward or backward,” Xi told hundreds of investors gathered on the resort island of Hainan, in a speech that didn’t mention Trump’s name. “In today’s world, the trend of peace and cooperation is moving forward and the Cold War mentality and zero-sum-game thinking are outdated.”

Trade talks between the world’s biggest economies broke down last week after the Trump administration demanded that China take steps to curtail support for high-technology industries, a person familiar with the situation said. The conciliatory tone of Xi’s speech helped bring risk appetite back to Asian markets as shares from Sydney to Hong Kong rose alongside oil and metals and Treasuries extended declines with gold and the yen.

Eoin Treacy's view -

As soon as Mrs. Treacy’s old school friends have children she gets a friends request on WeChat. They begin planning at birth to send their child abroad to be educated. Only last week she was approached to be a guardian for one child about to enter high school and to help arrange a scouting trip for another family whose son is now five.



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March 26 2018

Commentary by Eoin Treacy

As Trump Takes On China, Another Trade Challenge Looms in Asia

This article by Connor Cislo and Jiyeun Lee for Bloomberg may be of interest to subscribers. Here is a section:

But at the same time, there’s been a spike in sales to China of precision metal working machines and equipment for making chips from firms like Japan’s Yaskawa Electric Corp. With a Chinese state-backed fund gearing up to pour as much as $31.5 billion into homegrown semiconductor manufacturing, there’s potential for trade flows to start to shift.

China’s ambitions, set out in its sweeping Made in China 2025 plan, go much further than semiconductors and would see its technical prowess advance in a host of areas, ranging from bio- medicine and artificial intelligence to new-energy vehicles and aircraft. The challenge to Japan, Korea and Taiwan also applies to European exporters like Germany, and comes on top of the risks to global trade from the Trump administration’s embrace of tariffs.

"The bits of the global supply chain that are currently the preserve of Korea, Japan, Taiwan, the U.S., and Germany, are the bits of the supply chain that China has a decade-long industrial strategy to move into," said Tom Orlik, Bloomberg’s chief Asia economist. He said it’s only a matter of time before many components for electronic products are made domestically and the country is on track to become a car exporter. Eventually, it will be selling airplanes, said Orlik.

Eoin Treacy's view -

China is moving up the value chain in just about all industries. It’s policies in achieving that goal are openly mercantilist. It has unabashedly supported domestic industry by whatever means necessary, closed off the mainland market to global competitors, engaged in industrial espionage on a grand scale and none of these actions are without precedent.



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March 22 2018

Commentary by Eoin Treacy

Protectionism Risks? What's Next?

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

Eoin Treacy's view -

A link to the full report and section from it are posted in the Subscriber's Area.

This is a very measured report which I think is underplaying the short-term volatility tariffs are likely to provoke. Bilateral trade between the USA and China is substantial and US companies have invested considerable resources in developing customer bases in China. They are far from immune from Chinese retaliatory measures which over the course of the medium-term will likely be ironed out but probably not before there is some pain felt on both sides.



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March 22 2018

Commentary by Eoin Treacy

Tencent Drops After Warning Spending to Weigh on Profit Margins

This article by Lulu Yilun Chen for Bloomberg may be of interest to subscribers. Here is a section:

Tencent’s business revolves largely around its vast social networks WeChat and QQ, the twin platforms through which more than a billion people consume games, news and online entertainment while paying for a plethora of real-world services. Chief Executive Officer Ma Huateng is now angling to grab a larger slice of an advertising pie dominated by Alibaba Group Holding Ltd., while investing in new areas such as financial, retail and computing services.

“Tencent needs to invest in new business, it would help the company build a better ecosystem infrastructure to support growth, but it will hurt margins in the short term,” said Benjamin Wu, an analyst at Shanghai-based consultancy Pacific Epoch.

Analysts at Credit Suisse Group AG and Citigroup Inc. lowered their earnings estimates for Tencent after the results.

Tencent’s quarterly profit included gains in the quarter of 7.9 billion-yuan thanks mainly to the initial public offerings of Sea Ltd., Sogou Inc. and Yixin Group Ltd. Those are just three of the 600 companies the company has invested in.

Eoin Treacy's view -

I don’t know a Chinese person, either by birth or heritage, that does not use WeChat. That fact alone means it is going to be more expensive to gain new customers.



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March 22 2018

Commentary by Eoin Treacy

Long-term themes review March 7th 2018

Eoin Treacy's view -

FullerTreacyMoney has a very varied group of people as subscribers. Some of you like to receive our views in written form, while others prefer the first-person experience of listening to the audio or watching daily videos.

The Big Picture Long-Term video, posted every Friday, is aimed squarely at anyone who does not have the time to read the daily commentary but wishes to gain some perspective on what we think the long-term outlook holds. However, I think it is also important to have a clear written record for where we lie in terms of the long-term themes we have identified, particularly as short-term market machinations influence perceptions.

Here is a brief summary of my view at present.



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March 21 2018

Commentary by Eoin Treacy

Policy focus shifted to sustainability from stability

Thanks to a subscriber for this note from Deutsche Bank which may be of interest. Here is a section:

March 19 2018

Commentary by Eoin Treacy

Understanding China's Rise Under Xi Jinping

This speech delivered by Kevin Rudd at West Point earlier this month represents an excellent summary of the machinations of political power in China which I found very interesting. Here is a section:

However, militating against any of the above, and the “tipping points” which each could represent, is Xi Jinping’s seemingly absolute command of the security and intelligence apparatus of the Chinese Communist Party and the state. Xi Jinping loyalists have been placed in command of all sensitive positions across the security establishment. The People’s Armed Police have now been placed firmly under party control rather than under the control of the state. And then there is the new technological sophistication of the domestic security apparatus right across the country—an apparatus which now employs more people than the PLA.

We should never forget that the Chinese Communist Party is a revolutionary party which makes no bones about the fact that it obtained power through the barrel of a gun and will sustain power through the barrel of a gun if necessary. We should not have any dewy-eyed sentimentality about any of this. It’s a simple fact that this is what the Chinese system is like.

And

Many scholars failed to pay attention to the internal debates within the Party in the late 1990s, where internal consideration was indeed given to the long-term transformation of the Communist Party into a Western-style social democratic party as part of a more pluralist political system. The Chinese were mindful of what happened with the collapse of the Soviet Union. They also saw the political transformations that unfolded across Eastern and Central Europe. Study groups were commissioned. Intense discussions held. They even included certain trusted foreigners at the time. I remember participating in some of them myself. Just as I remember my Chinese colleagues telling me in 2001-2 that China had concluded this debate, there would be no systemic change, and China would continue to be a one-party state. It would certainly be a less authoritarian state than the sort of totalitarianism we had seen during the rule of Mao Zedong. But the revolutionary party would remain. 

Eoin Treacy's view -

China is going to stay authoritarian and is in the process of implementing an internal security apparatus that is more sophisticated than anything the world has seen before. The nexus of artificial intelligence, cameras, local monitoring, real name social media enforcement, social scorecards are all designed to ensure the long-term sustainability of single party rule.



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March 13 2018

Commentary by Eoin Treacy

Email of the day on the differences between China's authoritarianism and India's chaotic democracy:

I have just returned from a visit to India and I visited China last autumn. I was struck by the difference between the two societies. In China I found an almost total absence of religious belief while in India I discovered an almost nationwide attachment to different religions and traditional mysticism. While I saw "tomorrow" all over China in the form of futuristic cities like Shanghai and Hong Kong, I only saw "yesterday 's poverty and superstition" in India. David and you harp on the importance of governance. I heard many Chinese persons state that as long as their material well-being improves, they are prepared to accept the absence of democracy because this enables the government to take action without vested interests standing in its way. In India democratic discussion was said by the persons I met to be an obstacle to rapid and firm decision-taking. What is your opinion on this?

Eoin Treacy's view -

Thank you for sharing your impressions from China and India following your travels. You are not the first subscriber to have asked this question. There have been a number of people over the years who, having visited China and India, said that on coming home they sold their India positions and transferred the balance to China.



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March 12 2018

Commentary by Eoin Treacy

China's investments in research and innovation

This is a hot topic with two subscribers sending through articles from different authors covering the same topic for newspaper columns.

Eoin Treacy's view -

Links to both articles are posted in the Subscriber's Area.

China was making headlines today because Xi Jinping’s bid to remain in power following the end of his official term was rubber stamped by the People’s Congress today. It has been a key object of Xi’s to do everything possible to ensure China sits on a level playing field with the USA on the international stage. Modernisation of the military, greater surveillance of the domestic population, strengthening the nation’s censorship of the internet, the Belt and Road infrastructure program, dominating international engagement with African countries, spending on research and development and infiltration of university campuses in the OECD are all part of that plan.



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March 05 2018

Commentary by Eoin Treacy

China Turns Fiscal Screws While Targeting GDP Growth Around 6.5%

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

Xi has ratcheted up his drive to curb debt risk, pollution and poverty at a time when the world’s second-largest economy is on a long-term growth slowdown. His efforts to rein in spending contrast with an historic expansion of U.S. borrowing under Donald Trump during a period of economic expansion.

The 2018 targets “suggest slower growth and a fiscal drag,” said Callum Henderson, a managing director for Asia-Pacific at Eurasia Group in Singapore. “This makes sense for China in the context of the new focus on financial de-risking, poverty alleviation and environmental clean-up, but is less good news at the margin for those economies that have high export exposure to China.”

Growth handily surpassed 2017’s target with a 6.9 percent expansion that was the first acceleration since 2010. Economists forecast a moderation to 6.5 percent this year amid the ongoing deleveraging drive and trade tensions with the Trump administration and a further deceleration to 6.2 percent in 2019.

Eoin Treacy's view -

China has significant challenges ahead as it engages with deleveraging, particularly among the regional lenders. However, it is also worth considering that fiscal discipline at this stage in the cycle is admirable since it will leave the government with some firepower when the economy next slows. That is the exact opposite of what the US government is doing at present which is of course why interest rates are set to continue to rise.



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February 27 2018

Commentary by Eoin Treacy

What Does Population Aging Mean for Growth and Investments?

Thanks to a subscriber for highlighting this article by Henry McVey at KKR which appeared in the Macro Morsels report on the 23rd. Here is a section on China: 

Eoin Treacy's view -

Both a section from the report and the report are posted in the Subscriber's Area.

China has successfully developed a domestic demand driven digital economy out of nothing less than a decade ago. The introduction of social media, ecommerce, online banking, payments and saving are all contributing to the upskilling of the population.



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February 26 2018

Commentary by Eoin Treacy

China will scrap limit on presidential terms, meaning Xi Jinping can stay on

Thanks to a subscriber this article from the South China Morning Post which may be of interest. Here is a section:  

The party has in recent decades largely observed an unwritten retirement age of 68 for its top leaders, but its charter does not have any limit on terms. That means there are no restrictions on the general secretary position, but the Chinese constitution does limit presidents to a maximum of two five-year terms. 

Analysts said ending the two-term limit gives the strongest indication yet that Xi will stay in power longer than his recent predecessors at a time when the leadership was “fixated on stability”.

There was intense speculation in the lead-up to the party’s five-yearly congress in October over whether Xi would continue to lead the party beyond two terms, with some questioning whether his ambitious plans to “rejuvenate” China could be achieved within 10 years.

Eoin Treacy's view -

Governance is Everything. Does the removal of term limits represent a retrograde step? If we look at the anything beyond the short term then the answer had to be in the affirmative. Absolute power corrupts and the removal of term limits means any semblance of checks and balances will be removed. Xi has been clear that no one is above the law but China does not have an independent judiciary so that statement means nothing. 



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February 15 2018

Commentary by Eoin Treacy

Mapping shadow banking in China: structure and dynamics

Thanks to a subscriber for this report from the Bank for International Settlements. Here is a section: 

Understanding the structure of China’s shadow banking system is crucial for analysing China’s financial system. We provide a stylised map of shadow banking in China, which highlights the main forms of shadow banking and the resulting financial system interlinkages. Shadow banking in China takes a markedly different form compared to that in the United States. A key characteristic is that commercial banks are the dominant players in China’s shadow banking system. The system is effectively a “shadow of the banks”, while securitisation and market-based instruments still play only a limited role.

We show that the structure of shadow banking in China is evolving. Its size and dynamics have changed rapidly in recent years. The main area of growth has shifted from shadow credit provision to private firms with less privileged access to formal bank credit, towards offering alternative savings instruments (e.g. WMPs and trust products). Similarly, at the intermediate stage, new and more complex “structured” shadow credit intermediation has emerged and quickly has reached a large scale. This is driven by banks trying to alleviate regulatory burdens (e.g. NPL provisions or LTD ratio ceilings) through a reclassification of existing bank assets into investment receivables. Tight and growing financial sector linkages further raise the potential for the transmission of financial shocks among savers, banks and the bond market. In addition, new forms of internet-based credit intermediation, such as P2P lending, have been expanding at an extraordinary pace. As a result, shadow banking in China is growing more complex and thereby becoming slightly more similar to the US shadow banking.

Eoin Treacy's view -

We tend to hear a great deal about the problem of non-performing loans and the shadow banking sector in China. However, a point that often seems to be overlooked is that not every bank is equally affected. 



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February 01 2018

Commentary by Eoin Treacy

Post 19th Party Congress: Xi the King of China

Thanks to a subscriber for this report from APS Insights which focuses on the political machinations that brought Xi Jinping to power. Here is a section: 

A section from the full report is posted in the Subscriber's Area. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. I’ve been travelling to China on at least an annual basis since 2005 but it is only in the last 18 months that the pace of social change has been noticeable. Everyone is used to going to China and marvelling at the infrastructure but the social change underway with the birth of a consumer culture and domestic services industry represents a massive change for China. 



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January 30 2018

Commentary by Eoin Treacy

US dollar policy. It really matters

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

A section from this report is posted in the Subscriber's Area. 

Eoin Treacy's view -

The Dollar has been trending lower since early 2017 and the pace of the decline picked up pace with the approval of the Trump tax cuts. Since these measures represent procyclical policies which are the equivalent of deficit spending they have had a negative effect on the Dollar while also boosting stocks and commodity prices. 



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January 29 2018

Commentary by Eoin Treacy

China H Share Euphoria Enters New Stage as Laggards Surge

This article by Sofia Horta e Costa for Bloomberg may be of interest to subscribers. Here is a section:

As a bull market in the China H-share gauge extends into the 715th day, one of the longest in its 23-year history, investors are finding plenty of reasons to buy and few to sell.


While technical measures suggest a pullback is overdue, growing confidence around China’s economy and earnings will support the gains for now, according to JPMorgan Asset Management’s Marcella Chow.


“It’s been a very rapid rally but only a change in fundamentals will trigger a correction and people are still quite confident,” said Chow, a Hong Kong-based global market strategist for JPMorgan Asset Management, which oversees $2 trillion worldwide. "It’s all about finding bargains.”


In such a market, any decline is seen as an opportunity to buy. When the gauge finally snapped a record 19-day winning streak on Thursday with a 1.7 percent retreat, it rebounded 2.5 percent the next day as investors pounced on the biggest losers such as banks. At the same time, persistent favorites such as China Vanke Co. and Ping An Insurance (Group) Co. show no signs of slowing down.


As a perennial underperformer itself, due to the index’s dominance by sprawling state-owned enterprises, there’s little for investors to worry about in terms of valuations. Even after an 85 percent bull run, the Hang Seng China Enterprises trades at 8.9 times its members’ projected earnings. That’s a 39 percent discount to the tech-heavy MSCI China Index, while a gauge of global equities is about twice as expensive.

Eoin Treacy's view -

The China Enterprises Index (H-Shares) has been trading at a discount to its international peers for years. However, it is the return to synchronised global economic expansion in 2017 that reignited the hunt for bargains amid valuations on Wall Street that are expensive by historical measures. At the same time, the Chinese government has been slowly but surely raising obstacles to the continued growth of the shadow banking system while the consumer economy continues to expand rapidly. 



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January 23 2018

Commentary by Eoin Treacy

Asia Bank Primer 2018

This heavyweight 246-page report from Bank of America/Merrill Lynch may be of interest to subscribers. Here is a section:

A section from this report is posted in the Subscriber's Area.

Eoin Treacy's view -

Hong Kong interest rates rise with those of the Fed. The Chinese export engine is back in fine fettle with Purchasing Managers Indices trending higher just about everywhere, but especially in Europe which is a major destination for goods. Additionally, Chinese banks trade at significantly lower multiples to their global peers. That is translating into a positive environment for the region’s banks. 



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January 18 2018

Commentary by Eoin Treacy

China Posts First Full-Year Pickup Since 2010 on Global Tailwind

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

"There’s still a mountain of debt and major structural challenges to address. But compared to hard-landing fears in early 2016, and expectations of a pronounced slowdown at the start of the year, China’s economy outperformed in 2017."

In a year that began with fears of a trade war with a newly elected Donald Trump, exports turned back into a growth engine for the world’s factory floor. The contribution of net external trade to growth improved by around 0.4 percentage point in real terms last year, “more than fully explaining the pick-up” in GDP growth, said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong.

Reflation was also key to boosting company profits and raising their ability to service debt. The GDP deflator for the full year, a gauge of economy-wide inflation, came in at 4.33 percentage points, while nominal growth accelerated to 11.2 percent. GDP in those terms grew to 82.7 trillion yuan ($12.9 trillion) -- up 8.4 trillion yuan in the year.

"Another Indonesia created in one year!" said Jim O’Neill, former chief economist at Goldman Sachs Group Inc. "The nominal GDP size confirms China has diminished the previous deflation risk and silly comparisons with 1980s Japan were just that, silly."

Eoin Treacy's view -

There is nothing quite like synchronised global economic expansion to flatter the prospects for exporters as demand increases for just about everything. That is helping China to outperform expectations and eases the burden on the economy from the efforts underway to deleverage the shadow banking system which primarily affects unlisted regional lenders. 



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January 08 2018

Commentary by Eoin Treacy

A deep-dive into demographics; healthy demand ahead

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

A section from the full report is posted in the Subscriber's Area. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

China’s property market represents a potent source of potential trouble at some point in the future. However, it has not stopped going up, and until it does the layers of leverage that constitute every bull market will not be exposed. 



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December 29 2017

Commentary by Eoin Treacy

Chinese Consumers Now Rule the World. Get Used to It

This article by Tracy Chen may be of interest to subscribers. Here is a section: 

According to the latest official data, China’s final consumption accounted for 63.4 percent of gross domestic product (Chart 2). Household consumption experienced exponential growth and climbed to $4.5 trillion (Chart 3). Retails sales have been growing at healthy pace of about 10 percent. Spending on Singles’ Day this year (Nov. 11), is impressive, registering $25 billion, almost double U.S. Black Friday online sales of $14 billion (Chart 4).

Eoin Treacy's view -

I have mentioned on multiple occasions how much of a transformation has occurred in China over the last few years where customer service has evolved out of nowhere. Our trip to Guangzhou in July provided a number of examples of this. We used ele.me to order a fruit platter. When the person at the store saw that the delivery address was a hotel they called and asked if we would like the fruit chopped because we probably wouldn’t have a knife in our room and at no additional charge. When Mrs. Treacy was buying a phone, my girls were playing on grab machines a little way off. They were getting frustrated by their unrelenting failure to win a toy so one of the girls from the phone store came over to show them how to pick the right machine so they could win. 



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December 13 2017

Commentary by Eoin Treacy

A $4 Trillion Reason for China's Smaller Banks to Worry

This article by Nisha Gopalan for Bloomberg may be of interest to subscribers. Here is a section:

But two things look clear: The WMP market's years of torrid growth have ended; and in an environment of higher risk, investors will prefer products sold by large state-owned lenders that are seen to be safer and of better quality. 

That will put pressure on smaller banks, which have limited scope to increase lending. Minsheng, China CITIC Bank Corp., Ping An Bank Co. and China Everbright Bank Co. all had loan-to- deposit ratios exceeding 90 percent as of the third quarter, according to Francis Chan of Bloomberg Intelligence -- much higher than their bigger rivals. Shares of Minsheng and CITIC Bank have fallen in Hong Kong this year, while ICBC has jumped 27 percent.  

A reckoning is approaching. As with all measures to rein in China's debt, the WMP clampdown is likely to be a stop-go process. But smaller banks will need to start looking for another source of growth, and fast.

Eoin Treacy's view -

Many of the smaller banks which have been most profligate in the use of wealth management products (WMP) are not listed. That represents a challenge in monitoring any issues they encounter using conventional stock market analysis of relative strength and leadership. 



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December 07 2017

Commentary by Eoin Treacy

China's Banks Need More Capital After Credit Boom, IMF Says

Thanks to a subscriber for this article from Bloomberg News which may be of interest to subscribers. Here is a section:

President Xi Jinping has highlighted financial stability as a top priority. People’s Bank of China Governor Zhou Xiaochuan warned in October about the risk of a ‘Minsky moment,’ or a sudden collapse of asset values. Financial watchdogs last month promised to overhaul regulation of asset-management products, which hold about $15 trillion and are seen as a key threat to stability.

Speaking to media on Thursday on a video call, the IMF’s deputy director of monetary and capital markets, Ratna Sahay, said China’s financial system held three main risks. She pointed to an increase in credit that in other countries has been linked to financial distress. An increasingly complex and opaque financial system makes it hard to identify risks, and implicit guarantees encourage excessive risk-taking, she said.

Credit growth needs to slow, guarantees should be gradually removed, and banks need more capital during that process, Sahay said. “Banks need to have some buffers in order to protect against any possible distress that might happen,’’ she said.

 

Eoin Treacy's view -

Financial stability is a priority for every country and just about everywhere has its own version of implicit guarantees. We can only imagine what would happen in the USA if the now explicit guarantee behind Fannie Mae and Freddie Mac were removed. What state would the financial sector be in now if the EU and UK had not stepped in to backstop it during what was dubbed a sovereign debt crisis but was in fact a cross border banking sector calamity?  



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December 06 2017

Commentary by Eoin Treacy

Tencent Seen Doubling by Stock-Picker Already Up 6,000%

This article by Charles Stein for Bloomberg may be of interest to subscribers. Here is a section:

Fueled by fast-growing sales, Tencent and Alibaba have almost doubled in share price this year, and both have market caps above $400 billion even after slipping recently. Their parallel climb explains in part why Leverenz’s fund has returned 31 percent in 2017, on track for its best year since 2009.

The stocks come with political risks. The Chinese government in September made creators of online message groups responsible for managing information within their forums, a move that chilled users of WeChat, Tencent’s popular social network.

“If you are an investor in Tencent you are basically betting on management’s ability to adjust to policies,” Duncan Clark, chairman of technology consulting firm BDA China Ltd., told Bloomberg News at the time.

 

Eoin Treacy's view -

Privately held companies will be tolerated and even prosper in China provided they accept the role of ensuring the permanence of Communist Party rule and toe the Party line. Jack Ma saying today that China benefits from the stability of a single party system can be viewed in that vein. “Private” companies are increasingly organs of central propaganda and are expected to assist both in monitoring and influencing the public. 



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December 05 2017

Commentary by Eoin Treacy

Copper Falls to 2-Month Low on Worries of Slowing China Demand

This article by Yuliya Fedorinova for Bloomberg may be of interest to subscribers. Here it is in full: 

“Industrial metals prices will consolidate due to a marked slowdown in China’s metals consumption growth,” BMI Research wrote in an emailed note.

China’s frenzied construction of roads, bridges and subways is set for a major slowdown, adding a headwind to economic growth in 2018. Fixed-asset investment in infrastructure will grow 12 percent next year, according to the median estimate in a Bloomberg survey, down from almost 20 percent in the first ten months this year.

All 18 economists in the survey anticipated a moderation, adding to reports by Morgan Stanley, Goldman Sachs Group Inc. and UBS Group AG predicting a similar trend.

Adding to the selloff is speculation that metals prices have overshot fundamentals in the recent run up. Nickel has retreated 13 percent since early November, giving up some gains from earlier in the year.

"The recent rally in nickel was mostly due to expectations of increased use of the metal in batteries, which will definitely realize some day, but right now stainless steel, not EVs, is still major consumer of nickel and its market driver," Boris Krasnojenov, an analyst at Alfa Bank in Moscow, said by phone.

 

Eoin Treacy's view -

China has infrastructure on par with many developed countries and has more spare steel capacity, for example, than the entire industries of Japan, South Korea and Taiwan combined. At some point there will be a rationalization of that industry. However the big question is what will replace it? 



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November 27 2017

Commentary by Eoin Treacy

China Shares Resume Decline as Year's Top Performers Take a Hit

This article by Emma Dai for Bloomberg may be of interest to subscribers. Here is a section:

The CSI 300 Index of large-cap stocks closed down 1.3 percent, with ZTE Corp. and BYD Co. both falling the 10 percent limit in Shenzhen, while BOE Technology Group Co. slid 9.7 percent. Shanghai-listed liquor giant Kweichow Moutai Co. couldn’t maintain its brief foray into positive territory and closed down 1.4 percent, its seventh straight loss since state media warned it was climbing too fast. The stock has slumped 14 percent since Nov. 16.

“Institutional investors are choosing to cash in toward year-end as valuations are near historic highs and market sentiment deteriorated after official media targeted Moutai,” said Shen Zhengyang, Shanghai-based analyst at Northeast Securities Co. He said the market “lacks steam” for further gains.

Eoin Treacy's view -

The pace of the CSI300’s advance has picked up over the last six months and has outperformed the bank-heavy Shanghai A-Share Index. The institutional memory of the bubbly activity which contributed to the surge and collapse of the market in 2015 is still relatively fresh and the government does not want to see a repeat. That suggests some pressure may be coming to bear on the highest-flying shares, to instil some discipline among investors. 



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November 24 2017

Commentary by Eoin Treacy

After Sudden Rout, China Stock Traders Question Beijing Put

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

For Sun Jianbo, president of China Vision Capital Management Co. in Beijing, valuations among large-cap shares are too expensive for state-backed funds to intervene.

The CSI 300 traded at its highest level relative to the broader Shanghai Composite Index in at least 12 years at the start of this week as investors flocked to large caps such as Moutai and Ping An Insurance (Group) Co.

"There’s no need to prop up the market yet," Sun said. "A lot of big caps are still expensive and it would do more harm than good to state-backed funds if they buy now."

The divergence between large-cap shares and the rest of the market may be one reason why the government took aim at Moutai. Before Xinhua warned last week that gains in the liquor maker were excessive, the stock had more than doubled this year.

Eoin Treacy's view -

Following the botched introduction of options trading in 2015 the Chinese administration introduced new rules on disclosures and selling by company principles. It also banned short selling for a time. Through steady purchases by various state-owned vehicles, they manufactured the slow and steady pace of the stock market’s advance since the low in early 2016. 



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November 22 2017

Commentary by Eoin Treacy

One in three Chinese children faces an education apocalypse. An ambitious experiment hopes to save them

This article by Dennis Normile for Sciencemag.com may be of interest to subscribers. Here is a section:

One in three Chinese children faces an education apocalypse. An ambitious experiment hopes to save them – This article by Dennis Normile for Sciencemag.com may be of interest to subscribers. Here is a section:

The result is a widening gap between urban and rural educational achievement in China, Rozelle says. Many urbanites fit the stereotype of "tiger" parents, pushing kids to excel in school. After hours, their schedules are packed with music and English lessons and sessions at cram schools, which prepare them for notoriously competitive university entrance exams. More than 90% of urban students finish high school.

But only one-quarter of China's children grow up in the relatively prosperous cities. Rural moms have high hopes for their children; Rozelle's surveys have found that 75% say they want their newborns to go to college, and 17% hope their child gets a Ph.D. The statistics belie those hopes: Just 24% of China's working population completes high school.

Rozelle believes such numbers bode ill for China's hopes of joining the ranks of high-income countries. Over the past 70 years, he explains, only 15 countries have managed to climb from middle- to high-income status, among them South Korea and Taiwan. In all those success stories, three-quarters or more of the working population had completed high school while the country was still in the middle-income bracket. These workforces "had the skills to support a high-income economy," Rozelle says. In contrast, in the 79 current middle-income countries, only a third or less of the workforce has finished high school. And China is at the bottom of the pack. School dropouts don't have the skills needed to thrive in a high-income economy, Rozelle says. And, worryingly, the factory jobs that now provide a decent living for those with minimal training are moving from China to lower-wage countries.

Rozelle thinks a lack of opportunity isn't the only factor holding back China's rural children. Physically and mentally, they are also at an increasing disadvantage, hampering their performance in school and their prospects in life.

Eoin Treacy's view -

You might remember last year the OECD’s Pisa rankings of schools was released and China featured particularly highly. That is because the data only looked at Beijing, Shanghai, Guangdong and Jiangsu where the best of the country’s education resources are concentrated. As the above article highlights the real story is of a country that still has a long way to go in equipping its population with the tools necessary to succeed in the 21st century. 



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November 16 2017

Commentary by Eoin Treacy

Stronger enforcement, improving cashflow

Thanks to a subscriber for this report from Deutsche Bank focusing on the Chinese Environmental sector. Here is a section:

The sector’s valuation looks attractive at current levels compared with its own trading history and also with the index. The P/Es of most stocks are below/close to their average minus one standard deviation since 2015, in terms of both their own PE and also relative PE to MSCI China. We think that the sector’s current valuation offers decent safety margins to buy into most stocks.

China usually strengthens environmental enforcement during the last three years of Five-Year Plan periods as the country gets closer to assessment deadlines. We expect the same to take place from 2018, especially as the CPC's 19th National Congress recently mentioned that China plans to set up a "National Natural Resources and Ecology Administration" soon. We expect these factors to benefit this laggard sector, together with improving cashflow profile/earnings quality with selective companies over the next few years

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

By all accounts New Delhi’s pollution is quickly catching up with Beijing’s but China is further along on its development track that India. The thick soup of smog that clings to Northern China during the winter is a political liability as the middle class evolves and demands better conditions. The closing down of inefficient production facilities and fabricators is driven both by a desire to cut back on overcapacity and to tackle nonperforming loans. Improving the environment at the same time is a bonus.



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November 10 2017

Commentary by Eoin Treacy

Foreign Banks Invited to End of the Credit Party

This article by Tom Orlik for Bloomberg may be of interest to subscribers. Here is a section: 

In the 2000s, China invited foreign banks into the domestic market, as it tried to manage down a legacy of bad loans. HSBC bought a share of Bank of Communications, Royal Bank of Scotland took a minority stake in Bank of China and Bank of America purchased a piece of China Construction Bank – helping them on their way to listing. Fast forward to 2017 and the bang is bigger. Based on an announcement Friday, limits on foreign ownership of Chinese banks and asset managers will be removed, and foreign firms will be able to take a 51% stake in securities and life insurance firms. But the aim is the same – helping clean up a financial mess, and prevent it from happening again.

Bloomberg Economics had flagged financial market opening as one of the possible deliverables from this week’s U.S. - China summit. Recognizing that the devil will be in the as-yet-unknown details, here’s our take on the implications:

There’s potential for a grand bargain here. China’s financial system will receive an influx of foreign capital and expertise.

That will help deal with the aftermath of a credit binge that has seen debt swell to 259% of GDP, and engineer efficiency gains that may help prevent a repeat occurrence. After paying the price of entry, foreign firms will get a piece of the Chinese market – the second largest and fastest growing in the world.

 

Eoin Treacy's view -

China has taken on a great deal of debt over the last couple of decades as the pace of infrastructure development has beaten all records. Quite what to do with it is a big question and there are three answers. However, perhaps the biggest takeaway is that the administration is taking substantive measures to tackle the problem.  



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October 25 2017

Commentary by Eoin Treacy

Xi Jinping Unveils China's New Leaders but No Clear Successor

This article by Chris Buckley for the New York Times may be of interest to subscribers. Here is a section:

The five new Standing Committee members are party leaders with long careers in Chinese politics, including one of Mr. Xi’s longtime allies and a scholar of international relations. But the party declined to name a younger leader to the committee who might succeed Mr. Xi when his second term as president ends in 2023.

That was a departure from China’s carefully scripted transfers of power in recent decades and a possible signal that Mr. Xi intends to govern beyond this next five-year term. Mr. Xi may also want more time to test possible successors, while avoiding lame duck status with an heir waiting in the wings.

But by discarding the unspoken conventions that have ensured relatively stable leadership changes in recent years, Mr. Xi has pushed Chinese politics into new territory that critics have warned could lead to turmoil, or a cult of personality with echoes of Mao.

“If Xi goes for broke and breaks precedent by not preparing for an orderly and peaceful succession, he is putting a target on his back and risking a backlash from other ambitious politicians,” Susan L. Shirk, the chairwoman of the 21st Century China Center at the University of California, San Diego.

“By taking such a risk, he shows himself to be more like Mao than we originally thought — he demonstrates his power by overturning institutions,” said Professor Shirk, a former State Department deputy assistant secretary for China policy.

 

Eoin Treacy's view -

Xi Jinping is 64 years old which means he will be older than the “unofficial” retirement age of 68 when the next Party Congress is next held in 2022. He has not anointed a successor so there is going to be a hiatus in promotions for ambitious party cadres over the next five years. Meanwhile the trajectory of his rule points towards his desire to extend his tenure beyond two consecutive terms.



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October 24 2017

Commentary by Eoin Treacy

Xi's China a boon for mining

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

And Xi's enormous power also means his pet projects should receive the full backing of the state.

The One Belt One Road initiative to recreate the Old Silk Road connecting Asia with Europe was mentioned five times during the speech. (Mao Zedong and Deng Xiaoping received four mentions each)

Another mega-undertaking, Beijing-Tianjin-Hebei integration, which includes the Xiongan New Area, Xi mentioned twice.
And even if the party's priorities are shifting away from market-orientated reforms, Beijing's transformation of its heavy industries coupled with programs to fight pollution has already benefitted mining.

For instance, eliminating overcapacity has boosted profitability in the domestic steel industry and in the process steelmaking raw material prices have been dragged higher. At the end of last year consensus forecast for the iron ore price was $57 a tonne during 2017. Year-to-date it's averaging $71.

 

Eoin Treacy's view -

Building new cities is nothing new for China but the Xiongan New Area will move the administrative hub from central Beijing to a new city which will remove a substantial number of people in one fell swoop. This also means that the new city will need to be both architecturally secure and technologically capable enough to house one of the world’s largest and most ambitious bureaucracies. 



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October 20 2017

Commentary by Eoin Treacy

Email of the day on China's yield curve

Thank you for such an eloquent financial service! Further to your comment on China today, according to Tracy Alloway of Bloomberg, the Chinese 5-10 Yield curve inverted yesterday. Is this a bad omen or can China be different!? 

Eoin Treacy's view -

Thank you for your kind words and this email which may be of interest to subscribers. The Chinese yield curve is inverted between the 5 and 10-year maturities but, generally when we talk about the yield curve spread, which is what I believe you are referring to, we look at the difference between the 2 and 10-year maturities. 



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October 18 2017

Commentary by Eoin Treacy

Xi Skips Old Growth Pledge as China Seeks Quality Not Quantity

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

"China’s policy makers are likely to tolerate growth to have another leg down to 5 to 6 percent in the next five years, so that they could have bigger room to fix the structural problems and make growth more sustainable," Hu wrote.

That’s in line with earlier messages of tolerance of slower growth in exchange for stable development. Xi told a meeting of the Communist Party’s financial and economic leading group last year that China doesn’t need to meet the objective if doing so creates too much risk, Bloomberg News reported in December.

Xi’s speech, which ran for more than three hours and mapped out a grand strategy for China’s development by 2050 implies "a change in growth and development objectives," said Chen Xingdong, chief China economist at BNP Paribas SA in Beijing.

The party is seeking to share "growth and prosperity for the majority of people through reformation of income distribution," Chen said

 

Eoin Treacy's view -

The larger an economy becomes the more difficult it is to sustain double digit growth rates. China is a perfect example of this and its size is a clear example for why smaller economies like India or the Philippines are currently outpacing its expansion. 



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October 06 2017

Commentary by Eoin Treacy

Macro Morsels

Thanks to a subscriber for this edition of Hardings report for Maybank which today includes a section by Russell Napier. Here is a portion:

While developed world central bankers claim and deserve some credit for saving the world from a depression in 2009, their colleagues in the emerging markets may also have been key players in staying disaster. As OECD broad money growth actually contracted in late 2009, China saw broad money growth around 30% and India around 20%. 

Could this have been a key factor in preventing a debt deflation? If so, we need to be concerned that as broad money growth in the OECD slows rapidly the growth of broad money in India and China has reached new lows. 

In China M2 growth year on year, at 8.9%, is the lowest level of growth recorded since records began. That is a marked slowing from the growth rate of above 11% when the world thought Chinese growth was collapsing in 1Q 2016. That tightening in monetary policy occurs as three-month interest rates in China have risen from a low of 2.7% in 2016 to 4.7% today.  

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

China is attempting to clamp down on property market speculation as prices continue to climb. That could well be behind the slow pace of money growth. However, it is also worth considering that the cuts to reserve requirements on its banks announced Wednesday were designed to act as some incentive to increase money supply

The Hong Kong Financials Index, which is comprised primarily of mainland banks and insurance companies, continues to outperform the China Enterprises (H-Share) Index. The 4000 level has acted as an area of psychological resistance since 2008 and it rallied above it on Wednesday. A break in the progression of higher reaction lows would be required to question medium-term scope for additional upside.

 

The Shanghai Property Index pulled back sharply before the mainland market closed for the Mid-Autumn festival and is now testing the region of the trend mean and the progression of higher reaction lows. It will need to bounce soon if potential for higher to lateral ranging is to be given the benefit of the doubt.

 

Russell Napier’s contention that risk is growing in the financial sector is far from a lone voice in the wilderness and there is some weight to the argument however if we assess the consistency of trends across global markets there is scant evidence of top formation development, at least right now.  



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October 06 2017

Commentary by Eoin Treacy

Baidu Invites China's Cybercops to Label, Rebut Fake News

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

The platform links 372 police agencies who will use sophisticated artificial intelligence-driven tools to monitor and respond to fake news, blogposts and other items across about a dozen Baidu services, including the popular search engine, the official Xinhua News Agency reported. More than 600 organizations and experts in different areas will be enlisted to weigh in on their respective fields, according to an email sent by Baidu. They included official organs such as the Chinese Academy of Social Sciences, as well as media outfits such as Shanghai United Media Group and Caijing.

Internet giants from Facebook Inc. to Twitter Inc. are struggling to deal with a proliferation of spurious news articles across social media services. Baidu’s approach allows the Chinese government to intervene directly and write articles in rebuttal. Items that its system decides are fake will be clearly labeled a “rumor” at the very top of search results, alongside an explanation penned by the relevant agency or organization, according to a sample page Baidu provided.

Eoin Treacy's view -

One of the reasons companies like Alphabet and Facebook cannot gain access to China’s market is because they are unwilling to acquiesce to the demands the central government makes in terms of unfettered access to user data. Domestic Chinese companies do not have the luxury of choice. 



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September 27 2017

Commentary by Eoin Treacy

2017 at the Three Quarter Pole

Thanks to a subscriber for securing an invitation for me to attend Jeff Gundlach’s presentation yesterday which as always was an educative experience. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

There were a number of interesting points raised but I believe the most relevant for subscribers’ centre on what he said about shrinking the Fed’s balance sheet, the outlook for the Dollar, commodity markets, the relative attractiveness of emerging markets and his best guess for when to expect the next recession.



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September 26 2017

Commentary by Eoin Treacy

Email of the day on Chinese customer service

My first experience of Shanghai customer service was in 1987. One afternoon we were bussed around the local Friendship Stores to spend money; but, I was having no more of it and took my camera to get some shots of real locals rather than Communist Party guides! My broken Mandarin got me an invite to join some locals at a table for food and beer. I politely declined the offer of food but said I would indulge in a beer. Unfortunately, the glass had a viral bug on it which 2 hours later caused my anatomy to require plenty of boiled eggs to help reverse my problem! We were staying at a hotel on The Bund. At 5pm we asked for room service and requested lots of boiled eggs on toast, only to be told, sorry, we only serve eggs at breakfast time! 30 years ago, Customer Service was unheard of.

Eoin Treacy's view -

Thank you for sharing you experience which gels with my own, at least until this most recent trip. 



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September 22 2017

Commentary by Eoin Treacy

Shanghai police turn to facial recognition software to catch misbehaving cyclists

This article from the South China Morning Post may be of interest subscribers. Here is a section: 

On the same day, another e-bike user who had previously been caught twice driving in the opposite bike lane was fined 100 yuan for doing so a third time.

If traffic law breakers do not accept the charges, police will publicly broadcast details of their offence on the surrounding advertising billboards until the culprit hands themselves in.

Shanghai traffic police said that following the success of the pilot, more “electronic police” surveillance units will be set up at major traffic intersections across the city.

 

Eoin Treacy's view -

While in China this summer I was amazed at the improvement in customer service that has come about as a result of the online review system available via many different social media services. The fear of receiving negative reviews has literally changed behaviour beyond recognition in service establishments. 



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September 18 2017

Commentary by Eoin Treacy

China Is Said to Draft Plans for Financial Sector Opening

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

As part of an early package of reforms agreed between the two leaders, Beijing agreed in May to allow U.S.-owned card payment services to begin the process of obtaining local licenses, in a move that would erode the near-monopoly held by China UnionPay Co.

China will open up its insurance market further, mainly by encouraging foreign insurers already operating locally to enter the health, pension and catastrophe insurance sectors, China Insurance Regulatory Commission Vice Chairman Chen Wenhui said earlier this month.

Chinese regulators last year decided to open up the nation’s fund market, allowing investment firms in China to be 100 percent owned by foreign managers. At least a dozen global money managers such as Man Group Plc, Bridgewater Associates and Fidelity International have announced plans since then to start private securities funds. Before the rule change, foreign firms were restricted from running such private funds in China but could take stakes in mutual fund companies and provide advice to onshore funds.

 

Eoin Treacy's view -

The most basic premise of insurance is to pool risk among as wide a grouping as possible to minimise the exposure any one individual takes on. Taken from that perspective the timing of the decision by Chinese officialdom to begin allowing foreign investors access to its capital markets is interesting. 



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September 12 2017

Commentary by Eoin Treacy

Email of the day on Chinese online retailers and online universities

Hello as you are familiar with China, what do you think of JD.com? I was also wondering if you could analyze universities who enable you to do their programs online 

Eoin Treacy's view -

– Thank you for these questions which may also be of interest to the Collective. I reviewed the online retail sector when I was in China in July. It has developed considerably since my last visit two years ago together with online payments, banking and same day delivery services. Here is a link to comment of the Day on July 25th. 



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August 30 2017

Commentary by Eoin Treacy

The Fat Tech Dragon

This report by Scott Kennedy for the Center for Strategic & International Studies may be of interest to subscribers. Here is a section:

China’s embrace of intellectual property (IP) is highly positive when contrasted with the country’s original disdain for property rights of any sort and widespread violation of IP rights. However, China’s efforts to develop and obtain more IP is driven heavily by bureaucratic imperatives as opposed to market incentives. Moreover, China may now be a “large” IP country, but it is still a “weak” one. Whether one is discussing licensing and royalties, mergers and acquisitions, or dispute settlement, Chinese patents still have little commercial value. 

China’s commercial success has outstripped its progress in technology innovation. Chinese companies are acquiring greater market share in high tech, particularly in the most commodified segments of sectors. The value-added contribution to manufacturing is growing in absolute terms, and domestic companies are contributing a growing share to China’s high-tech exports. 

Overall, China’s high-tech drive may be characterized as “good-enough innovation.” From a negative perspective, China is investing—and may be wasting—a great deal of human capital and funding, but is still far from a leader in high tech. From a more positive perspective, China is achieving incremental progress by benefiting from its strong capacity in manufacturing, the accumulation and diffusion of tacit knowledge, and the opportunities provided by such a large market. 

Regardless of the level of support they receive from their government, Chinese companies will face growing challenges in their interactions with multinational businesses and in overseas markets. Foreign governments and multinational businesses likewise need to decide how to strategically respond to China’s approach. They could take a firm stand in opposition, try to influence China’s approach at the margins, or go along with the strategy as best they can. In any case, if they are not careful, they could end up under the heavy foot of a fat tech dragon.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

In addition to its race to become a centre for high tech innovation China is also intent on a “China first” policy of making sure it is producing its own semiconductors without having to rely on US, Japanese, Taiwanese and South Korean manufacturers. That raises important questions about M&A activity since so much of it is state sponsored. The reality is that if China gains the technology to produce its own semiconductors it will seek to flood the market with cheap products and that could represent a significant issue for the global tech ecosystem. 



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August 21 2017

Commentary by Eoin Treacy

Navigating China's post-congress landscape

This article by Ryan Hass for Bloomberg may be of interest to subscribers. Here is a section: 

Over the past five years, the Chinese leadership’s top priorities have proven extremely consistent, reflecting a consensus on broad goals. The leadership has remained steadfastly focused on strengthening the Communist Party, safeguarding stability, and enhancing China’s regional leadership and global standing. There have been changes to the manner in which Xi has centralized power and the party has headed off domestic and external challenges. But on the top priorities, the party has followed consistent north stars to guide policy.

To this end, the Chinese leadership will continue to emphasize financial and economic stability and guard against financial shocks. Particularly with the much-anticipated centenary of the founding of the Communist Party in 2021, Beijing will be determined to achieve its goal of becoming a “moderately well-off society,” which in practical terms means doubling per capita income and national gross domestic product from 2010 levels.

Over the past five years, when confronted with choices between greater control and greater openness to innovation, China’s leaders consistently have opted for the former. Expect economic policies to continue favoring state control and stability, even at the cost of some economic growth. This bias is likely to extend to policies related to the internet and social media, where heightened censorship over the past five years has demonstrated the leadership’s wariness of losing control of information in the digital age.

 

Eoin Treacy's view -

Political machinations are going into overdrive to ensure stability in the Communist Party’s handover of power to a new generation at the upcoming Congress. No fewer than five of the Standing Committee’s members are to be replaced while 40% of the wider Politburo are retiring as well. 



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August 15 2017

Commentary by Eoin Treacy

Chinese automakers covet FCA

This article by Larry Vellquette for Automotive News may be of interest to subscribers. Here is a section:

Why, after two years on the block, is FCA apparently drawing interest from at least one potential Chinese buyer now?
The answer: FCA's global network and product — specifically Jeep and Ram — fit the requirements the Chinese government has set for attractive acquisitions.

Quality gap
Chinese automakers have openly dreamed of cracking lucrative North America for a decade, spending millions to display their vehicles at high-profile U.S. auto shows. Early efforts showed that Chinese automakers had a long way to go before they were ready to compete here.

But in more recent years — through knowledge and expertise gained via joint ventures with the world's largest and most successful automakers — Chinese companies have closed the quality gap.

And the automakers feel like they finally have closed that gap enough to start selling their products in the U.S., said Michael Dunne, president of Dunne Automotive, a Hong Kong investment advisory company and an expert on the Chinese auto industry.

They also are under pressure from the government to expand beyond China, Dunne said. A government directive dubbed China Outbound pushes Chinese businesses to acquire international assets from their industries and operate them "to make their mark," much as Geely has done since acquiring Volvo in 2010. Bloomberg reported last week that Chinese companies plan to spend $1.5 trillion acquiring overseas companies over the next decade — a 70 percent increase from current levels.

 

Eoin Treacy's view -

Germanys auto sector has been garnering all the wrong sorts of attention lately with increasingly evidence that the major manufacturers may have colluded in hoodwinking the globe into believing diesel engines are clean. On the other hand, China’s auto manufacturers have been among the best performers this year as they have increasingly focused on partnerships with international brands. 



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August 09 2017

Commentary by Eoin Treacy

Currency-Manipulating China Gives Trump What He Wants -- A Cheap Dollar

This article by Bradley Keoun for The Street may be of interest to subscribers. Here is a section:

While China still keeps an iron grip on its exchange rate, 2017 has thus far brought a reversal of a three-year stretch in which the dollar weakened against the yuan, also known as the renminbi or by its trading symbol RMB.

Some of the Chinese currency's strength stems from appreciation in major currencies like the euro and yen against the dollar, putting upward pressure on the yuan on a trade-weighted basis. But the gains versus the dollar show a willingness on the part of China to cede a marginal advantage to the U.S., its biggest single destination for exports.

"We do expect that the RMB should continue to gradually strengthen versus the weakening dollar over the next few years," said Jan Dehn, head of research at London-based Ashmore, which specializes in emerging-market stocks and bonds.

The exchange-rate reversal comes amid increased tensions between Trump and Xi, who has taken steps to improve his country's standing as a powerhouse in international trade even as the U.S. president pledges to renegotiate trade deals he considers unfair -- in order to protect American manufacturers and workers.

Eoin Treacy's view -

Greece couldn’t get a deal on debt restructuring until after the German election so that Merkel could further cement her place as the nation’s longest serving Chancellor. The rush to get deals done with Cuba and Iran in the last 18 months of Obama’s administration were equally aimed at legacy building. It’s plain for anyone to see that politicians care about their legacy and go to rather extreme lengths to get the headlines they want. Why should China be any different? 



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July 25 2017

Commentary by Eoin Treacy

Hong Kong Stocks Advance to Two-Year High Amid Mainland Inflows

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

Inflows from the mainland have helped Hong Kong’s benchmark equity gauge climb 22 percent this year to outperform most global peers. Onshore shares have largely been left behind amid concerns about rising funding costs, corporate governance issues, liquidity pressures and tougher regulatory oversight.

Chinese investors have bought about 35 billion yuan ($5.18 billion) worth of Hong Kong stocks in July as of Friday, surpassing June’s total monthly net purchases according to Bloomberg calculations.

“Mainland investors are buying Hong Kong stocks to diversify their portfolios and hedge risks, thanks to the weak performance of mainland equities, especially the ones listed in Shenzhen," said Banny Lam, managing director and head of research at CEB International Investment Corp.

The ChiNext, cowed by an official battle against speculators, is on the verge of becoming cheaper than the Nasdaq Composite Index for the first time on record. Its valuation based on reported earnings is now at 36.2, compared with 34.3 for the Nasdaq, leaving the narrowest gap since the Chinese board started in 2010.

Eoin Treacy's view -

The upcoming Party Congress slated for September or October represents a pivotal transition for the Chinese administration. This event is more important than any in at least the last fifteen years because so many members of the Politburo and Standing Committee have reached retirement age. It represents a key opportunity to cement power for the existing team by appointing their own people into key positions of power they could occupy for the next decade. 



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July 18 2017

Commentary by Eoin Treacy

Copper price jumps on gangbusters China growth

This article by Frik Els for Bloomberg may be of interest to subscribers. Here is a section:

Copper futures trading on the Comex market in New York jumped on Monday on renewed optimism about economic strength in top commodity consumer China.

Copper for delivery in September jumped to a high of 2.7375 a pound (just over $6,000 a tonne) in lunchtime trade, up 1.7% on the day to the highest level since end-March. LME copper's 2017 year to date gains in percentage terms are now within shouting distance of 10%.

Commodity-intensive sectors continue to expand at a faster rate than the broader measure of industrial production

The economy of China, responsible for nearly half the world's consumption of copper, expanded at an annual rate of 6.9% in the second quarter against expectations of a slight decline and at a quicker pace than Beijing's own target of 6.5% growth for 2017.

In seasonally-adjusted quarter on quarter terms, growth was even more significant, picking up from 1.3% to 1.7%. If the trend continues, this year would be the first time since 2010 that the Chinese economy grew faster than the year before.

Industrial production data for June released today also pointed to a significant improvement. Growth in industrial output picked up from 6.5% year on year to 7.6% led by greater electricity and steel production. Bloomberg consensus forecasts pointed to no acceleration for Chinese industrial output.

 

Eoin Treacy's view -

China has a major political transition coming up in September or October. Xi Jinping has not yet anointed a new successor probably because so many positions are opening up in the Standing Committee and the Politburo, and he has a vested interest in stacking them with his own appointees. 
The ousting of Sun Zhengcai, a current Politburo member, from Chongqing over the weekend supports the view Xi is angling towards the kind of control Zhang Zemin had over the political apparatus which persisted long after he was in the top position. 

Talk of containing “grey rhinos” or in Donald Rumsfeld speak “known knowns” can also be viewed as an attempt to ensure Xi’s legacy. Here is a section from an article discussing the issue from Bloomberg: 

"The message from the leadership last weekend was very clear -- financial stability is now regarded as an important element of national security," said Raymond Yeung, the Hong Kong-based chief economist at Australia & New Zealand Banking Group Ltd.

An editorial in the Communist Party’s People Daily newspaper on Monday pointed to the seriousness of the campaign, warning of potential "grey rhinos" -- a variation on the black swan events popularized during the global financial crisis, with the difference that the danger from a charging rhino is more immediate and the animals are less rare.

 



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July 17 2017

Commentary by Eoin Treacy

Bitcoin Split Risks Increase

This article by Andrew Quentson for Bloomberg may be of interest to subscriber subscribers. Here is a section:

As such, we are likely to have at least two bitcoins on August the 1st, but there may be even more. Bitcoiners, therefore, are strongly advised to not transact on that day until the situation becomes more clear.

Once the chain does split, BitcoinABC will probably be listed in at least one exchange, thus a period of high volatility and perhaps even trading frenzy should be expected as the market passes judgment on the value of the bitcoins.

Eventually, the dust will likely settle with one coin probably gaining some 80% or so of the current bitcoin value, while the minority coin can continue operating in their own network, free to follow their own roadmap and vision.

Which one will be which only the free market can tell us sometime next month as bitcoin finally makes a monumental and probably highly historical decision, at least for this space.

 

Eoin Treacy's view -

Bitcoin was set up so that no more than 21 million coins could ever be mined. More than 16 million have already been created, with the complexity of each successive block growing progressively more expensive to solve.  With bitcoins already priced out to 6 decimal places that limitation has asked legitimate questions about the sustainability of the global market when supply is so limited. That has led to a debate between monetary purists and miners who want to support the value by withholding supply and others who wish to see dynamic supply to allow the market to grow. 



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June 21 2017

Commentary by David Fuller

China shares get MSCI nod in landmark moment for Beijing

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

Inclusion in the index marks a key victory for the Chinese government, which has been working steadily over the past few years to open up its capital markets, investors said.

"Given the size and importance of China as an economic superpower, I think this is a historic moment," Kevin Anderson, senior managing director of State Street Global Advisors and head of investments in the Asia Pacific region told Reuters.

"It's a long-awaited and much-debated decision in the past, and I think it's more than symbolic as it will create additional flow of capital and potentially a new segment of institutional investors in the China market."

Traders said MSCI's widely expected "Yes" decision had been largely priced in, with the announcement triggering some profit-taking in blue chips, which are no longer cheap after strong rallies this year.

David Fuller's view -

MSCI admitting mainland Chinese shares to the Emerging Markets Index is a major event for China since it has been campaigning for entry for years already. However if we look at what the composition of the new Index is going to be then China does not get a much larger foothold. What the decision does create is the option for MSCI to include mainland shares but it would have to be at the expense of overseas listed shares which have clearly outperformed over the last year and more. 



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June 16 2017

Commentary by Eoin Treacy

China Banks Endure Record Costs as Squeeze Leaves No Choice

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

When cash supply tightens, small- and medium-sized lenders are usually among the hardest-hit because they lack the retail deposit arsenal of larger banks, said Yulia Wan, a Shanghai- based banking analyst at Moody’s Investors Service. They also may not have enough bonds to use as collateral to borrow money in the repo market. The banks need the money to finance longer- term and less liquid assets, such as debt and investment in loans and receivables, she added.

The PBOC has begun to take note of the stress on the financial system.

The monetary authority has injected a net 160 billion yuan through open-market operations this week, the most since the five days through May 19. The central bank-run Financial News said on June 10 that the “abnormal market swings” of June 2013 won’t happen again -- a reference to a record cash crunch four years ago.

Still, China’s seven-day repurchase rate -- the money- market benchmark -- has averaged 2.74 percent so far in 2017, compared with 2.32 percent a year ago. The gauge climbed four basis points this week to 2.95 percent, while the one-day rate rose three basis points to 2.86 percent.

“Some lenders don’t have better sources of funding to replace NCDs,” said Moody’s Wan. “Issuing such debt at such a high price will have a negative impact on their profitability.”

Eoin Treacy's view -

There is a lot happening in the Chinese financial sector right now. First off there is an official drive to contain speculation. The question is why now? Leverage, speculation and infrastructure development, all backed by government support, have been part and parcel of China’s economic growth model for decades. The question now is why is it such a problem today? I can think of two answers. 



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June 07 2017

Commentary by Eoin Treacy

Demographically challenged

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

A deep dive into demographics suggests a dire outlook for property prices
Following an in-depth demographic study for Hong Kong, we have turned more negative on housing demand. Taking into account weaker demand and rising supply (we published a FITT report on supply in Sept-16) we have cut our medium-term (2018E-21E) residential price forecasts significantly. We now expect vacancy to surge to 9% (4% now) and ASP to slide 48% by 2026 from current levels. We reiterate our view that developers will be forced to change their business model from land-banking to asset turnover. Hence, we overhaul our valuation methodology from discount-to-NAV to SOTP, using P/E to value development businesses. We downgrade HLD, Kerry and NWD to Hold.

Several negative demographic trends
In this report, we identify several notable demographic trends in Hong Kong, with the most significant being: 1) natural population growth has already peaked and is likely to turn negative by around 2027; 2) reduced immigration; 3) the quick shrinkage of the 25-44 years age group to 26% of the total population by 2025, from 38% in 1995 (vs. 29% now); 4) the rise in people aged over 60 years to 30% of the total population, from the current 22%. Hong Kong already has the second-highest over-60 population in Asia, as a percentage of total population, behind Japan.

Aging population constrains financing, translating into lower affordability
In our view, housing affordability will be severely affected by an aging population. We believe affordability (debt servicing) is a function of property prices, mortgage rates, loan tenures and income. As the population ages, fewer households will be able stretch their mortgages to the maximum tenure of 30 years. On our new estimates, we expect only 11.5% of total households will be able to afford an average private housing unit by 2019. Moreover, by factoring in upcoming rate hikes, we expect overall affordability to worsen and ASP to decline by 48% over 2017-26 to restore the supply/demand equilibrium.

A new valuation methodology for property development – P/E approach 
With improving supply and a bleak outlook for the physical market, we expect land-banking to fade as a business strategy, and we anticipate a growing focus on asset turnover. As a result, we believe a discount-to-NAV valuation methodology will become less relevant in valuing the developers, and we advocate adopting a P/E approach for the development businesses. For the investment properties owned by the HK Property companies, we continue to estimate NAVs based on cap rates. We then apply a discount to the investment property NAV of 34% (the average discount over the past 25 years).

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Hong Kong has long defied sceptics in its ability to innovate and adapt to changing market structures. However that has not freed it from the cyclicality of the property market which has always been prone to boom and bust. With a pegged currency and interest rates that are beginning to rise from a very low base, the threat to property prices, which are at elevated levels, is growing. 



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May 24 2017

Commentary by Eoin Treacy

China's Markets Get a Double Dose of Caution From Moody's, MSCI

This article by Chris Ansley and Enda Curran for Bloomberg may be of interest to subscribers. Here is a section: 

Moody’s Investors Service unveiled a surprise downgrade of China’s sovereign credit rating, citing concerns about its continued buildup of debt. Earlier, the head of one of the world’s top stock-index compilers suggested China had more work to do to get its onshore stocks into emerging-market gauges. With a June 20 deadline looming, “there’s still a lot of issues to resolve,” MSCI Inc. Chief Executive Officer Henry Fernandez said.

Underlying the critique from both: issues stemming from the Chinese leadership’s preoccupation with control. Few analysts expect painful reforms to be unleashed ahead of the Communist Party’s leadership reshuffle due later this year. While officials preach the need to rein in credit, ensuring the economy hits a 6.5 percent growth target remains the top priority.

Moody’s highlighted that policy makers’ are fixated on economic growth targets, meaning already-high leverage will continue to build. For MSCI, concerns include authorities placing restrictions on financial products abroad that would incorporate Chinese stocks.

 

Eoin Treacy's view -

Trying to lean on the shadow banking sector, while also stimulating the economy is a tough goal while also achieving an outsized growth rate. However it is also worth considering that only about 12% of China’s debt is held externally. The caveat of course is that a good portion of that has been raised by property developers recently through US Dollar bond issuance. 



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May 22 2017

Commentary by Eoin Treacy

Macro Morsels on China

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

Chinese authorities are attempting to delever their excessive levels of DEBT, which is causing a lack of credit at the short end of the curve, which in turn is driving up the cost of borrowing money at the short end.

Hence , short rates are higher than long rates.

However, unlike in the West, where an Inverted Yield curve signals trouble to the economy and to equities, having an Inverted Yield Curve is NORMAL in China.

This Inverted Yield Curve has been the situation for the majority of the last decade.

The red shaded area shows the times when 3 Month SHIBOR has been above 10 year government yields.

Currently the 3 Month SHIBOR is at 4.44%, higher than the 10 year at 3.61%

The AA 5 year rates have moved quite dramatically since last Oct, from a yield of 3.6% to 5.6% now.

This rise in their cost of debt should be negative for Equities.

Equities (SHCOMP) have indeed broken their uptrend and will remain an avoid until they can regain the 3200 level. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

China’s wide divergence between lending and deposit rates as well as the de facto state control of the banking system tend to skew financial conditions so that while an inverted yield curve is an omen of stress in the West, it is apparently less of a factor in China. 



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May 10 2017

Commentary by Eoin Treacy

China Stocks Still Adored Abroad as Losses Mount for Locals

This article by Sofia Horta e Costa for Bloomberg may be of interest to subscribers. Here is a section:

Mainland markets have struggled under the government’s campaign to trim risk in the financial sector, making stocks the least linked to the offshore index since 2006. With history showing sentiment can flip quarter to quarter, international traders are riding on a bet that solid corporate and economic data will continue to support the divergence.

“These investors don’t believe that any of this will lead to a crisis,” said Caroline Yu Maurer, the Hong Kong-based head of Greater China equities at BNP Paribas Investment Partners.
“For stocks, people are buying earnings growth rather than macro stories. The market is quite resilient as long as that holds.”

For a gauge that is rarely this expensive relative to the rest of the world, improving earnings are emerging as a key line of defense against worsening sentiment. While profit estimates are being upgraded at the fastest pace since 2010, they’re failing to keep pace with the index’s rally, which has pushed valuations toward the highest levels since 2015. The gauge gained another 0.4 percent on Wednesday, while the Shanghai Composite slumped 0.9 percent to its lowest level since October.

 

Eoin Treacy's view -

The mainland Shanghai Composite is heavily weighted by state owned enterprises like banks and infrastructure companies which are the primary focus of the clamp down on the shadow banking sector and financial leverage in “private lending clubs”. Privately owned companies, many of which are listed in Hong Kong or the USA continue to perform not least because they are not overly impacted by the financial sector tightening currently underway.



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May 09 2017

Commentary by Eoin Treacy

Buying Spree Brings Attention to Opaque Chinese Company

This article by David Barbozamay for The New York Times may be of interest to subscribers. Here is a section:

Last week, HNA was the subject of wild online speculation after a fugitive Chinese billionaire said in a television interview that relatives of a senior Chinese leader, Wang Qishan, had a stake in the company. No proof was provided.

The allegations leveled by the billionaire, Guo Wengui, who has ties to China’s former spy chief, is part of his broader war on the Chinese government. From his New York apartment, Mr. Guo, using his Twitter account and Google’s YouTube, has been making claims of widespread government corruption. China has requested his arrest, on separate corruption charges.

As speculation swirled that HNA could be drawn into a political firestorm, shares of one of the company’s Hong Kong affiliates tumbled late last month. Soon after, critical news articles on the group began disappearing from Chinese websites, prompting concerns that government censors had handed down orders to delete unfavorable news about HNA.

 

Eoin Treacy's view -

Mrs. Treacy has been following this story closely. Guo’s interview on Voice of America’s Chinese channel in late April, which had been headlined as an exposé, was cut short when Chinese officials called the show directly to insist it be cut off. Here is a section from an article discussing the event: 



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May 08 2017

Commentary by Eoin Treacy

Big Short in Loonie on Concern Over Oil, Trump, Housing

This note by Maciej Onoszko for Bloomberg may be of interest. Here it is in full:

Hedge funds and other speculators increased their short positions in the Canadian dollar to the highest level on record, according to data from the Commodity Futures Trading Commission. The loonie, which is the worst-performing major currency this year, has been under pressure in recent weeks amid concerns over a potential trade war with the U.S., a plunge in crude oil and financial woes of alternative mortgage lender Home Capital Group Inc.

Eoin Treacy's view -

The Canadian Dollar skirted the worst effects of the credit crisis by virtue of having a strongly regulated banking sector when just about everywhere else in the G7 had given into the worst excesses to deregulation. The rebound in oil allowed the Loonie to retest its 2008 peak in 2011 but the subsequent decline in commodity prices has taken its toll.



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May 02 2017

Commentary by Eoin Treacy

Can the Synchronous Recovery Last?

Thanks to a subscriber for this report from Morgan Stanley which has a number of interesting nuggets. Here is a section:

For the first time since 2010, the global economy is enjoying a synchronous recovery (see chart). The developed markets’ (DM) private sector is exiting deleveraging after several years of slow growth due to a focus on balance sheet repair and, after four years of adjustment, the emerging markets are in a recovery mode. These trends create a positive feedback loop. Indeed, the DM economies account for 60% of emerging market (EM) exports, so as their real import growth accelerates, EM exports are rebounding. What’s more, an improving EM outlook reduces DM disinflationary pressures. 

How sustainable is this recovery? Typically business cycles end with macrostability risks (price, external and financial) spiking, forcing policymakers to tighten monetary and/or fiscal policy. In this cycle, considering that emerging markets inflation and current account balances are moving toward their central banks’ comfort zones, it is unlikely that macrostability risks will surface soon. Moreover, the emerging markets now have high levels of real rate differentials vis-àvis the US, providing adequate buffers against normalization of the Federal 

DEVELOPED MARKET RISK. In our view, the key risk to the global cycle is apt to come from the developed markets— most likely the US, considering that it is most advanced in the business cycle. Moreover, the US tends to have an outsized influence on the global cycle, particularly the emerging markets. While price stability features prominently in debating the monetary policy stance of any central bank, financial stability is clearly emerging as an equally important factor.

How will it play it out? For insight, we can look at history. The late ’60s saw fiscal expansion at a time of strong growth and low unemployment. In the mid ’80s, the US pursued expansionary fiscal and protectionist policies in an improving economy. We look at similarities and differences versus today, analyzing asset class performance by fiscal deficit and unemployment quartiles.

To that end, private-sector leverage has picked up modestly in the US. In fact, the household-sector balance sheet, which was the epicenter of the credit crisis, had been deleveraging until 2016’s third quarter. Moreover, the regulatory environment has been relatively credit-restrictive. Hence, we see moderate risk to financial stability. However, risks could rise, considering that monetary policy is still accommodative, and particularly so if the administration eases financial regulations. Price stability is a critical risk, too—especially since the core Personal Consumption Expenditures Index inflation rate is close to the Fed’s target and US unemployment is around the rate below which inflation could accelerate. Reflecting this, we expect the Fed to hike rates six times by year-end 2018 (see page 3). We expect other major DM central banks to take a less dovish/more hawkish stance

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The MSCI World Index broke out to new all-time highs in March and continues to extend that breakout. There is no denying that the Index is heavily weighted by the USA but it has been a generally firm period for global stock markets as economic growth figures pick up against a background where interest rates are still relatively accommodative. 



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April 28 2017

Commentary by Eoin Treacy

Email of the day on China's deleveraging

Good morning Eoin. I attempted to send this message from my mobile which I fear I bungled. I expect you must have a mountain of email daily, not least the amount which must be caught up after your travels. I hope you had a great trip. You may recall, I asked a month ago for your thoughts on liquidity in China. The Regulators have continued to rein in, essentially squeezing out smaller banks. I found it interesting that the Govt took a survey of banks regarding their recent policies, or is that positive. In any event, I will re-produce the article, I refer below:

Eoin Treacy's view -

Thank you for your warm regards and the attached article from Market News. We had a wonderful trip to Asia. Thanks to Mrs. Treacy’s guangxi, I had the pleasure of having lunch with a senior Citic Securities dealer while in Beijing in 2014 who explained that the only game in town at the time was lending to private investment clubs which he referred to as “Chinese hedge funds”. 



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March 22 2017

Commentary by Eoin Treacy

Email of the day on Chinese liquidity

Is this the beginning of a liquidity crisis in China which I have long suspected? 

Eoin Treacy's view -

Thank you for the above article which raises some interesting points about the Chinese shadow banking system and liquidity in the financial sector generally. Here is a section:

China’s smaller lenders faced tighter liquidity this week as benchmark money market rates climbed to the highest level since April 2015, reflecting a mix of technical factors including cash hoarding for quarter-end regulatory checks. By letting borrowing costs rise, the People’s Bank of China may have been sending a warning to over-leveraged lenders, according to Banco Bilbao Vizcaya Argentaria SA. The central bank has been known to allow short-term jumps in money market rates to discourage excessive borrowing.

“The PBOC wants to warn the smaller lenders not to play the leverage game excessively,” said Xia Le, chief economist at BBVA in Hong Kong. “It’s a tug of war between the central bank and the financial institutions.”

 



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March 16 2017

Commentary by Eoin Treacy

Hong Kong Stocks Jump to 2015 High as Fed, China Energize Bulls

This article by Richard Frost for Bloomberg may be of interest to subscribers. Here is a section:

Hong Kong equities are back at heights unseen since China devalued its currency in August 2015.
A dovish Federal Reserve, China growth optimism and steady mainland inflows combined to fuel a 2.1 percent rally in the Hang Seng Index on Thursday, the biggest advance in almost 10 months. The gain also pushed the gauge firmly above the 24,000 level -- an effective ceiling for the past seven years. China Unicom Hong Kong Ltd. and Link REIT were among the day’s best performers, while Cathay Pacific Airways Ltd. was one of only two decliners after posting a loss on Wednesday.

Hong Kong-listed equities are particularly vulnerable to shifts in sentiment toward U.S. monetary policy thanks to a currency peg with the greenback, while the increasing dominance of Chinese companies on the city’s benchmarks means national economic indicators have a powerful pull. With investors relieved the Fed didn’t increase the projected pace of rate hikes and fears of a Chinese hard landing receding, the serially under-performing Hang Seng Index may have room to rally further.

 

Eoin Treacy's view -

With a pegged currency the Hong Kong market is heavily influenced by Fed policy but that effect is exacerbated by the Renminbi’s relative weakness versus the Dollar which makes Hong Kong a more attractive destination for mainland flows.



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January 23 2017

Commentary by Eoin Treacy

Email of the day on cannabis and steel

For information. Canopy has made an offer to buy Mettrum for Canopy stocks. This will triple my Canopy position and will help you to understand the reason for the similar chart pattern since early December. 

On your presentation yesterday (that I watched today), I was intrigued by the iron ore comment. Canadian iron ore companies (have a look at: Alderon, Labrador iron ore...) are on fire and I sold way too early exactly because I saw China slowing down and their financial situation reminded me of USA 2007-2008. 

So stock piling for war?.... hmm.. It is true that the US never really got out of the depression woes until their implication in the WW2 conflict, which they used also to help breaking European French and English ''Empires'' among others. This is certainly something to watch, and Trump ''shoot first'' attitude probably add to the concern for sure.

 

Eoin Treacy's view -

Thank you for this additional intelligence on the Canadian cannabis sector. Iron-ore is an interesting market because steel is such a political sector. China is expected to account for 71% of global steel production this year according to this article from CNBC. That’s a lot of supply and not all of it is designed to cater to the domestic market. 



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January 18 2017

Commentary by Eoin Treacy

Behind China's Bond Selloff, a Risky Twist on the Repo Trade

This article by Shen for the Wall Street Journal may be of interest to subscribers. Here is a section:

As much as 12 trillion yuan ($1.73 trillion) in bonds—or 19% of the country’s $9 trillion bond market—could be subject to such repurchase agreements, according to an estimate by Shui Ruqing, president of bond clearing-house China Central Depository & Clearing Co., cited last month in China’s influential Caixin Magazine. Traders say the deals are so opaque that even estimates are hard to make.

Banks sometimes use the “dai chi” agreements to move risky assets temporarily off their books during earnings periods or audits, the people said. Brokers like Sealand typically use them to borrow quickly and flexibly—leveraging their investments many times over, they said.
Until last year, Chinese financial regulators had largely ignored the practice, beyond saying they opposed it during a bond-market crackdown in 2013. But the informal nature of dai chi also meant the trades could be difficult to enforce when conditions worsened.

“Because it’s not really an official business, agreements aren’t legally binding,” said the executive who had bought bonds from Sealand.

Sealand’s problems became apparent on Dec. 15, when the southern China-based company announced that two of its traders had forged dai chi agreements worth 16.5 billion yuan ($2.4 billion), a move that market participants interpreted as meaning the broker didn’t intend to honor the deals.

The amount was more than five times what Sealand had declared in its Sept. 30 financials as its financial assets under official repurchase agreements, and more than seven times its disclosed bond-holdings.

 

Eoin Treacy's view -

China has developed extraordinarily quickly from a closed backwater into a massive financially significant hub. While the pace of development has been blistering the evolution of regulatory standards of governance has been much more moderate. The single party system where cronyism, nepotism and the modern equivalent of simony combine to ensure just about anything is permissible, provided your social standing is within the correct circle, and only exacerbates the situation.  



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January 12 2017

Commentary by Eoin Treacy

Bitcoin Falls 6% After PBOC Shanghai Inspects Trading Platform

This article by Linly Lin for Bloomberg may be of interest to subscribers. Here it is in full: 

Bitcoin drops 6% after PBOC Shanghai says it conducted on-site inspection at Shanghai-based BTCChina.com to check for any violations of market manipulation, money laundering and safety of customer funds.

Bitcoin prices have plunged 20% from record high of $1,091.7 on Jan. 4

Current trading price at BTCChina.com, platform tailored to Chinese clients, dropped 9% from 24-hour high

Trading volume was 1.5m bitcoins on BTCChina as of today, 1.2m on Huobi.com today, 1.8m on OKCoin.cn

NOTE: Bitcoin trading could only accommodate a small fraction of funds leaving China, Bloomberg Intelligence says

NOTE: BTCChina, Huobi.com, OKCoin.cn are major bitcoin trading platforms providing services to Chinese clients

NOTE: Jan.9, China to Study Bitcoin Custodian Platform: Securities Journal.

Eoin Treacy's view -

Bitcoin is a small market compared to national currencies, However there is no getting around the fact that Chinese traders represent the majority of participants in that market. Therefore rather that Bitcoin representing the primary organ for money leaving the country it has been the victim of its own limited success by embarrassing monetary policy makers.



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January 06 2017

Commentary by Eoin Treacy

Yuan Pares Record Rally as Goldman Says Now's the Time to Sell

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

The offshore yuan is sinking because there is some recovery in the dollar, perhaps the unwinding of short-yuan positions has mostly been done, and it’s closing the gap with the onshore currency,” said Roy Teo, senior currency strategist at ABN Amro Bank NV in Singapore. The yuan is likely to weaken this year as capital outflows continue and the U.S.
Federal Reserve increases interest rates, Teo said.

China’s central bank raised its daily reference rate by 0.92 percent to 6.8668 per dollar on Friday, following a 1 percent drop in a gauge of the greenback’s strength overnight.

The offshore yuan was trading 0.8 percent weaker at 6.8457 per dollar as of 5:23 p.m. in Hong Kong, paring its weekly gain to 1.9 percent, the most in data going back to 2010. The onshore rate slumped 0.6 percent. Friday’s fixing was weaker than Mizuho Bank Ltd.’s prediction of 6.8447 and Australia & New Zealand Banking Group Ltd.’s estimate of 6.8456.

The three-month yuan interbank rate in Hong Kong, known as Hibor, surged to a record high, while the overnight rate jumped 23 percentage points to 61 percent, the highest since last January’s cash crunch. Rising interbank rates can make some short positions prohibitively expensive.

 

Eoin Treacy's view -

The Chinese administration has attempted to squeeze short sellers in much the same way it did a year ago when it believed perceptions of the Yuan as a one way bet were too prevalent. That does not mean the Chinese don’t want, or perhaps more importantly need, a weaker currency. They do but they want it to weaken in a measured manner.  



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January 05 2017

Commentary by Eoin Treacy

Bitcoin Suffers Biggest Fall in Two Years Following China Currency Gains

This article by Martin Baccardax for Bloomberg may be of interest to subscribers. Here it is in full:

Bitcoin's value suffered its biggest single-day decline in two years Thursday, just hours after China's offshore yuan posted its biggest two day gain and days after the cryptocurrency touched $1,000.

The price of bitcoins against the U.S. dollar fell 13% in London trading, changing hands at around $950 each by 13:45 GMT. Bitcoins traded as low as $880 during a volatile session which saw it reach as high as $1137, according financial bookmakers IG.

The moves follow the biggest two-day gain on record for China's offshore yuan, which trades more freely than the domestically controlled currency of the world's second-largest economy. Speculation of government buying led the gains as investors bet authorities are determined to stem capital outflows and avoid a sustained decline in the currency ahead of the inauguration of President elect Donald Trump, who has vowed to label China as a currency manipulator.

The connection is relevant in the nearly all of the daily trading in bitcoin is linked to the yuan, which has fallen more than 7% against the dollar over the past year, as speculators attempt to skirt currency controls and ensure value.

The offshore yuan gain 1% to 6.7989 against the greenback in Asia trading, putting downward pressure on the dollar index and boosting the yen in foreign exchange trading. The move whipsawed the dollar index, a measure of its strength against a basket of six global currencies, from a near 14-year high on Tuesday to three-week low of 101.74 by the start of European trading before it recovered to 102.10 by 13:45 GMT

Eoin Treacy's view -

I have been pointing out in recent audios that China represents the majority of Bitcoin trading and what goes on in that country is likely to have a profound impact on the value of the cryptocurrency. In many respects we might look on Bitcoin as the anti-Renminbi because it tends to do best when Chinese investors are worried about the stability of their domestic currency. 



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January 04 2017

Commentary by Eoin Treacy

China Said to Consider Options to Back Yuan, Curb Outflows

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

China’s currency stockpile has probably shrunk further after hitting a five-year low of $3.05 trillion in November, according to the median estimate in a Bloomberg survey before data due as early as this week.

Capital outflows from China accelerated in recent months as the yuan suffered its worst year of losses against the U.S. dollar since 1994, declining 6.5 percent. About $760 billion left the country in the first 11 months of 2016, according to a Bloomberg Intelligence gauge. The yuan will decline 2.7 percent the rest of this year, according to the median estimate in a Bloomberg survey.

“The policies, if implemented, can help increase foreign-exchange supply in the onshore market, and hence help defend the yuan in the short term,” said Carol Pang, vice president for fixed income, currency and commodities at Zhongtai International Holdings Ltd. in Hong Kong. “However, it won’t change market expectation of further depreciation.”

 

Eoin Treacy's view -

The Renminbi is somewhat oversold at present following a quicker pace of depreciation in the last quarter than seen in the three-year downtrend to date. Therefore there is scope for a reversionary rally or at least some steadying. 



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December 20 2016

Commentary by Eoin Treacy

China Throws Out South China Sea Rule Book

This article by Andrew Browne for the Wall Street Journal may be of interest to subscribers. Here is a section:

During the Cold War, rules of the road, diligently adhered to, prevented accidents that might have brought the U.S. and the Soviet Union to war. China and the U.S. have been working on similar protocols. Last week’s apparently calculated act of lawlessness, though, changes the game.
Between Mr. Trump’s cavalier approach to China’s sacred cows, and China’s new disdain for legal niceties, expect regular eruptions. China is clearly testing U.S. resolve.

A shift in strategy assumes of course that the decision to snatch the drone came from the top rather than a rogue commander, though the latter possibility is just as ominous: It would raise questions about Mr. Xi’s sweeping reorganization of the armed forces designed to impose greater Communist Party control.

Mr. Xi’s administration has declared “maintaining stability” to be its top task for 2017 as the economy sputters. Now, the challenge from Mr. Trump to Beijing is forcing both countries into uncertain waters. Mr. Xi’s navy has just literally and figuratively rocked the boat.

 

Eoin Treacy's view -

Change doesn’t come easily and for a decade just about everything went right for China. Its economy was growing faster than any other. Hundreds of millions of people were lifted out of poverty and into the middle classes. China’s new consumers are feted all over the world and Hollywood blockbusters pander to Chinese sensibilities. Meanwhile the USA went through a massive credit crisis, was mired in two unproductive wars in the Middle East and Afghanistan, while Europe has spent almost a decade wallowing in the misery of austerity. 



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December 15 2016

Commentary by Eoin Treacy

China Halts Trading in Key Bond Futures as Panicky Investors Sell Securities

This article by Yifan Xie and John Lyons for the Wall Street Journal may be of interest to subscribers. Here is a section:

Some of these bubbles have burst dramatically over the last 18 months, with the crash in China’s stock markets last summer the most notable example. On Thursday, the pain spread to China’s $9 trillion bond market, which remains overwhelmingly driven by domestic investors, despite some opening up to foreigners this year. The yield on 10-year government bonds had reached as low as 2.6% in August.

“People woke up to the fact that the bond bubble is too large,” said Hao Hong, co-head of research at Bocom International, which is owned by Hong Kong’s Bank of Communications. “The bond market in China is under severe pressure, across the board.”

The U.S. Federal Reserve’s decision to raise interest rates helped trigger the selloff. Chinese investors believe it increases the chance China will guide its own rates higher to stem the yuan’s recent decline against the dollar and heavy capital outflows from the country.

But the bond market slump also exacerbates the policy dilemma facing China’s central bank. It has tightened short-term lending in recent weeks in an effort to make it harder for speculative investors to borrow money. The problem is that such tightening moves—along with any future rate rises—could provoke market plunges and panics as liquidity dries up.

 

Eoin Treacy's view -

One of the greatest challenges the Chinese administration has is that many of its capital markets are dominated by individual investors rather than institutions. Coupled with a wide spread between the lending and deposit rate speculation is rife and that tends to encourage manic periods of both buying and selling. 



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December 12 2016

Commentary by Eoin Treacy

China Warns Trump Against Using Taiwan for Leverage on Trade

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

China warned Donald Trump against using the One-China policy regarding Taiwan as a bargaining chip in trade talks, a swift response that indicates Beijing is losing patience with the U.S. president-elect as he breaks with decades of diplomatic protocol.

“Adherence to the One-China policy is the political bedrock for the development of the China-U.S. relationship,” Foreign Ministry spokesman Geng Shuang told reporters in Beijing at a regular briefing on Monday. “If it is compromised or disrupted, the sound and steady growth of the China-U.S. relationship as well as bilateral cooperation in major fields would be out of the question.”

Trump said in an interview broadcast on Sunday that his support for the policy --- which has underpinned U.S. behavior toward Taiwan since the 1970s -- will hinge on cutting a better deal on trade. He has repeated his accusations against China since election day, telling a crowd in Iowa last week that China would soon have to “play by the rules.”

Policy makers in Beijing initially had a more subdued response after Trump departed from diplomatic convention earlier this month and spoke by phone with Taiwan’s president. Now things are getting more serious: The official Xinhua News Agency warned that world peace hinges on close and friendly ties between the U.S. and China.

“For China, there is no balancing of trade and Taiwan,” said Wang Tao, head of China economic research at UBS AG in Hong Kong. “Taiwan is considered the utmost core interest of China, not for bargaining.”

 

Eoin Treacy's view -

China has been flexing its military muscle in the South China Sea for the last few years to the alarm of its neighbours but with very little push back from the rest of the world. Additionally it has been steadily increasing what it is spending on arms, with the total soaring from $123 billion in 2010 to an expected $233 in 2020. 



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December 12 2016

Commentary by Eoin Treacy

Hong Kong's Squeezed Money Market Sends a Sell Signal on Stocks

This article by Justina Lee for Bloomberg may be of interest to subscribers. Here is a section: 

"Even with two expected U.S. rate hikes next year, the rate gap with Hong Kong won’t be wide enough to spur significant outflows," said Thomas Shik, acting chief economist at Hang Seng Bank Ltd. Investors also like Hong Kong because of its currency peg with the strong greenback and Asia’s higher growth potential, he added.

There are money market concerns on both sides of the Hong Kong-mainland border. The Shanghai Composite Index retreated the most in six months on Monday as concern about dwindling liquidity was exacerbated by a regulatory crackdown to insurers’ stock investments and Donald Trump’s remarks about the U.S.- China trade relationship.

Currency weakness, along with concern mainland assets are overpriced, has driven Chinese investors to put their cash in Hong Kong equities and homes. China is now stepping up restrictions on outflows to defend the yuan, including tightening curbs on its citizens buying insurance in Hong Kong.

The city has also raised its stamp duty to rein in its world- topping home prices. “Inflows from China may slow because of recent measures," said Steven Leung, Hong Kong-based executive director at UOB Kay Hian. "Hong Kong hasn’t seen outflow pressure, but next year it will be more obvious."

 

Eoin Treacy's view -

HIBOR rates has been depressed for a long time but are rising in line with LIBOR as the island’s peg with the US Dollar will force an interest rate hike next week. That will represent a change for the property market which has soared as a leveraged bet on easy Fed monetary policy. 



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December 02 2016

Commentary by Eoin Treacy

China's Central Bank Is Facing a Major New Headache

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

People’s Bank of China Governor Zhou Xiaochuan already has one policy headache with the currency falling to near an eight-year low. He could have an even bigger one next month.

That’s when a $50,000 cap on how much foreign currency individuals are allowed to convert each year resets, potentially aggravating capital outflow pressures that are already on the rise. If just 1 percent of China’s almost 1.4 billion people max out those limits, that’s an outflow of about $700 billion -- more than the estimated $620 billion that Bloomberg Intelligence estimates indicate has already flowed out in the first 10 months of this year.

Middle class and wealthy Chinese have been converting money into other currencies to protect themselves from devaluation, exacerbating downward pressure on the yuan. Outflows could intensify if Federal Reserve interest-rate hikes fuel further dollar appreciation.

That leaves Zhou in a bind identified by Nobel-prize winning economist Robert Mundell as the “impossible trinity” -- a principle that dictates nations can’t sustain a fixed exchange rate, independent monetary policy, and open capital borders all at the same time.

"At a moment like this, you have to compare two evils and pick the less-worse one," said George Wu, who worked as a PBOC monetary policy official for 12 years. "Capital free flow may have to be abandoned in order to maintain a relatively stable currency rate."

 

Eoin Treacy's view -

The $50,000 limit of foreign transfers is per person, so a family with two parents, one child and four grandparents can send $350,000 overseas with no need to resort to more sophisticated methods of transferring funds. There are of course many alternative routes to sending money overseas. So far rules aimed at controlling flows have focused on corporations and purchases of foreign real estate in the order of $1 billion but the flow of retail funds on aggregate represents a very large figure overall. 



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November 30 2016

Commentary by Eoin Treacy

A China recovery is coming

Thanks to a subscriber for this article by Simon Hunt in copperworldwide.com. here is a section:

China’s economy is recovering. Accommodating monetary policy is being augmented by expanding the fiscal deficit which might include tax cuts. Construction is beginning to recover since total surplus inventory has fallen to the key seven-month level. The NDRC has released 25 infrastructure projects most of which were frozen earlier this year because cases of corruption were detected. Both wages and consumer spending continue to increase. In some key manufacturing sectors inventories have been reduced. Many private sector companies are now managing cash flow appropriately so are improving profitability. Investment will follow in 2017. Against this background real consumption of metals has begun recovering and will gather pace in 2017.

Eoin Treacy's view -

A link to the full note is posted in the Subscriber's Area.

One of the reasons China has been going through such a difficult time is because many of the markets it sends exports to have been in difficulty. The US credit crisis, the EU’s sovereign debt and banking crisis and the collapse of commodity prices all hit demand for China’s exports.   



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November 18 2016

Commentary by Eoin Treacy

Email of the day on Hong Kong listed Chinese shares

Most mainland China Indices are very strong; however, H-Shares continue to lag. Doesn't add up in my book; H-Shares should be going gangbusters. Any thoughts? 

Eoin Treacy's view -

Hong Kong listed Chinese shares, represented by the China Enterprises Index (H-Shares) outperformed the mainland market until about September and has been engaged in a process of mean reversion since. The Hang Seng Index did even better but has also pulled back more recently.



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November 16 2016

Commentary by Eoin Treacy

China's Yuan Tumbles to Eight-Year Low as Banks Weaken Forecasts

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

“The pressure for the yuan to decline could be stronger next year as Trump’s policies could lead to a dollar rally and amid concerns about China-U.S. trade relations," said Harrison Hu, chief greater China economist at Royal Bank of Scotland Group Plc in Singapore. "The People’s Bank of China can curb high volatility with stronger fixings and intervention, but it won’t do so unless outflows surge, as such measures could add great pressures to the foreign reserves."

A record $44.7 billion left China in September in yuan payments, while the nation’s foreign-exchange stockpile shrank the most since January last month. Chinese officials have taken a series of steps to plug capital control loopholes, such as a potential plan to curb transactions that use the bitcoin digital currency to take funds out of the country. UnionPay Co. late last month limited mainlanders from using its cards to buy insurance in Hong Kong.

HSBC Holdings Plc, UBS Group AG and Australia & New Zealand Banking Group Ltd. lowered their yuan forecasts on Tuesday, predicting that the currency will end this year at 6.9 per dollar, compared with earlier estimates of 6.8 for the first two lenders and 6.75 for the third. BMI Research, a unit of Fitch Group, downgraded its year-end forecast to 6.85 from 6.8, while Norddeutsche Landesbank said it has revised its view to 7 from 6.8.

Eoin Treacy's view -

The Dollar has been trending higher against the Renminbi since early 2014 but the pace of the advance has picked up following the US election. The rate paused at CNY6.4, 6.6, 6.7 but has surged through 6.8 this week. The Renminbi’s depreciation is part of Chinese government policy since it is needs a weaker currency to soften the blow from the rationalisation of heavy industry particularly in the steel, cement and coal sectors. However it will want to avoid an unruly decline and therefore the quicker the Dollar rises the greater the risk of some form of intervention. 



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November 07 2016

Commentary by Eoin Treacy

China Ousts Finance Minister Lou Jiwei as Xi Jinping Turns to Allies in Surprise Reshuffle

This article by Lingling Wei and Jeremy Page for the Wall Street Journal may be of interest to subscribers. Here is a section:

“Lou Jiwei’s abrupt ouster sends a strong signal that any prospects of even limited economic reforms are falling prey to President Xi’s focus on consolidating his power,” said Eswar Prasad, a Cornell University professor and former China head of the International Monetary Fund.

Since coming to power in late 2012, Mr. Xi has been moving away from the party’s decadeslong collective leadership model and centralized decision-making within a number of small committees he heads. Last month, he was named the “core” of the party’s leadership—a designation giving him an even stronger perch to influence the outcome of the congress in late 2017.

At that time, up to five of the seven current members of the Politburo Standing Committee, the top leadership body, are due to retire. In addition, more than 60% of the 376-seat Central Committee—which includes ministers, state industry chiefs and army generals—are expected to be replaced. Still, despite his consolidation of power, party insiders say Mr. Xi still has to vie with departing and retired leaders seeking to promote their own favorites.

 

Eoin Treacy's view -

With so many powerful positions becoming vacant over the next two years it is little wonder that Xi is attempting to ensure his favourites accede. Not only does it give him the potential to strengthen his own power base but perhaps even more importantly it gives him to the opportunity to encroach on the power structures of his adversaries. As a result we can anticipate a great deal of activity around which group within the Party will succeed in holding what positions. 



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November 07 2016

Commentary by Eoin Treacy

What drove the October ferrous rally?

Thanks to a subscriber for this report from Goldman Sachs covering the iron-ore market. Here is a section:

$/CNY was one of the most important market drivers of 2H 2015. When China weakened its currency in August 2015, it sent shockwaves around the globe with the S&P 500 index falling 10%. In the third quarter of 2016, $/CNY stayed range-bound between 6.6 and 6.7. In October, however, the depreciation resumed and $/CNY is now approaching 6.8.

The recent CNY depreciation is different from previous rounds of $/CNY moving higher. It has not generated the same international spillover effects as it did back in 2015. This implies further room for the Chinese government to weaken its currency against the US Dollar without negatively affecting global demand for its exports. On the other hand, the link between $/CNY and capital outflows remains strong. Our China Economics team estimated that FX outflows from China rose to US$78 billion in September and are likely to be even higher in October (Exhibit 7). This implies that there is an underlying desire among onshore investors to move into dollar-linked assets. Such desire may become particularly strong whenever the pace of CNY depreciation picks up. In fact, onshore commodities prices increased across the board on October 25 after the $/CNY moved higher for three consecutive days.

There are reasons why iron ore may be the first in line to benefit from onshore investment flows into commodities amidst renewed CNY depreciation. For example, the iron ore futures curve is almost always backwardated, making long iron ore a positive-carry trade. To the extent that a higher $/CNY also leads to a weaker local currency on a trade-weighted basis, iron ore may benefit from potentially higher Chinese steel exports. Additionally, rebar and iron ore are the most traded commodities in the onshore futures exchanges. Exhibit 8 shows the positive correlation between iron ore futures trading volumes and the $/CNY in recent months. By our estimates, about 60% of the iron ore price rally in October can be explained by the CNY depreciation.

Eoin Treacy's view -

A link to the full note is posted in the Subscriber's Area.

If the correlation between the appreciation in iron-ore prices and the deprecation of the Renminbi are indeed causal rather than coincidental that could continue to be positive for commodity prices considering how much a weak currency benefits China’s economy. 



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October 31 2016

Commentary by Eoin Treacy

China's Factory to the World Mulls the Unthinkable: Price Hikes

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

China’s factories may be on the cusp of delivering a new shock to the global economy after years of undercutting rivals with cheaper costs. This time, increases in prices could reverberate around the world.

To understand why, consider the dilemma facing Jiangmen Luck Tissue Mfy Ltd., now caught in a squeeze between surging wages and tepid demand. The company has already slashed staff by half, shaved prices and automated production to survive. Now, with margins razor thin, it’s weighing the first price increases since 2010.

"There’s just no possibility for me to cut prices any more," says deputy director Roger Zhao, 52, whose company is based in the city of Jiangmen in southern Guangdong province.

"Because costs are already pretty high and I don’t see any possibility they’ll go down, I’m seeking opportunities to raise prices a little bit."

That push to recover lost margins -- even as demand remains muted -- was shared by exporters of everything from clocks to jacuzzis interviewed in Guangzhou last week at the Canton Fair, a biannual gathering where 25,000 exhibitors and 180,000 mostly foreign buyers ink export deals in booths spanning exhibition space equivalent to about 3,400 tennis courts.

For the world economy, decisions from companies like Jiangmen Tissue to stop cutting prices -- and even raise them where demand allows -- removes a source of disinflationary pressure. To be decided is whether China, the factory to the world, swings from becoming a drag on consumer prices to a source of pressure nudging them higher.

Eoin Treacy's view -

Chinese factories have been dealing with margin compression for years. Labour costs have been on a steady upward trajectory while commodity prices have been a mixed blessing. However right now both are increasing and despite the danger of losing their competitive edge the first signs of price hikes are emerging. This article from a couple of weeks ago highlights the first rise in China’s producer price index in nearly five years.  



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October 31 2016

Commentary by Eoin Treacy

Rio Gives Away Giant Iron Ore Field Once Worth Fighting For

This article by Thomas Biesheuvel for Bloomberg may be of interest to subscribers. Here is a section:

The writing has been on the wall for a while. The company took a $1.1 billion writedown on Simandou in February. New Rio Chief Executive Officer Jean-Sebastien Jacques said in August “there is no obvious way to take Simandou to the next phase,” and the company hasn’t been able to find a way to finance it.

“It cleans another dead asset off the portfolio,” said Hillcoat, who added that the market doesn’t apply any value to the asset. “In the brave new world we’re in now, you just can’t develop these projects.”

Guinea will want the new owner, also known as Chinalco, to fare better than Rio. The country is counting on the project to double the size of its $6.5 billion economy and turn it into the third-biggest exporter of iron ore. Earlier this year, Guinea blamed project delays on the “ramblings of the technical team in London,” a reference to Rio.

The parties should finalize the deal quickly to establish a new plan for Simandou’s development, Minister of Mines and Geology Abdoulaye Magassouba said in an e-mailed statement.

“This is a very positive event for the project, but we still have many months of work and major challenges ahead,” Magassouba said.

Before the deal was signed on Friday, Simandou was 46.6 percent owned by Rio, 41.3 percent by Chinalco, and 7.5 percent by the government.

 

Eoin Treacy's view -

Investors have lamented the inability of mining executives to conduct successful M&A activity and I’ve even heard more than a few suggest CEOs should be precluded from engaging in mergers as a condition of taking the job. Simandou is another example of a boondoogle project that was initiated when prices were high and abandoned when prices are bottoming. 



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October 05 2016

Commentary by Eoin Treacy

September 28 2016

Commentary by Eoin Treacy

China's Ambitious Plan to Make the Yuan the World's Go-To Currency

This article by Robin Ganguly and Cedric Sam for Bloomberg may be of interest to subscribers. Here is a section:

The world will only play along if China leaves the yuan alone

One of the basic definitions of a reserve currency is that it must be freely traded. And the yuan is not quite there yet. The People’s Bank of China is often suspected of intervening in the market to nudge its exchange rate one way or the other. The central bank also limits onshore daily moves to 2 percent on either side of a fixing that it sets. Then there are capital controls, which restrict the ability to move money out of the country.

Despite this, people have found ways to move money out to escape yuan depreciation pressures and a volatile stock market. An estimated $1 trillion has flowed out of China since September 2015.

The Federal Reserve Bank of Dallas suggested in July that the yuan failed a safe-haven test, finding that China’s currency underperforms as market volatility increases.

SDR inclusion is likely to prompt the Chinese government to push ahead with reforms to its
exchange-rate policy, as part of its efforts to bolster international usage of the currency. But challenging the dollar’s hegemony will take more than a while, with the memory of the shock August 2015 devaluation relatively fresh in investor minds. The greenback has maintained its dominance since the mid-20th century, fighting off competition from the yen and the euro.

After the IMF in 2010 rejected China’s request to include the yuan in the SDR basket, the nation took several steps to support its claim. It made the yuan’s fixing more market-based, allowed greater access to its bond market and closed the gap between the currency’s rates at home and abroad. In November last year, the IMF deemed that the yuan was freely tradable enough to become a global reserve currency.

In the long run, a stronger yuan could be a much-needed fix for the global economy as it would increase the purchasing power of China, the biggest consumer of commodities in the world.

 

Eoin Treacy's view -

I find it interesting that this article assumes the Chinese Yuan is likely to become stronger as reforms are instituted and the currency gains access to the IMF’s Special Drawing Rights. There is another way of thinking about the development. 



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September 06 2016

Commentary by Eoin Treacy

China's Productivity Growth is the Worst Since the Asia Crisis

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

Labor productivity in the world's second-largest economy increased 6.6 percent last year to $7,318 per person, National Bureau of Statistics and International Labour Organization data show. The level, calculated as average inflation-adjusted gross domestic product per employed person per year, measures the efficiency of workers economy-wide.

China kicked off a big surge in efficiency in the early 2000s after entering the World Trade Organization, implementing aggressive reforms to streamline state corporations and allowing more of a private real estate market. But even after those gains it still lags far behind more productive economies in Europe, Japan and the U.S.

 With a shrinking working-age population already hurting economic growth, China must boost the value created by each worker if it is to join the ranks of the world's wealthy economies.  The hope is that upgraded machinery, services sector advances and a shift up the value chain will help make workers more efficient--and maybe even shorten the  badminton lunches.

 

Eoin Treacy's view -

At over $7000 per person China is squarely in the middle income bracket of global economies. However that figure is distorted by the inequality evident within a population of over 1 billion where extraordinary wealth contrasts with profound poverty in the hinterland. If China is going to march towards continued standard of living improvements then productivity growth will need to continue and that will be contingent on government appetite for economic reform. 



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August 29 2016

Commentary by Eoin Treacy

Yuan Bears Emerge From Hibernation as Fed Threatens G-20 Calm

This article by Justina Lee for Bloomberg may be of interest to subscribers. Here is a section:

Derivative markets are pointing to renewed bets on yuan depreciation, with a three-month measure of expected price swings poised for the biggest monthly increase since January. Other indicators, such as the premium on options to sell the yuan over those to buy and the discount of forward contracts over the spot rate, have also climbed, indicating rising expectations for declines.

The increased pessimism comes after a period of calm that sent the measures to the lowest in at least nine months as the Federal Reserve held off on raising interest rates and investors bet that China would steady the yuan before it hosts a Group of 20 meeting in September. Traders are probing the People’s Bank of China’s willingness to allow the yuan to fall between the G-20 gathering and the currency’s entry into the International Monetary Fund’s Special Drawing Rights on Oct. 1, especially with the chances of Fed action increasing.

"After G-20 ends next Monday, the market may want to test how much yuan depreciation the PBOC can tolerate," said Gao Qi, a strategist at Scotiabank in Singapore. "China doesn’t want the yuan to move too much during G-20 and become a topic of discussion. SDR’s impact will be smaller than G-20." 

 

Eoin Treacy's view -

China is under the spot light as it prepares to host the G-20 summit next week and not least because it wants to use the event as an opportunity to showcase its newly found position as an economic superpower. However the fact the Chinese administration is engaged in a massive transition from an investment and export oriented business model to one more supported by internal consumption, services and high technology cannot simply be ignored. 



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August 15 2016

Commentary by Eoin Treacy

Emerging Markets Are Hot, Except for China

This article by Mia Lamar and Rachel Rosenthal for the Wall Street Journal appeared in Saturday’s edition but the authors might have wished they waited another day before publishing. Here is a section:

The wariness partly reflects how unnerved global investors remain by markets that have proved exceptionally unpredictable, even by emerging-market standards. After surging 60% in the beginning of last year, Chinese stocks tipped into a selloff that sent Shanghai’s benchmark index down as much as 41% from June to August. The index rebounded briefly last fall, then plunged 23% in January. The yuan, meanwhile, logged a 5% loss against the dollar in 2015, following an unexpected devaluation one year ago that helped to spur enormous outflows of money as panicked Chinese sent cash abroad.

Many investors say they are disturbed by steps China has taken to tame market convulsions, from heavy-handed currency intervention and the buying of shares by state-backed funds, to allowing widespread trading suspensions of shares and blaming “malicious” forces for stock-price falls.

Others say they remain concerned about China’s economic slowdown, and suspect conditions may be worse than official figures suggest.

Chinese officials have stressed measures by Beijing to address the concerns of global investors, and played down concerns about growth. “The Chinese economy is a ‘stability anchor’ for the global economy,” Premier Li Keqiang said last month. “Prophecy of China’s economy heading for a hard landing is rarely heard now.

Eoin Treacy's view -

Many of the limitations imposed on the Chinese market have been aimed at inhibiting speculation following a particularly tumultuous period in 2015. That is a condition which is in sharp contrast to the environment on a number of other international indices. 

Chinese regulators messed up the launch of options trading, and timing its debut with the opening of the Shanghai – Hong Kong connection only exacerbated the short term mania. In trying to avoid a crash they threw every measure available to stem the decline and there is plenty of evidence over the last six months that the 3000 level on the CSI300 is being defended. 



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August 08 2016

Commentary by Eoin Treacy

August 01 2016

Commentary by Eoin Treacy

Amazon Takes on Alibaba With Japan Portal for Chinese Shoppers

This article by Grace Huang and Reed Stevenson for Bloomberg may be of interest to subscribers. Here is a section: 

“The opportunity is huge,” said Jasper Cheung, president of Amazon Japan. “We have already increased the selection that we can export by the millions over the last several weeks.”

Chinese shoppers are looking for authentic Made-in-Japan products, spooked by tainted baby milk and fake merchandise proffered on web stores in China. While that’s helping to drive an influx of shoppers to Japan -- 3.08 million Chinese tourists have visited the archipelago so far this year, up 41 percent -- it’s also boosting demand for Amazon.co.jp, Wandou and other web outlets featuring Japanese goods.

Rakuten Inc., the Japanese online store, also lets people shop for stuff from Japan in Chinese, as well as in Korean and English. Amazon’s Japan website has been available in English for years.

The new iteration of Amazon Japan’s shopping portal, in simplified Chinese, offers millions of products with more coming, the company said. Consumers in Asia’s biggest economy are demanding access to authentic brands and quality, from clothing and cosmetics to baby products and health goods. That’s why Costco Wholesale Corp. has a shop on Alibaba’s Tmall.com, while Macy’s Inc. and other U.S. retailers are tapping into China’s dominant online-payments system by accepting Alipay on their sites.

 

Eoin Treacy's view -

For billions of new consumers entering the middle classes their first taste of consumerism is likely to be via their mobile phones where they are aggressively marketed to via Wechat, Facebook, Instagram and a host of other social media sites. That puts dominant online marketplaces like Amazon, Alibaba, Ebay and Rakuten in a favourable position to compete for their business and China represents a major battleground. Uber’s experience in China highlights the difficulty of doing business in that country where one is competing with a domestic copycat operation. Amazon’s strategy of building out its Japanese operation may act as a hedge to domestic Chinese operations where it competes directly with JD.com and Alibaba.  



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July 28 2016

Commentary by Eoin Treacy

Macau's Chief Sees 2017 Economy Returning to Growth on Casinos

This article by Daniela Wei for Bloomberg may be of interest to subscribers. Here is a section:

“Macau’s gaming industry and the whole economy will continue to adjust, but the decline may shrink to 7.2 percent this year and even resume growth in 2017,” Chief Executive Fernando Chui said in a televised session of the city’s legislature Wednesday. “It’s a good time for Macau to re-position after a 25-month gaming revenue drop.”

Gross domestic product in Macau declined 20.3 percent in 2015, worsening from the 0.9 percent drop the year before, as the world’s largest gambling hub was hurt by China’s anti-corruption campaign that scared off high-rollers. The casino industry, which accounts for half of Macau’s GDP, is in the midst of a casino building boom to boost revenue from mainstream gamblers and tourists.

Recreational Gamblers
Macau’s government is working with its six casino operators to “improve synergies” between gaming and non-gaming pursuits, Chui said. The city is trying to reduce its reliance on gambling and is targeting to raise the proportion of casinos’ non-gaming revenue to 9 percent by 2020 from 6.6 percent in 2014.

 

Eoin Treacy's view -

The outlook for the gaming sector and China are inextricably linked. Macau represents a much larger gambling market than even Las Vegas and that city also depends on the largesse of Chinese high rollers to drive profitability. With the outlook for growth improving in Macau that may be an initial sign that the Chinese tourist market is still healthy. 



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