The intervention comes after Simon Cheng -- a Hong Kong resident who worked for the consulate’s business-development team before he went missing in mainland China for 15 days in August -- said on Wednesday he was beaten and forced to confess while detained by Chinese agents, who pressed him for information on participants in the city’s protests.

“Simon Cheng was a valued member of our team,” U.K. Foreign Secretary Dominic Raab said in a statement. “We were shocked and appalled by the mistreatment he suffered while in Chinese detention, which amounts to torture.” Raab said he summoned the Chinese ambassador in London to demand an investigation into the “brutal and disgraceful treatment of Simon in violation of China’s international obligations.”

China claims anyone with Chinese heritage as its own, regardless of where they were born or what passport they hold. It’s what forms the basis for the greater China argument and is used to back up their territorial claims well beyond their land border. It also ensures that people who look Chinese tend to be treated as if they are Chinese when in custody. It’s questionable whether Simon Cheng would have been treated the same were he Caucasian.

I get something else, too. If there is no hope, there is only the present. Things you do today will have no consequences. That, actually, can be a liberating realisation. If there is no tomorrow, then anything is possible, nothing is prohibited.

Violence is its own liberation – an ecstatic orgy of destruction alongside your comrades. It’s not a means but an end in and of itself. But you are not doing it because you are fighting for freedom and democracy, or against tyranny. You only say you are.

Maybe we self-serving old-timers have robbed our children of their future. But they are helping us dig our own graves. It’s not: “If we burn, you burn with us.” It’s: “We are all burning together.”

Well, dear young people, you now have your wish: we can all self-destruct together. It’s the end of Hong Kong as we know it, and many local people are fine with it.

Hong Kong is the subject of a major transition. The great Pearl River Delta is the focus on a major industrial hub where Hong Kong has long acted as an interlocutor for international trade. The future as outlined by the central government is that the cities of Shenzhen, Guangzhou, Hong Kong and Macau will form unified trading and financial hub aimed at rivalling the Bay Area in California. For Hong Kong that represents a major change because it is more a marriage of equals at best or at worst it represents the terminal decline of the island economy in preference to the mainland.

The investment data shows how cautious private companies have become, with their spending in the first 10 months of the year at the lowest level since 2016. The continued stability in spending by state-owned firms’ is preventing an even stronger drop in the headline data.

Investment in the property market is one bright spot, with spending by the manufacturing sector barely above the record low recorded in September. Infrastructure investment growth continued to bounce along around 4% as it has all year.

“I’m quite concerned with property investment, the only stable element in fixed-asset investment now,” according to Xue Zhou, analyst at Mizuho Securities Asia Ltd in Hong Kong. “Monetary policy needs to be more supportive on economic growth and there should be more cuts to banks’ reserve ratios to help smaller banks.”

The first couple of months of the year are when the Chinese financial system gets its annual quota for lending and generally makes its full allocation by around Chinese New Year. That sends a surge of liquidity into the market in January and February but the broader question is how much of that is already priced in considering it is so predictable.

Shares of Luckin Coffee Inc. (LK) shot up 7.6% in premarket trading Wednesday, after the China-based coffee seller reported wider third-quarter loss but revenue that rose above expectations. The net loss was RMB531.9 million ($74.4 million), or RMB3.60 per American Depository Share, after a loss of RMB484.9 million, or RMB2.24 per ADS a year ago. Excluding non-recurring items, the adjusted per-ADS loss was RMB2.08, compared with the FactSet consensus for loss per ADS was RMB2.75. Revenue rose to RMB1.54 billion ($219.6 million) from RMB240.8 million, to beat expectations of RMB1.47 billion. Average monthly items sold were 44.2 million, up from 7.8 million a year ago, while the average monthly transacting customers grew to 9.3 million from 1.9 million. "During the third quarter, sales from freshly-brewed coffee drinks continued to maintain very strong growth, and we believe we will reach our goal to become the largest coffee player in China by the end of this year," said Chief Executive Jenny Qian. The stock. which went public on May 17, has tumbled 22.7% over the past three months, while the S&P 500 has gained 5.7%.

I wanted to try a Luckin Coffee while in Guangzhou over the summer but I was voted down by my daughters who could not get enough of boba tea. Since they discovered smores frappacinos the two alternatives are more balanced but they will always still choose a boba tea over a trip to Starbucks.

Continuing on from the hours-long siege yesterday (Nov. 11), when police fired tear gas at the school and made arrests on campus, protesters took their positions again this morning as they faced off with police stationed on a bridge just outside the school grounds. Shortly after 3pm local time, riot police charged onto the hilly tree-lined campus, deploying round after round of tear gas continuously for at least a quarter of an hour.

Just after sunset, police finally appeared to retreat as university vice-chancellor Rocky Tuan addressed a crowd after speaking with students and police separately. But tear gas was again fired soon after, breaking the momentary cease fire. Another attempt by pro-vice-chancellor Dennis Ng to broker a deal, with the school official speaking on the phone to the police commander as a student relayed the message in real time over a microphone to the crowd, similarly faltered. Clashes stretched late into the night, as students and police battled it out on a bridge that connects to campus from across a harbor.

There is no sign the protests in Hong Kong are moderating. In fact, the trend is towards further intensification which is obviously a challenge to Beijing’s policy to date of waiting it out. When schools are closed there are tens of thousands of students with nothing to do so many find themselves on the street. In such an emotional volatile situation there is ample scope for further escalation.

“If China, U.S. reach a phase-one deal, both sides should roll back existing additional tariffs in the same proportion simultaneously based on the content of the agreement, which is an important condition for reaching the agreement,” Gao said.

Such an understanding could help provide a road-map to a deal de-escalating the trade war that’s cast a shadow over the world economy. China’s key demand since the start of negotiations has been the removal of punitive tariffs imposed by Trump, which by now apply to the majority of its exports to the U.S.

The US Presidential election is less than a year away. The time to prime the pump so growth is humming by the time people vote is now. China might have suffered more from the tariffs, because it has more to lose, but it is also well aware of the electoral timing the Trump administration is pressured by. That suggests a deal is likely to be signed and it is likely to be valid for at least a year.

Are we about to see a “currency pact” between the US and China? Investment bank Jefferies’ Hong Kong-based Christopher Wood sees it as a possible significant development in the difficult ongoing trade negotiations between the two countries.

It could give Donald Trump “a face-saving ‘out’ in terms of declaring victory in negotiations, where he has clearly over-estimated his leverage, for the simple reason that the Chinese leader has more tolerance to take pain than does America’s.”

A currency agreement based on a Chinese commitment not to engage in a competitive devaluation of its renminbi makes sense as both Washington and Beijing want the same thing. Neither wants a stronger dollar and a weaker yuan.
Beijing may see such an agreement as a way at least to end an escalation of the trade war or even to end it. It has no desire to see a major devaluation against the dollar. That would encourage accelerating capital outflow – “the Achilles heel of China’s command economy” -- at a time when such pressures are rising because wealthy citizens are keen to achieve international diversification. The outflow reached about $240 billion in the 12 months to the second quarter.

Devaluation would also make Chinese consumers poorer in dollar terms, undermining the policy of seeking to make the economy more driven by domestic consumption. And it would undermine the current successful policy of attracting foreigners to invest in China’s stock and bond markets.

“The last thing China needs right now is a further sharp appreciation of the US dollar – and that also seems the last thing Trump wants.”  

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China has to manage capital flight risk. The drop below the psychological CNY 7 area earlier this year was a catalyst both for a breakout by the gold price for Chinese investors and the desire to become globally diversified.

Federal Reserve officials reduced interest rates by a quarter-percentage point for the third time this year and hinted they may be done loosening monetary policy, at least for one meeting.

The Federal Open Market Committee altered language in its statement following the two-day meeting Wednesday, dropping its pledge to “act as appropriate to sustain the expansion,” while adding a promise to monitor data as it “assesses the appropriate path of the target range for the federal funds rate.”

As with the September statement, the FOMC cited the implications of global developments in deciding to lower the target range for the central bank’s benchmark rate to 1.5% to 1.75%.

Treasuries weakened on the Fed’s announcement, pushing the 10-year yield up briefly to 1.81% from 1.80%. Stocks were little changed and the U.S. dollar gained. Traders also pared wagers on a fourth consecutive rate cut in December.

The Fed has been of the opinion we are in the midst of a mid-cycle slowdown. I think we can think of that as a best-case scenario which is why there is so much uncertainty about the outlook for rates amid the surge in bond prices. Let’s see what the charts tell us.

The bank gave a Chinese president a crystal tiger and a Bang & Olufsen sound system, together worth $18,000. A premier received a $15,000 crystal horse, his Chinese zodiac animal, and his son got $10,000 in golf outings and a trip to Las Vegas. A top state banking official, a son of one of China’s founding fathers, accepted a $4,254 bottle of French wine — Château Lafite Rothschild, vintage 1945, the year he was born.

Millions of dollars were paid out to Chinese consultants, including a business partner of the premier’s family and a firm that secured a meeting for the bank’s chief executive with the president. And more than 100 relatives of the Communist Party’s ruling elite were hired for jobs at the bank, even though it had deemed many unqualified.

This was all part of Deutsche Bank’s strategy to become a major player in China, beginning nearly two decades ago when it had virtually no presence there. And it worked. By 2011, the German company would be ranked by Bloomberg as the top bank for managing initial public offerings in China and elsewhere in Asia, outside Japan.

If anyone knows of an alternative route to building a business in China, I’d like to hear it.

The U.S. and China reached a partial agreement Friday that would broker a truce in the trade war and lay the groundwork for a broader deal that Presidents Donald Trump and Xi Jinping could sign later this year, according to people familiar with the matter.

As part of the deal, China would agree to some agricultural concessions and the U.S. would provide some tariff relief. The pact is tentative and subject to change as Trump prepares to sit down with China’s Vice Premier Liu He later Friday.

Stocks jumped Friday after the news. Equities had advanced globally earlier in the day amid growing conviction that the U.S. and China would negotiate a trade truce. Trump tweeted earlier Friday that “good things” were happening in the meetings -- and that if the countries did reach an agreement, he would be able to sign it without a lengthy congressional approval process.

On Thursday and earlier Friday, Liu and U.S. Trade Representative Robert Lighthizer held the first senior-level discussions between Washington and Beijing since a previous agreement fell apart in May and tariffs were raised in the months after. The world’s two biggest economies have been trying for the past year and a half to settle their trade dispute.

The words from Bill Clinton’s early ‘90s election campaign must be ringing in President Trump’s ears, “It’s the economy, stupid”. There is a clear rationale for pressuring China on trade but is it worth losing the election for? The hardest hit parts of the US economy just about all voted for President Trump in the last election and have been specifically targeted by Chinese tariffs. Little wonder then that agricultural imports are front and centre in whatever deal is to be announced. With the election less than 13 months away it’s time to at least put the trade war on hold and let animal spirits loose. 

I have to admit I don’t look at the internals of the market all that often because it is the trend rather than the day to day moves which lend some insight into the health of the market. I thought it might be useful to look at some of the most common measures to discern if any clues to market direction are evident.

The Total Number of New 52 Week Highs on the NYSE Index is coming back down towards the lows December 2018 and towards the end of 2015. The significant spike on the upside in late 2017 was an anomaly suggesting a period of underperformance ahead, but generally lows are better predictors of market bottoms than spikes are of tops.

President Xi Jinping declared that no force could stop China’s rise, exuding confidence during a key
anniversary as he faced unprecedented challenges from protesters in Hong Kong and Donald Trump’s trade war.

Speaking at the start of grand parade marking 70 years since the founding of the People’s Republic, Xi called for stability in Hong Kong, unity among Chinese ethnic groups, and the “complete unification” of the country. Xi delivered the remarks at the site where late Communist Party patriarch Mao Zedong proclaimed the nation’s founding on Oct. 1, 1949.

“Today, a socialist China is standing in the east of the world and there is no force that can shake the foundation of this great nation,” Xi told a crowd of carefully vetted guests under smoggy skies in the center of the capital. “No force can stop the Chinese people and the Chinese nation forging ahead.”
Xi’s rallying cry came before an hours-long pageant showcasing China’s industrial and scientific achievements, including sophisticated weaponry such as DF-17 ballistic missiles believed capable of circumventing U.S. defense systems.

The closely scripted proceedings sought to reinforce the strength of a party facing multiple threats, from the slowest economic growth in decades to violent unrest in one of Asia’s top financial hubs.

Sometimes I feel like a broken record always repeating the same point about China, but governance is everything. The ranks of apologists for tyranny continue to advocate strongly for China despite its record on human rights, the environment, intellectual property, corruption, censorship and a host of additional factors.

The one thing China has going for it, is its economic expansion. Investors will be willing to give it the benefit of the doubt provided the expansion persists. It will an entirely different narrative if China has a recession.

The arguments for action inside the Trump team vary from simply enforcing U.S. transparency laws and creating a level of reciprocity, to raising national-security concerns with some of the Chinese companies that American pension funds are exposed to, according to people familiar with the conversations.

Some of those companies are firms that the U.S. government has identified as bad actors or has imposed sanctions against. The argument continues that Americans would unlikely want to invest in those companies if they had the choice.

The market capitalization of the 156 Chinese companies, including at least 11 state-owned firms, listed on the three-largest U.S. exchanges — the NASDAQ, New York Stock Exchange and NYSE American — stood at a collective $1.2 trillion as of late February, according to a report by the U.S.-China Economic and Security Review Commission.

China earlier this month removed a $300 billion cap on overseas purchases of Chinese stocks and bonds meaning global funds no longer need to apply to purchase quotas to buy the assets. The move is designed to lure more foreign capital into Chinese markets.

The removal of the cap on QFII investments was largely moot since only about a third of the allocation was being used anyway. The point I have been making for years is the only incentive China has to open up its financial sector is to diversify its risk. Today’s most of the risk resides domestically. The only way China can expect to receive assistance from the rest of the world during a crisis is if that risk is shared. That is the only reason for opening up to the financial sector to overseas investment. Risk pooling is the most basic factor in insurance planning and that is what China is doing. It therefore makes logical sense to question whether it is wise to buy what they are now so desperate to sell?

Police of the PRC searched the house of Zhang Qi, 57, the former mayor of Danzhou and found a large amount of cash, as well as 13.5 tons of gold in ingots in a secret basement of his home, reported local media.

In addition to the mayor’s post, the official held others, such as the Secretary of the Communist Party. According to unofficial reports, in addition to the gold, cash worth 268 billion yuan was discovered.

Luxurious real estate with a total area of ​​several thousand square meters, which the former city manager had been hiding for a long time, became the cherry on the cake for the Chinese Anti-Corruption Committee.

One of the most memorable quotes I’ve heard in China was back in 2011 when the communist official from a small town a couple of hours north of Beijing said to me “I’m only a small guy so I’m only a little corrupt”. His boss was the county head and the gift to attend his daughter’s wedding was a stack of CNY100 notes six inches tall. They were counting the money in cubic metres. Then think about the head of the head of a province like Hainan which is being developed as “China’s Hawaii”. From that perspective the monopoly money sums are still huge but do help to highlight just how engrained corruption is.

Hao Jianyu, 26, who works at Google in Beijing and owns a Xiaomi phone, says he holds credit cards from China’s four biggest banks but prefers taking out loans from Xiaomi Finance to fund his daily spending. He says daily interest on what he borrows is 0.065%, an annualized rate of 23.4%. That’s higher than the interest rate on his credit cards, Mr. Hao says, but he has been able to increase his credit limit much faster with Xiaomi. The more often he uses Xiaomi’s short-term loans and repays on time, the bigger his credit line, which now exceeds the limits on his credit cards. He says his credit limit from Xiaomi has increased to 60,000 yuan from a few thousand yuan over two years.

In a stock-exchange filing last year before Xiaomi went public, the Beijing-headquartered company said its finance business had a “highly advanced and customized credit assessment and risk management approach” that was built on its big database of users. The company said its proprietary risk-assessment model is used to preapprove individuals for certain amounts of credit. Xiaomi said in reporting its results for the second quarter of this year that revenue from its fintech business grew 63% from a year earlier to 792 million yuan ($112 million) in the three months through June.

China is attempting to implement countercyclical monetary policy. There is a bubble in the housing market and 50 million homes are vacant. Their consumer sector, particularly younger upwardly mobile generations have taken to credit like just about all new consumers in other countries before them.

The UK trades with everyone and especially in the insurance, reinsurance, shipping, capital and currency markets. There will be some disruption in the event of a disorderly Brexit and not least if the future relationship between the UK and Europe is not formalized ahead of the exit.

State media reported over the weekend that the Hangzhou Municipal Government would transfer 100 representatives to “key enterprises such as Alibaba, Geely Holdings and Wahaha.”

A full list of the 100 companies included in the initiative was not released.

The directive, which media said was part of the Hangzhou government’s “New Manufacturing Plan,” is reportedly an attempt to boost manufacturing and bolster the local economy in the eastern province of Zhejiang.

It is the latest strategy signalling the Chinese government’s efforts to transform the country’s economy. Its core strategy, Made in China 2025, aims to catch China up with its economic rivals in high-value industries such as robotics and aerospace.

This is not exactly new news. The trend of overt government involvement in the management and strategic thinking of the Chinese private sector has been underway for at least the couple of years.

China’s central bank drained funds from the financial system and kept the one-year rate on medium-term loans steady on Tuesday morning, a move analysts said shows it’s sticking with its prudent approach to stimulus. That’s even after data Monday signaled the economy slowed in August, with industrial output, retail sales and fixed-asset investment rising less than anticipated.

“Investors now realize the central bank won’t ease its monetary policy as aggressively,” Zhang Gang, a strategist with Central China Securities Co. “The market was due for a pullback after the Shanghai index climbed above 3,000-point level. Turnover failed to keep up.”

China’s government is more worried about a property bubble than a growth slowdown. it would be tempting to think they have reached the conclusion that massive money printing only helps to inflate asset prices and does not deliver quality growth which is capable of sustaining the economy during tough times. On the other hand perhaps they have an inflationary problem and don't want to exacerbate it. 

Industrial output rose 4.4% from a year earlier in August, the lowest for a single month since 2002, while retail sales came in below expectations. Fixed-asset investment slowed to 5.5% in the first eight months, with the private sector lagging state investment for the 6th month.

The data add support to the argument that policy makers’ efforts to brake the slowing economy aren’t sufficient as the nation grapples with structural downward pressure at home, the risk of yet-higher tariffs on exports to the U.S. and now surging oil prices. Nomura International Ltd. said this all raises the likelihood that the People’s Bank of China will cut its medium-term lending rate on Tuesday.

China’s monetary and fiscal policy arms are walking a tight wire between overstimulating the property market, which already has bubbly characteristics, versus trying to support flagging growth in the industrial sector which is hurting from the global slowdown and the trade war. The devaluation of the Renminbi is a partial solution but there is a clear need for more conclusive action to support the economy not least because a weaker currency stokes inflation for such a large commodity importer.

London, Seattle, Manchester and, um, Xiamen. Some of the world’s priciest housing markets aren’t where you might think. A four-year property boom in China has elevated a collection of little-known cities and turned them into real estate gold.

While that’s been great news for speculators, it’s raising concern about whether China’s educated middle-class is quickly being priced out of these so-called second-tier cities, undermining Beijing’s goal of making them home to the millions moving from rural areas. Another risk is increasingly stretched family budgets: The average household debt-to-income ratio in China soared to a record 92% last year from just 30% a decade ago.

“A property bubble is foaming up in many places in China,” said Chen Gong, the chief researcher at independent strategic think tank Anbound Consulting. “Prices are starting to look
abnormal when compared to residents’ income.”

When something sounds crazy, that’s usually because it is. Xiamen is a smallish city, by Chinese standards, in Fujian. It’s a long way from any of the other coastal metropolis’ stature so its rise as one of the most expensive places in the world to buy property is further evidence of another bubble inflating in financial assets, this time in China.

“You can say we’re having very meaningful talks, much more meaningful than I would say at any time frankly,” Trump said while meeting with German Chancellor Angela Merkel on Monday. “Maybe I’m wrong but we’re in a stronger position now to do a deal, a fair deal for everyone,” he added.

Still, a spokesman for China’s foreign ministry wasn’t able to immediately confirm the details of the phone calls on Monday. Later, Hu Xijin, editor-in-chief of China’s Global Times newspaper, said in a tweet that top trade negotiators hadn’t spoken by phone in recent days and that Trump was exaggerating the significance of the trade contacts.

Trump later, at a separate bilateral meeting, insisted that calls were had at the highest level and was not aware that China was disputing them. U.S. Treasury Secretary Steven Mnuchin, also in Biarritz, said "there were discussions that went back and forth and let’s just leave it at that.”

Let’s look past the rhetoric and repeated announcements of progress and focus instead on the purpose of the trade war. The USA is the current global superpower and China has clearly stated they wish to overtake the USA economically, technologically and militarily. That suggests there is little prospect of relation returning to the status quo of the last 30 years. The question is primarily about the degree of separation which can be achieved without sparking a broader conflict.

“Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States,” Powell said in the text of his remarks Friday to central bankers gathered at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. “We will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective.”

It is looking like the learning curve for a newly installed Fed chair is about 18 months. Today’s measured statement from Jerome Powell did an excellent job of placating investor fears while leaving open the optionality of how much to cut by. The Fed has made clear they will cut rates if they need to but will not hurry. However, the simultaneous announcement by China that they are increasing tariffs on $75 billion of US goods is likely to be prove the catalyst for deeper cuts.

Most Hong Kong retailers have seen sales drop more than 50% in August, according to the city’s Retail Management Association, as the ongoing political protests take a toll on business and the economy.

The association has urged landlords in the city to halve rents for six months to help tenants overcome difficult times, and has called on the government to provide relief measures to retailers, according to a press release. Retailers are facing large cash flow pressures and a few of them will cut jobs or even shut down if the situation continues to worsen, it said.

The release didn’t explain what period it was comparing August’s sales with. Hong Kong’s government expects the city’s businesses to continue to suffer this year. The value of retail sales dropped 6.7% in June from a year earlier, the fifth straight month of declines, while the overall economy contracted in the three months through June from the first quarter. Embattled Chief Executive Carrie Lam said earlier this month that she saw “no room for optimism” for the economy this year.

Several hundred thousand people chanting slogans outside your store unsurprisingly puts a dent in sales. Vital tourist traffic has slowed to a trickle as the street protests have persisted for months. Importantly, mainland travellers are staying away and that is a problem for the Hong Kong economy.

Any further selloff could also create problems for Chinese property developers and other corporate borrowers who have borrowed heavily overseas, since their earnings are largely in yuan while their international borrowings are mostly in dollars.

Chinese companies had nearly $900 billion of dollar-denominated debt securities outstanding at the end of March, nearly three times the amount five years ago, according to data from the Bank for International Settlements.

Despite Beijing’s strict capital controls, China could experience capital flight if the yuan weakens further, some observers say.

Louis Kuijs, head of Asia economics at Oxford Economics, said policy makers wouldn’t be comfortable with a major weakening of the yuan, given concerns about triggering large outflows.

“People in China tend to take weakening of the currency as a harbinger of more such weakening to come,” he said. “That is a reason for some to shift money abroad.”

Amid the platitudes about having confidence in its ability to deter capital flight, the fact US Dollar denominated debt has continued to trend higher since it was banned more than a year ago should give policy officials pause. China needs a weaker currency and we are unlikely to see it trade stronger than CNY7 any time soon. The bigger question is how long it will take to hit CNY8.

There are two very big questions we have to answer which are fundamental to the construction of a long-term portfolio. The first is does governance really mean anything? The second is how do you value private assets in a portfolio?
 
At this service we have long held that governance is everything. Is that still true? Ray Dalio appears to be agnostic on whether property rights, respect for minority shareholder interests, an independent judiciary and a free press are important. What I personally find particularly interesting is that the performance of China’s stock market, during the decade where it has achieved the heights of its ambition has been dismal.

In 55 years of observing markets, we have NEVER seen such a downside capitulation as October 2008; and, we have believed we are in the biggest secular bull market of my lifetime!  This morning Chinese Foreign Ministry spokeswoman Hau Chunving said, “China will not accept any kind of extreme exertion of pressure, intimidation or blackmail. Neither will China give in an inch on major issues of principle.  Now it's time for Washington to show sincerity and demonstrate to the world that the US is still a reliable partner that can carry out negotiations.”  And with that the renminbi is at decade lows versus most currencies.  Such action has the preopening S&P 500 futures off some 40-points . . . Good Grief!

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This was the front page of the China Daily newspaper on the flight from Beijing to Guangzhou yesterday. The drop below CNY was normal currency activity, there is a clear need for peace to spontaneously break out in Hong Kong’s protests and apparently China is not avoiding US agricultural exports. This is just one more example of how the same news can be spun in a number of different ways.
 

The yuan declined 0.9% in mainland trading last week, its biggest loss since mid-May, after President Donald Trump abruptly escalated the trade war with new tariffs on Chinese goods. Beijing pledged to respond if the U.S. goes ahead with a plan to impose a 10% tariff on a further $300 billion in Chinese
imports.

“It appears that the tariffs hike suggests the return of tit-for-tat moves and a suspension of trade talks, and the PBOC sees no need to keep the yuan stable in the near term,” said Ken Cheung, a senior currency strategist at Mizuho Bank Ltd. The tumble exacerbated losses in Asia’s financial markets.

China devalued its currency when the first round of tariffs was imposed and it is doing so again now that tariffs have been imposed on all of its exports to the USA. The Renminbi broke below CNY 7 today and that represents the reassertion of its bearish trend.

The devaluation of the currency below CNY7 is a major change of policy for China and it greatly increases potential for capital flight. That is the one thing China cannot afford to allow. The entire rationale for supporting the economy, and ensuring the ability to manage systemic risk in the nonperforming loans sector, is based on the trillions in deposits sitting in the banking and post office systems

South Korean President Moon Jae-in called Japan “reckless” in a national address Friday and his country planned to cross its neighbor off a preferred-trade list. The move came hours after Japanese Prime Minister Shinzo Abe’s cabinet removed South Korea from its list of trusted export destinations.

U.S. Secretary of State Michael Pompeo met his counterparts from both countries Friday, but the dispute, which simmered for months as the Trump administration sat on the sidelines, looks set to worsen amid protests, boycotts and economic warnings. “By bringing economic sanctions, they’ve really escalated it to another level,” said Robert Dujarric, director of the Institute of Contemporary Asian Studies, Temple University, Japan. “This isn’t going to make South Korea cave in. If anything, it heightens South Korean nationalism. It makes it harder to de-escalate and harder to have a ‘united front’
against China.”

Japan and South Korea compete in many of the same export markets and their rivalry had previously been contained by the global trade network but the historical enmity between the two countries is never far from the surface. The advent of trade wars, mercantilist competition and shifting loyalties is introducing a degree of uncertainty in the region that hasn’t been seen in decades.

Hope all is well.

 I had a question about the comment you made at the end of your video today. You mentioned that the indicator that we should focus on which will lead to this current cycle unwinding is Private equity and the success of their investments, plus on government debt and the deficits they are building.

Are you able to expand on what we can track (tangibly) for these 2 issues?

Thanks v much

Thank you for this question. I am very conscious of the temptation of generals to always be fighting the last war. In 2005 and 2006 there was some talk of a housing bubble in the USA but few people understood just how massive the liar loans problem was. Consumers had become extraordinarily overleveraged. As interest rates ground higher the first signs of trouble appeared in the underperformance of banks, rising credit card delinquencies and the collapse of leveraged hedge funds at major investment banks. The big question we need to ask is whether it will be these factors which are most relevant in this cycle?

Let’s think about the economy as made up of consumers, corporations and the government. After a decade of extraordinary monetary policy total debt has gone up but the US consumer has been de-levered while corporations and the government have seen their debt loads balloon.

China has reaffirmed its policy of never being the first in a conflict to use nuclear weapons. Experts refer to this policy as “no first use,” or NFU.

The NFU policy reaffirmation, contained in Beijing’s July 2019 strategic white paper, surprised some observers who expected a more expansive and aggressive nuclear posture from the rising power.

One has to question why this statement was made now? One possible interpretation is China is stating its position in order to lay the groundwork for what it anticipates is going to be a difficult geopolitical environment in the near future.

The board is also a testing ground for regulators, who have waived rules on valuations and debut-day price limits for the first time since 2014. The venue is the only one in China to welcome companies that have yet to make a profit, as well as shares with unequal voting rights. The Shanghai stock exchange will create an index tracking the firms about two weeks after the 30th listing starts trading.

Shares on the Star board have no daily price limits for the first five trading days, followed by a 20% cap in either direction. To limit volatility, the venue suspends activity for 10 minutes if a stock moves by 30% and then 60% from the opening price in the first five trading days, a wider band than the rest of the stock market. Only certain qualified foreign investors can buy the stocks directly, as there’s no access through trading links with Hong Kong.

The first batch of listings included China Railway Signal & Communication Corporation Ltd., whose Hong Kong shares sank on huge volume as traders switched into the A shares. Advanced Micro-Fabrication Equipment Inc., which was the most expensive listing of the batch, jumped as much as 331%. Its 171 multiple compared with an average of 53 times for the group, and 33 for similar stocks on other Chinese venues.

Despite the hype, there are questions about whether the excitement will give way to the lukewarm sentiment that’s blanketing the world’s second-largest equity market. On the other hand, a sustained period of ultra-high demand risks draining funds from other exchanges, where volumes are shrinking. The Shanghai Composite Index fell 1.3% on Monday, while the ChiNext Index was down 1.7%.

There is no doubt China can stage manage product launches and a stock market venue is no different. The question of whether the STAR market becomes the next Nasdaq is much thornier. It will be months before we have a clear idea of how much liquidity the venue can attract and perhaps more importantly whether that will simply siphon interest away from other markets or it will create organic growth in demand for speculative shares.

To be sure, Noah is not alone. Central China Securities Co., a mid-sized brokerage, said on Thursday two asset management products totaling 240 million yuan are in danger of defaulting after the borrower falsified documents. It didn’t provide more details.

For Noah, the incident has raised questions about the firm’s approach to risk management, said Yan Hong, a finance professor at Shanghai Jiao Tong University.

“It exposed the lack of credit-risk controls and absence of a verification mechanism for contract authenticity, which is a low-level mistake for a manager of private credit products,” Yan said.

It’s not the first time that Noah’s investments have run into trouble, as JPMorgan Chase & Co. analysts noted in a July 8 research report. In 2017, products managed by Gopher had exposure to China Huishan Dairy Holdings Co., which collapsed after being targeted by short sellers. In May 2018, Noah’s Hong Kong unit was fined by the city’s securities regulator for failing to comply with know-your-customer, due diligence and other requirements.

One lesson for asset managers is that they should talk to all of the relevant parties in an investment before committing money, said Jesse Si, a Beijing-based senior manager at Mintz Group, which specializes in due diligence investigations.

A clear trend is emerging of fund managers who invested in opaque instruments in an effort to generate outsized returns and are now suffering the consequences. GAM in Switzerland, Neil Woodford in the UK, France’s H2O and a string of Chinese firms have all suffered from being unable to meet redemption requires because they invested in highly illiquid instruments.

“U.S. clients are definitely very, very worried,” Fung said in an interview with Bloomberg. “Everyone is making razor-thin margins already and most people have a huge percentage in China. So if the biggest source increases the price by 25%, they are worried,” he said, referring to the scale of tariffs threatened on all Chinese imports to the U.S. by President Donald Trump.

Though Fung didn’t specify Walmart by name, the U.S. retailer is the company’s second-biggest customer after Kohl’s, accounting for 7.6% of revenue, according to Bloomberg data. A spokeswoman for Walmart declined to comment.

The size of China’s manufacturing sector dwarves that of any other country and therefore the migration of US business is hitting choke points because of a lack of infrastructure elsewhere to deal with the demand. That represents a once in a lifetime opportunity to spur manufacturing in cheaper locations like India and Africa to pick up US business.

But the rise of China’s tech industry put it squarely in the crossfire of the trade war. The Trump administration has accused China of stealing intellectual property and unfairly subsidizing companies in strategic fields, including semiconductors, artificial intelligence and autonomous driving. In May, the U.S. blacklisted Huawei Technologies Co., preventing the telecom giant from buying American components, and is considering doing the same to a swath of startups.

The trade war gives investors one more reason for caution. Valuations had already grown vertiginous. High-profile startups such as smartphone-maker Xiaomi Corp. and delivery giant Meituan Dianping saw their stocks tumble after they went public, reinforcing the impression that private-market valuations had gotten out of hand.

So-called sharing economy startups have also tested the patience of their investors. Companies like Didi, Meituan and bike-sharing provider Ofo blitzed the market with heavy subsidies to grab market share from rivals, making up for their losses with venture money. Now there’s skepticism that many such companies will ever turn a profit.

“You’re really reaching the end of the shared economy -- this idea of let’s give away services for free and make up for it in volume,” Rieschel said. “Some companies -- Didi is the classic case -- are just not showing any ability to become profitable.”

Do visionaries appear at the just the right time, or do they get the opportunities to turn their ideas into a semblance of reality because liquidity is cheap and abundant? A confluence of technological innovations can coalesce to create wonderful new products like the iPhone. Alternatively, we can find new ways of doing things because the cost of running interminable losses is so low relative to the potential pay-out that any venture can secure funding. The latter group have clearly dominated in this cycle which tells us liquidity is the dominant reason behind the surge in valuations for private companies.

Together with the Guardian and the New York Times, the reporting team commissioned several technical analyses of the app. Penetration testing firm Cure53 on behalf of the Open Technology Fund, researchers at Citizen Lab from the University of Toronto, and researchers from the Ruhr University Bochum as well as the Guardian itself all provided insights about BXAQ. The app's code also includes names such as "CellHunter" and "MobileHunter."

Once installed on an Android phone, by "side-loading" its installation and requesting certain permissions rather than downloading it from the Google Play Store, BXAQ collects all of the phone's calendar entries, phone contacts, call logs, and text messages and uploads them to a server, according to expert analysis. The malware also scans the phone to see which apps are installed, and extracts the subject’s usernames for some installed apps. (Update: after the publication of this piece, multiple antivirus firms updated their products to flag the app as malware).

Xinjiang is one of China’s buffer states which separates the heartland from its neighbours. It is also an energy producer and bread basket so China has additional reasons to quell even a whiff of separatist sentiment. The extend of surveillance and re-education programs (incarceration) is unparalleled in modern history and is a testament to just how overtly authoritarian the administration is.

For firms that obtained funding via unorthodox methods, conditions may become particularly challenging. One of those practices is known as structured issuance, where a company will transfer cash to an asset manager to buy a slice of the bonds the company is itself selling. The manoeuvre helps give the appearance of greater demand for its securities and stronger ability to obtain funding. What could make the practice untenable is if asset managers can no longer use those securities held in custody as collateral for repos.

“Since some repo transactions have defaulted recently, it is unclear whether companies can continue to borrow money from the structured issuance method, said Meng Xiangjuan, chief fixed-income analyst at SWS Research Co. in Shanghai. “If it stops, some issuers will certainly face difficulties operating their business normally, and their debt-repayment pressure will rise,” she said.

The main headline today was the fact some Chinese banks have been breaking the sanction prohibitions on North Korea. However, the fact it is possible for companies to partially fund their own bond issuance by promising to buy it themselves with the funds received is garnering a lot less interest.

That’s all put the economy on track for its weakest fiscal year since the last recession in 1991. Even the Reserve Bank, which rarely wades into political territory, is urging more government stimulus after cutting interest rates for the first time in almost three years.

But whether boxed in by his sunny disposition or pledges to deliver a budget surplus made ahead of the government’s shock re-election last month, Frydenberg appears unfazed. While he’ll push to pass tax cuts when parliament resumes on July 2 and ramp up infrastructure spending, that’s about it, leaving the heavy lifting of stimulus to the central bank.

“I’ve found the treasurer to be remarkably sanguine,” said Danielle Wood, an economist at the Grattan Institute, an independent think tank in Melbourne. “When you’ve got the central bank governor coming out and talking about perhaps moving to stimulatory fiscal policy as well as the need for more long-term structural reforms, I’d be hoping for a more substantive response.”

The RBA cutting interest rates to previously unimagined levels, with more to come, is a bonus for consumers with floating rate mortgages, but the wider concern is about the health of the Chinese economy which Australia depends on for export demand growth.

In its lending business, meanwhile, Ping An says it uses its technology to analyze the faces of loan applicants in real time, searching for “micro-expressions” that reveal their emotional and psychological state. Such expressions typically occur within fractions of seconds and are hard for people to control, and loan officers make more accurate judgments on the applicants’ credibility based on this information, according to an article posted by Ping An on its official WeChat social-media account in China last year.

For large loans, applicants often have to answer questions in an online video meeting that typically lasts 10 to 15 minutes. Ping An records and analyzes how the applicant answers questions, and looks for signs of eye-shifting or other suspicious behavior, which would be flagged by its system.

Ping An in January said it has made more than 500 billion yuan worth of loans with the help of its micro-expression technology. It also said the technology has helped shorten its average loan-approval times to two hours from five days.

Tracking movement of large numbers of people and compiling databases on patterns of behaviour, social media activity and even utilities bills is about as a Big Brother as is currently imaginable. The rolling out of the social credit scheme to the insurance sector is just another part of that long-term project to compile a unique score for each individual which will be more exact than a credit score and will have broad spectrum uses beyond credit, not least in quelling political activism.

"Forget about the psychological 7 level," said Khoon Goh, head of research at Australia & New Zealand Banking Group Ltd., adding that the fixing will stay stronger than 6.9 before the Group of 20 summit. "Today’s fixing sends a clear message that the authorities are still intent on keeping the yuan stable, and
have no desire to see it weaken further."

Trump Says He’ll Raise China Tariffs If Xi Won’t Meet at G-20 U.S. President Donald Trump and his Chinese counterpart Xi Jinping may meet at the G-20 summit in Osaka this month. Traders will be closely watching the gathering to gauge the outlook for trade negotiations and the yuan.

"We expect the Chinese authorities to continue defend 7 in the foreseeable future," said Becky Liu, head of China macro strategy at Standard Chartered Plc, adding that a negative outcome at the G-20 summit wouldn’t warrant a change in this stance. "The PBOC may step up the size and frequency of bill issuance should the yuan come under greater depreciation pressures."

With upwards of a million people protesting on the streets of Hong Kong and the world paying attention to the trade war between the USA and China, the Chinese administration has a clear incentive to project an aura of stability and calm.

China has spent much of the past five years tightening its gripover Hong Kong with little challenge. Now, hundreds of thousands in the city are fighting back.

Hong Kong is bracing for a potentially historic showdown over extradition legislation that could for the first time subject residents to face justice in Chinese courts, further eroding the city’s autonomy. Opponents on Sunday staged one of the largest protests since the former British colony’s return to China: Organizers said more than 1 million participants showed up, while police put the figure at 240,000.

Tensions are only heating up, with demonstrators vowing to surround the city’s Legislative Council on Wednesday, when lawmakers debate scores of proposed amendments. Hong Kong’s Beijing-backed leader, Carrie Lam, defended the bill in a 45-minute news briefing Monday, saying it was necessary to prevent the city from becoming a “haven” for fugitives and vowing to press ahead with its passage. China endorsed her government’s efforts later in the day.

Deng promised the “one country, two systems” model would last for a century. Hong Kong will be lucky if it makes it to quarter of that time. Extra judicial disappearances have been a feature of Hong Kong life for the last decade and this extradition law would institutionalise the process. Tightening mainland oversight, particularly of critics of the administration is inevitable regardless of how many people protest. In the meantime, there is a clear intent to express power and control over Chinese territories so this situation has the potential to escalate.

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

The Gold/Silver ratio is at rather extreme but not the most extreme levels seen historically. David long described silver as high-beta gold and poor man’s gold. The less liquid nature of silver trading and the various use cases for the metal contribute to it being more volatile than gold.

If passed, the new legislation would allow the transfer of fugitives from Hong Kong to jurisdictions with which it has no extradition deal, including mainland China.

Organisers estimated the turnout to be between 2,500 and 3,000, but police said attendance peaked at 880.

Four Nordic chambers of commerce also jointly expressed concern that the bill had been “fast tracked without the thorough consultation and full legislative scrutiny that is customary for a piece of legislation of this nature”.

The city’s last colonial governor Chris Patten meanwhile urged the government to shelve the bill, arguing it would “strike a terrible blow” to Hong Kong’s rule of law.

Any hope that Hong Kong will be allowed to host critics of the mainland’s administration are being quashed. The time when Hong Kong is completely subsumed within China is drawing progressively closer as the “one country, two systems” approach is abandoned.  

Chinese authorities already maintain a vast surveillance net, including tracking people’s DNA, in the western region of Xinjiang, which many Uighurs call home. But the scope of the new systems, previously unreported, extends that monitoring into many other corners of the country.

The police are now using facial recognition technology to target Uighurs in wealthy eastern cities like Hangzhou and Wenzhou and across the coastal province of Fujian, said two of the people. Law enforcement in the central Chinese city of Sanmenxia, along the Yellow River, ran a system that over the course of a month this year screened whether residents were Uighurs 500,000 times.

Police documents show demand for such capabilities is spreading. Almost two dozen police departments in 16 different provinces and regions across China sought such technology beginning in 2018, according to procurement documents. Law enforcement from the central province of Shaanxi, for example, aimed to acquire a smart camera system last year that “should support facial recognition to identify Uighur/non-Uighur attributes.”

Last April, Mrs. Treacy was at a 7-Eleven in Guangzhou and the cashier offered her a 10 Yuan discount for taking her photo and before she could answer had already taken her data. A day later she found herself accidentally paying for items at a different store with her face.

We are having a significant discussion in the West about privacy and how much of our data should be available to corporations. That discussion does not exist in China and regardless of what venue gathers your data, it all ends up in the hands of the government and that is everything from passwords to fingerprints, to facial features, to browsing history, to utility usage, to travel history to social media contacts to purchasing patterns and genetics.

Within China, all forms of debt have risen, reflecting a shift in the dynamics of its economy. Before the crisis, China had largely managed to finance its growth without recourse to much debt. The inflows from exports had done the job. The population, fast reaching middle-class living standards, still tended to fund itself conservatively. But household debt has almost tripled from 18.8% of China’s GDP before the crisis to 51.2%. All this debt has successively less impact in stimulating economic growth.

There are reasons why China’s debt is not creating greater fears. If countries want to avoid crisis, issuing a greater share of debt in their own currency is key. This avoids the risk that a devaluation can force them into default, and it leaves them with the option—not necessarily a good one—of printing money to escape difficulties.

China does more than 90% of its borrowing in local currency, which limits the risks somewhat. Meanwhile, almost all large emerging markets now do more than half of their borrowing in their own currency. But not all emerging markets have made uniform progress in converting to local market debt. The two biggest exceptions are Argentina and Turkey—and it is no coincidence that these two countries both slipped into crisis during 2018 as a strong dollar put pressure on their currencies.

Where the burden of debt resides in an economy gives us a clue as to where the greatest effect will be felt from a problem. When the credit crisis struck it was mortgage debt in the USA which led the market downwards and it was consumers who felt the brunt of the decline with the foreclosure crisis and erasing of savings. Today, debt resides on company balance sheets and in China’s regional banking sector in particular.

Successive attempts to wring leverage out of the regional banking sector have finally had the desired effect of ending shadow banking. However, without resource to government capital, Dollar loans or private lending clubs, the regional banks are in serious peril. This is a difficult sector to monitor because only a handful are listed on the stock market.

The People’s Daily, a flagship newspaper of the ruling Communist Party, said in a commentary that the U.S. shouldn’t underestimate China’s ability to fight the trade war. The country is “seriously” considering restricting rare earth exports to the U.S., the editor-in-chief of the Global Times, a newspaper affiliated with the Communist Party, said in a tweet. An official at the National Development & Reform Commission told CCTV that people in the country won’t be happy to see products made with exported rare earths being used to suppress China’s development.

 

The U.S. relies on China for about 80% of its imports of rare earths, the group of materials that are used in everything from electric cars to high-tech military equipment. Rare earths, which include elements such as cerium and dysprosium, are relatively abundant in the Earth’s crust but mine-able concentrations are less common than other ores.

China produces about 70% of the world’s mined rare earths and its industry is dominated by a handful of producers including China Northern Rare Earth, China Minmetals Rare Earth Co., Xiamen Tungsten and Chinalco Rare Earth & Metals Co. Some of the country’s listed rare earths stocks are small caps, making them easy targets of speculation.

The country has taken a proactive approach to managing the global market, Bank of America Merrill Lynch said in a report, citing steady exports in the 1990s that depressed prices and a 40% reduction in its export quota in 2010 that led to a spike.

The last time rare earths were a political football in 2010, it was because China cut off exports to Japan in an effort to force high-end manufacturing to migrate. That set off a massive run-up in rare earth metal prices, investment in new mining facilities and a drive towards substitution. Faced with the threat of losing it dominant position China relented and began exporting again. Prices collapsed, most of the new miners went bust and some semblance of normality returned. How is this occasion different?

Overnight swap markets are currently pricing in two RBA cuts by November. Westpac Banking Corp. economist Bill Evans on Tuesday brought forward his forecast for the first reduction in the cash rate to June, with a second to follow in August. Commonwealth Bank of Australia and Royal Bank of Canada expect the same.

JPMorgan Chase & Co. though says two cuts may not be enough. “From where we are today, this is still not sufficient to fully neutralize risks to the RBA staff’s current forecasts, suggesting risks to a sub-1% cash rate,” economist Ben Jarman wrote in a note.

Franklin Templeton’s Canobi expects the RBA to lower borrowing costs three to four times over the next nine to 12 months as tepid inflation weighs. “We never felt that inflation has really had a grip since the RBA started easing in 2016, and it still looks pretty weak,” he said.

Australian mortgages are full recourse and floating rate. The Australian consumer is carrying some of the highest leverage ratios in the world, second only to Canadians in the G7. That’s fine as long as the property market is rising but when it starts to contract pressure starts to build on leverage at even a slight down turn in the ability of consumers to service their debts.

From now, Huawei will be able to use only the public version of Android and won’t have access to proprietary apps and services from Google, according to a person familiar with the matter. Though existing phones are expected to keep functioning largely as usual for now, users could lose some app functions, including some artificial-intelligence and photography features, the person said.

In a separate move, German chip maker Infineon Technologies AG said it was terminating the delivery to Huawei of some components originating in the U.S., in a sign that even non-U.S. suppliers to Huawei are being swept up in the U.S. trade restrictions. Infineon didn’t specify which components were affected by the action but said the “great majority” of products it sells to Huawei aren’t subject to trade restrictions.

Separately, Qualcomm Inc., San Diego, has suspended shipments to Huawei of its chips, and some employees have been told not to communicate with the Huawei side, according to a separate person familiar with the matter. Qualcomm chipsets are used in certain Huawei smartphone models. Huawei also designs a large number of its own chips for higher-end phones.

Huawei is a Chinese national champion, so the Chinese government looks on the efforts to excise it from competing internationally as a direct afront to the Made in China 2025 program which is one of Xi Jinping’s central policy objectives. There is no Chinese company with an operating system capable of replacing Android. Until now they never needed one but we can be sure this sequence of events is going to further accelerate the drive towards Chinese technological independence, however long that takes.

The rationale for allocating to emerging markets rests on three pillars: Superior economic growth has resulted in positive market returns historically, low correlation within emerging markets and across asset classes has provided diversification benefits, and relative scarcity of information has created opportunities for active portfolio management. Long-term historical data confirms that emerging markets have provided positive long-term risk-adjusted excess returns and enhanced portfolio diversification. Their diversity has led to high cross-sectional return dispersion, both at the country and at the security level, creating opportunities to add value through active country allocation and stock selection. Omitting this equity segment would have introduced a performance drag on global indexed strategies and reduced the investment opportunity set of active strategies. The opening of the domestic Chinese capital market and its integration into international markets is likely to have a transformative effect on the emerging markets equity segment. MSCI introduced domestic Chinese equities (A shares) into the MSCI Emerging Markets Index in June 2018 at a reduced weight. Chinese equities listed in mainland China and Hong Kong currently represent 30% of the index but could grow to over 40% when A shares are included at full weight. The growing size of China within emerging markets raises the prospect for investors of making dedicated allocations to China. Whether investors make separate China allocations or continue to seek opportunities across global emerging markets, the segment likely will remain an essential element of the global equity universe in the future.

China already dominates the emerging markets sector and its influence is likely to further increases with the increased weighting of A-Shares. At 40% of the Index it will become increasingly difficult to invest in emerging markets without gaining at least some exposure to China. That will be either because of direct participation or because of the reliance of some markets on Chinese demand.

As you say, the US has many alternative sources of cheap goods but there are limited sources of US technology. China also has no alternative buyers of its products. Round One of the international confrontation will be won by the US.

Buyers can always look elsewhere because there is always someone who is willing to provides services at a lower cost or who can manufacture a copycat item which is “good enough” Sellers have to focus on retaining that competitive edge but often have a hard time replacing lost customers, particularly when they are have already maxed out their growth.

Uncertainty over how the dispute would be resolved in the one-month deadline set by Washington will reinvigorate a hunt for haven assets in a world already hampered by slowing growth.

An easy bet will be to short the expected losers: risk-sensitive currencies from Asia to South America, they say. “To be honest, I thought the dollar would be rising at a much faster pace than this -- markets were pricing in a Goldilocks environment and they were clearly wrong,” said Stephen Miller, an adviser at asset manager GSFM and a former head of fixed income at BlackRock Inc.’s Australian business.

“Right now I’d be long U.S. dollar versus EM currencies, the likes of Argentina and Turkey.” There’s a 60% chance that China and U.S. won’t reach a deal in the coming weeks, according to analysts at Australia and New Zealand Banking Group Ltd., after last week’s talks laid bare divisions including the removal of existing tariffs and a breakdown in trust. While both nations plan to continue negotiations, traders are waiting for Beijing’s retaliation measures after Washington slapped more duties.

The Chinese renminbi has long been used as policy tool and tariffs being imposed on a wider range of goods, there is a clear argument for having a weaker currency. The country is obviously going to experience some difficulties from tariffs imposed on exports to one its largest trading partners but the potential for domestic inflation to spike on the back of a weaker currency is likely to limit the scale of devaluation.

Chinese policy makers could devalue the yuan to offset the impact of U.S. duties on China’s economy. The offshore yuan weakened 5.5% against the dollar in 2018, drawing Trump’s ire and fueling speculation that the country was deliberately weakening its currency. While it has fallen 1.8% this week, the currency rose on Friday after the People’s Bank of China set its daily fixing at a stronger-than-expected level.

However, China’s painful experience with devaluing the yuan in 2015, which prompted capital to flee the nation, is likely to dissuade a similar move, according to Tao Wang, UBS Group AG’s chief China economist and head of Asia economic research. “China doesn’t like the self-fulfilling outflows that come as a result of depreciation, which tend to diminish domestic confidence,” she said. “In addition, yuan depreciation last year angered the Trump administration and led to higher U.S. tariffs.”

Watch your own backyard first, worry about everything else afterwards has been the Chinese response to the imposition of additional tariffs on its US exports. The first order of business appears to have been to do what was necessary to avoid a negative reaction in the domestic stock market. That was achieved by clear support coming through for the A-shares market and it posted an upside key day reversal. This action is a testament to the fact that bull markets in China are state sponsored.

But the mood on both sides going into the talks appears to be hardening with Lighthizer calling members of Congress ahead of the discussions to warn that a deal this week is unlikely, according to people familiar with the conversations. While Trump on Wednesday insisted that Liu was coming to make a deal and dubbed him a "good man," he later told a rally of supporters that China "broke the deal" by backsliding on prior commitments, leading him to order higher tariffs.

China has disputed Trump’s characterization that the country reneged. But it has also sent its own signals that a deal could take time.

Unlike in some of his previous visits to Washington, Liu is not traveling with the designation "special envoy" of Xi Jinping, according to people briefed on his trip. Chinese officials’ public statements have also hardened in recent days with Beijing vowing to retaliate against Trump’s tariff increase and rejecting the idea that it has reneged on any commitments made during the months of tough negotiations that have led to this week’s showdown.

“China is credible and honors its word and that has never changed,” Commerce Ministry Spokesman Gao Feng told reporters on Thursday.

The Ministry of Commerce also announced it would soon publish details of new retaliatory tariffs.

Haggling is a part of Chinese culture and nothing is agreed until everything is agreed is a common tactic. Fawning over one item to distract attention from the real intent of the negotiation, only to introduce that object later in a backhanded manner, in order to get a better price is also common. Why would trade negotiations be any different. Reintroducing points already considered settled appears to be a central tactic in Chinese negotiating style but that is normal in all Chinese dealings rather than being an individual tactic to the trade negotiations. 

China continues to press banks to extend credit to the private sector, and small and medium-sized companies especially. The latest move came Monday, when the central bank loosened some reserve-requirement rules for lenders. But President Xi Jinping’s team has also focused on shrinking the shadow-banking system, where credit decisions were made with less regulatory oversight and where it was easier to build up unsustainable leverage.

It’s that funding squeeze that explains the default surge that began in late 2017 and continues today. By contrast, 2016 was more a story of China’s push to shrink excess industrial capacity having reverberating effects in credit markets. “Short bond tenors mean the companies need to refinance frequently,” and weaker ones will likely have difficulty, analysts including Hong Kong-based Nino Siu at Moody’s Investors Service wrote in a note last month. “Banks are reluctant to lend to weaker companies. Additionally, shadow banking, on which weaker Chinese companies rely, continues to contract as the government tightens regulation,” she and her colleagues wrote.

One of the companies listed in the above article is Neoglory. I visited their headquarters in Yiwu about seven years ago. Mrs. Treacy had a tourist focused store at the time and was sourcing costume jewellery. Neoglory was the largest, splashiest company around and was one of our first calls. We never purchased from them because when it came to negotiating prices, they had a complex web of discounts and promotions. When we questioned the accuracy of a salesman’s calculation he said “that’s how I do math”. At that point we walked. That phrase has passed “that’s how I do math” is something we still smile about. It looks like we were not the only ones to walk away from the company.

Goldman believes a tariff increase may be “narrowly avoided,” putting odds that tariffs rise on Friday at 40 percent, Phillips wrote in a note.

Will be watching whether a large delegation of Chinese officials comes to Washington on May 8, as scheduled; canceling would mean an agreement in the coming week would “seem very unlikely,” and would make an increase in the tariff rate to 25 percent “the base case.”

China trade issues have “negative implications for the outlook for auto tariffs and passage of the USMCA [U.S.-Mexico-Canada Agreement].” Trump’s “willingness to risk a market disruption by threatening an unexpected tariff hike suggests that he might also be willing to risk the disruption that formally proposing auto tariffs or announcing the intent to withdraw from NAFTA might cause.” Phillips raised the probability that auto tariffs will be implemented later this year to 20 percent from 10 percent, and lowered the probability that USMCA will pass to 60 percent from 70 percent.

How much of this is brinksmanship ahead of a crucial point in the negotiations or should we take the gambit seriously. That’s the big question everyone is asking today and it suggests there is likely to be a pause in buying at the very minimum, at least until we know more at the end of the week. Meanwhile it appears Liu He is travelling to the USA this week afterall. 

Details of the U.S. commitments and how the enforcement mechanism will operate remain scant. But Mnuchin’s comments have caused plenty of raised eyebrows from legal scholars to the business community and Congress.

If the U.S. allows China reciprocal enforcement powers, it would make China “judge, jury and executioner as to whether we have honored our obligations,’’ said Daniel Price, who served as a senior economic adviser to President George W. Bush and is now at Rock Creek Global Advisors in Washington. “I don’t think the U.S. business community is sufficiently alert to the risk of constantly being exposed to unilateral enforcement action by China.”

Details of the U.S. commitments and how the enforcement mechanism will operate remain scant. But Mnuchin’s comments have caused plenty of raised eyebrows from legal scholars to the business community and Congress.

If the U.S. allows China reciprocal enforcement powers, it would make China “judge, jury and executioner as to whether we have honored our obligations,’’ said Daniel Price, who served as a senior economic adviser to President George W. Bush and is now at Rock Creek Global Advisors in Washington. “I don’t think the U.S. business community is sufficiently alert to the risk of constantly being exposed to unilateral enforcement action by China.”
 

The quid pro quo of testing and enforcement is a clear risk from the impeding trade deal between the USA and China. Perhaps most important of all is that if the deal goes ahead as suggested above it represents a clear admittance that China is on par with the USA geopolitically. That may have already been a fact but it is quite something else to codify it in a treaty governing trade.

While climate-change activists make a lot of fuss about the US, where emission of greenhouse gases has been in decline, they aren’t demonstrating loudly about China -- which attacks developed countries for not doing enough, while itself doing most to worsen it,

The New York Times reports that China, the world’s leading emitter of greenhouse gases from coal, now admits it’s burning up to 17 per cent more coal than its government previously claimed when it signed up for the Paris accord.

And it’s making things worse. Across China the government is building a fleet of new coal-fired stations with 259 gigawatts of capacity, while outside the country it’s financing even more new coal plants, providing $36 billion for 399 gigawatts.

“Chinese bankers and project planners like coal-backed projects because they are cheap,” says the energy consultancy IEEFA. “While they are restricted by Chinese pollution and emissions targets at home, they are free to fund coal-backed projects abroad.”

The standard of living attained by China’s middle class has resulted in a clear call for cleaner air and the government is intent on showing progress. However, there is no getting around the fact that coal fired power stations are cheap to build and run and are very reliable. Moreover, China has plenty of experience building them and there is a ready market for coal in emerging markets, not least in India and increasingly Africa.

In automotive circles, Wang’s predictions of the combustion engine’s imminent demise often meet profound skepticism. Chinese sales of new-energy vehicles, a category comprising plug-in hybrids, pure EVs, and fuel-cell cars, more than tripled from 2015 to 2018, but they still account for only 4.5 percent of the total. The doubters, he argues, underestimate the country’s capacity for reinvention. “The Chinese way is to replace everything at once,” Wang says. “When we switched from black-and-white to color TVs, it took three years. In the West it was 10. Going from feature phones to smartphones took about one year. In Europe it was three. Cars will be the same. It will go very fast.”

China is a massive oil and gas importer but has abundant coal reserves. It therefore has a clear incentive to use less gasoline and natural gas and more coal. Electric vehicles fit squarely into that equation. Since coal is massively polluting nuclear energy is another growth industry in China.

"The credit data lifted expectations on market liquidity and economic fundamentals," said Wang Jianhui, a Beijing-based analyst with Capital Securities Co. "It provided an excuse for investors who wanted to bottom fish stocks after last week’s correction. But it’s more likely a technical rebound as there hasn’t been any substantial change in fundamentals."

The decline in mainland shares came after some companies issued profit warnings. In Shenzhen, Jiangling Motors Corp. sank by the 10 percent daily limit after it predicted an 84 percent decline in first-quarter net income from a year earlier.

Shandong Chenming Paper Holdings Ltd. slid 8.9 percent after saying its first-quarter profit may plunge 94 percent to 96 percent.

"While the macro numbers suggest a recovering trend, things are still looking weak in the micro segments including corporate profits," said Shen Zhangyang, a Shanghai-based strategist with
Northeast Securities Co.

The catch-22 facing policy makers is if they stimulate too much, they risk a bubble developing but if they don’t do enough, they risk a contraction. That is a clear reflection of the role liquidity has played in the evolution of the bull market over the last decade and how reliant on stimulus it is for continued expansion. They generally err on the side of caution so that is supportive of continued support.

The robust rate of credit expansion this year doesn’t rule out continued monetary easing. We think that’s still needed to help the economy find a solid footing, though the focus should increasingly shift to targeted measures.

Broad-based easing is still needed to provide liquidity to the banking sector so it can sustain the expansion in credit. The need is higher in 1H and we continue to see the possibility of reductions in the reserve requirement ratio, with the first potentially coming as early as in April.

There’s less of a necessity for an interest rate cut, in our view.

Targeted measures are important for channeling funding to sectors in greater need of funding -- small, private firms -- to lower their effective borrowing costs.

The result of the People’s Congress was to declare victory in the containment of the shadow banking sector and to signal a clear willingness to boost credit growth to reinvigorate speculative activity. That has resulted in the stock market popping on the upside, reversing the pattern of deterioration that prevailed for all of 2018.

The state-run Korea Development Institute on Sunday said Korea is slowly going into recession. The KDI said Sunday that the economy is "in a phase of gradual slowdown" as demand both overseas and at home shrinks.

Until last October, the institute had said Korea's economy was improving.

According to market researcher CEO Score, investment at 855 subsidiaries of Korea's top 60 businesses fell 3.1 percent last year to W98.5 trillion (US$1=W1,139).

Some 35 of them slashed spending last year. Samsung's cutbacks were particularly drastic with 46 subsidiaries reducing investment by 25.7 percent to W28.5 trillion.

South Korea is deeply embedded in the global economy and as a major electronics and vehicle exporter its health is an important barometer for the wider global economy.

However, Glaser said that the Chinese “haven’t done so for at least a decade, likely longer.”

“I’ve been told that Chinese jets approach the midline, but then veer off,” she said.

The flight came just after Taiwan President Tsai Ing-wen capped off a tour of several Pacific nations with a visit last week to Hawaii, where she said she had formally submitted new requests to the United States for F-16B fighter jets.

The U.S. has no formal ties with Taiwan but is bound by law to help it defend itself and is the island’s main source of arms. The Pentagon says Washington has sold Taipei more than $15 billion in weaponry since 2010.

China is suspicious of Tsai and her pro-independence Democratic Progressive Party and any push for the island’s formal independence.

Chinese President Xi Jinping said in January that Beijing reserves the right to use force to bring Taiwan under its control, but would strive to achieve peaceful “reunification.”

Beijing has called Taiwan “the most important and sensitive issue in China-U.S. relations” and has bolstered its military presence near the island, sailing its sole operating aircraft carrier through the Taiwan Strait in January and March of last year and holding large-scale “encirclement” exercises and bomber training throughout 2018.

Anything that promotes the notion of Taiwan declaring statehood is being met with progressively more strident efforts by China to stamp it out. Xi Jinping has succeeded in having his doctrine written into the constitution and he is economic plan is to make China the preeminent global economy. However, the crown jewel for any Communist Party leader, something that would ensure he is remembered forever in the annals of history would be to reacquire Taiwan.

Friday’s surge in Chinese stocks rounds up a winning quarter for the country’s investors. China’s equities have outrun every other national market in the world in the three-month period. The CSI 300 Index’s 29 percent rally is its best since the end of 2014, when the nation’s equity bubble was forming. Apart from a Taiwanese chipmaker, a Brazilian steel producer and Latin America’s largest utility, all the top 30 performers on MSCI Inc.’s emerging-market benchmark are Chinese companies.

Managing a momentum-driven investor base, where turnover is in the hands of almost 150 million retail traders, has always been a challenge for the government. China’s experienced two massive bubbles in the past decade, with a tight-grip approach to tame the rally backfiring in 2015, drawing the ire of foreign investors. Analysts predict Beijing will be more successful this time in engineering a slow bull market.

“It’s a critical time for the market,” said Liao Zongkui, an analyst at Lianxun Securities Co. “Investors are keeping a close eye on earnings from heavyweight companies. A good results season will be a big confidence boost, and will ensure the stock-market rally can continue.”

Veteran subscribers will be accustomed to our long-time contention that monetary policy beats most other factors most of the time. That’s particularly true on Wall Street and is an even more important factor in the age of extraordinary monetary policy. In China, the state dictates the fate of the market so it is clear that bull markets are state sponsored.

Chinese investments have become increasingly contentious in the EU. Diplomats in Brussels and influential western European capitals have long worried the 16+1 grouping of China and central and eastern European states, including 11 EU members, is a Trojan horse to divide the bloc. Beijing has denied this suggestion.  EU member states such as Germany and France have pushed for tougher screening criteria for Chinese investments. They want the bloc to develop a more unified strategy amid rising tensions over the security implications of using Chinese technology from companies such as Huawei, the telecoms group. Other countries including Greece and Portugal, where Chinese groups have invested billions of euros since the financial crisis, have adopted a more lenient approach.

I can’t help but think of the adage “a drowning man will clutch at a straw”. Italy’s populist administration has need of both funds for investing in public works and also a desire to snub the federalist ambitions of Northern European creditors. Meanwhile, China has a clear ambition to draw European countries within its sphere of influence in an effort to cement export markets and to weaken the chances of a concerted effort to blunt its expansionism.

“We need to create a strong capital market,” Guo Shuqing, the country’s chief financial regulator, said at the National People’s Congress, China’s top legislative session which wrapped up last week. “We could do more work especially in the capital market -- stock market, bond market -- for direct financing.”

China is trying to transform how it funds its economy after decades of relying on state-run banks that benefit from the implicit backing of the nation’s treasury -- but tend to direct most loans to other government-owned companies. The difficulty that small and private firms have in securing funding was one reason for an explosion of shadow-banking, and the rapid increase in debt and risk that came with it.

Spurred to act by a record $34 trillion debt pile, authorities in recent years have cracked down on risky loans, squeezing businesses that relied on such funding. While leaders including Guo have called on the banks to do more to finance private companies, lenders are grappling with their own concerns about loan quality and default rates. Even so, outstanding banks loans in China have increased by about 27 percent since 2016, while capital-market funding rose by around 15 percent.

“We shouldn’t put all the pressure on banks,” Xu Kuijun, an NPC delegate and vice president at Bank of China Ltd. In Shanghai said in an interview at the sidelines of the gathering. “We have to rely more on direct financing, and capital markets should do more.”

There is nothing says “We are done with tightening” quite like the statement “capital markets should do more”. The dominant policy narrative in China for the last three years has been the need to curtail speculation and most particularly in the shadow banking sector.

For years, the sum of China’s provincial GDP has exceeded the national figure, a clear sign of statistical inflation at the local level. The National Bureau of Statistics (NBS) has previously acknowledged that “some local statistics are falsified”, and in 2017 the central government accused three provinces in China’s north-east rust belt of fabricating data. 

The Brookings paper highlights how the NBS in Beijing struggles to make adjustments to the inflated data it receives from local officials. The analysis finds that the central government’s adjustments to local data are mostly accurate before 2007-08 but “after this date no longer appear to be accurate”. 

The NBS said last year that it would assert greater control over provincial data collection beginning in 2019 to eliminate discrepancies between local and national data. 

“NBS has done a lot of work to weed out the fake numbers added by local government, but it just doesn’t have enough power and capacity, nor the right incentives,” Michael Zheng Song, economics professor at the Chinese University of Hong Kong and a co-author of the paper, told the FT. “It would be unfair to blame NBS for fabricating GDP numbers.”

The reliability of Chinese data has been an enigma investors’ have been pondering for decades. It’s not really a question we can answer with any degree of confidence so the best course of action is to monitor the actions that can be backed up with some degree of confidence.

Would you care to comment on the different behaviour of the China A-50 future and the A-Share indices themselves?  It has been ironic, and frustrating, that while you and all the media talk of surging A-Share prices, the A-50 future, which is the one one can actually trade, has come down very sharply in the last few days.

Thank you for this email which highlights an interesting development. The FTSE-50 is much more concentrated that the Shanghai A-Shares Index which has 1453 members. In fact, its largest constituent, Ping An Insurance, occupies 12.31% of the Index. That is the largest weighting for an insurer in any of the China focused indices and ensures the Index does not track the performance of the mainland market as closely as one might like.

In all, Li rolled out tax cuts worth almost 2 trillion yuan ($298 billion) and pledged further stimulus ahead. While that emphasis on stronger fiscal policy can be seen as a loosening from last year’s vow to curb financial risks and trim the budget, the overall goal is still to buffer the economy without letting debt accelerate once more. That’s a balancing act that will be severely tested should any new threats to growth appear.

“It’s a big fiscal push,” said Michael Spencer, global head of economics at Deutsche Bank AG in Hong Kong. “There’s a reluctance to just turn on the infrastructure tap if they don’t need to.”

Li warned that China faces a graver and more complicated environment this year. He’s trying to rekindle lending to the private sector, mindful that the total debt pile is approaching 300 percent of GDP. “China must be fully prepared for a tough struggle,” he said.

Fiscal stimulus is in fashion and why should China be any different? The global economy is transitioning from a period of synchronised global monetary expansion to fiscal expansion. That is also stimulative but is likely to have more of an effect on consumer demand that central bank balance sheets.

Analysts say managers of funds that track MSCI’s emerging-markets index, such as the iShares MSCI Emerging Markets exchange-traded fund, are expected to make the necessary changes to bring their vehicles in line with the new weightings.

BlackRock Inc.’s global head of markets and investments for iShares and index investing, Manish Mehta, welcomed MSCI’s move, saying “the gradual addition of onshore Chinese securities deepens the investment opportunity for global investors, and we look forward to continued development in the market and regulatory environment to facilitate this increased access.”

Morgan Stanley analysts estimate that foreign inflows into mainland Chinese stocks could reach $100 billion to $220 billion a year over the next decade, with foreign ownership of the market rising to as much as 10%, from 2.6% now.

It will be impossible for the vast majority of foreign investors who invest in emerging markets to avoid China when these index changes go through. The MSCI Emerging Markets Index is already heavily weighted by Chinese companies and with the introduction of the State-Owned sector and smaller Chinese tech companies the influence of China on perceptions for the entire emerging world will only increase.

Enter the Foreign Raters! authorities have a record of pulling out the stops to aid some corporate debtors, including pressuring creditors into providing funding even after a company has defaulted. So it’s hard to imagine they’d be patient with downgrades by a foreign ratings company that could make it difficult for a troubled borrower to refinance.

Yet regulators in Beijing recognize that allowing credit to be priced based on the risk of the borrower could make investment across the economy more efficient. The People’s Bank of China says a certain amount of defaults can be healthy. And it sees foreign investors as a catalyst for reform. Given that those investors would prefer ratings akin to what they’re used to elsewhere, China in 2017 opened the door to the big three global ratings companies to operate wholly owned units.

S&P has hired at least 30 analysts for its Beijing office, preparing to open for business soon, says Simon Jin, chief executive officer of the company’s new China unit. The question on the minds of observers is just how S&P, along with Moody’s Investors Service and Fitch Ratings—if and when they follow—will manage to produce ratings that enjoy the confidence of international investors while also expanding business in a market that may not welcome hard truths about creditworthiness. Jin says “there is genuine demand for objective and reliable ratings in China” and that S&P plans “to provide Chinese market participants the same standards of transparency and independent analysis as we do anywhere else in the world.”

China’s growth since it began to open up over the last few decades has been supported by protectionism on the one hand but by outright support for domestic industry on the other. That manifested itself in free land for factories, generous open- ended credit availability through the banks, zero to low taxation, lax or no regulation, ignoring environmental standards and the creation of markets for the products produced. That resulted in rampant credit growth and, with clear government support, there were very low credit standards provided it served the national interest of industrialisation and full employment. 

After days of buildup, Trump kicked off the week by delaying a threatened increase in U.S. tariffs on Chinese imports and dangling a summit with President Xi Jinping at Mar-a-Lago, his Florida retreat, if “both sides make additional progress.” Along the way, he slapped down Lighthizer on a semantic point. Earlier, the two sides were haggling over how to ensure Beijing lives up to its promise to not weaken the yuan. Trump then reported substantial progress, including on currency.

And

Look for Powell to offer signals on what’s next for the Fed during two days of congressional testimony. When they last met, policy makers broadly backed ending the runoff of the central bank’s balance sheet. Lighthizer, who testifies Wednesday, may give a sense of how likely the U.S. is to impose tariffs on auto imports. The European Union is threatening to hit back. U.S. fourth-quarter gross domestic product, due Thursday, is expected to show 2.5 percent expansion last year, short of the Trump administration’s ambitious goal.

The Shanghai A-Share Index rose 5.95% as investors raced to price in the conclusion the trade war is over. The Index has been trending downwards for more than a year but broke its sequence of lower rally highs two weeks ago and extended that advance today.

While Chinese negotiators offered to stop providing government subsidies that distort prices and put Western rivals at a disadvantage, they haven’t so far produced a list of subsidies they would be willing to eliminate, the people said.

Instead, the Chinese side so far has focused its offer on greater purchases of U.S. agricultural and energy products such as soybeans, crude oil and liquefied natural gas, they said.

Whatever deal is struck, the U.S. is also seeking guarantees it will be enforced and a means to resolve disputes.

“It’s one thing to write something on a piece of paper,” said Secretary of State Mike Pompeo on Fox Business Network on Thursday. “It’s another thing to have enforcement mechanisms. And I know our trade team is hard at work, making sure that the American people get that.”

How likely is it that the USA and China will reach a trade agreement? I think it comes down to two factors. What is it that the USA wants from a deal and what is China willing to give up?

The rally since January has added more than $893 billion to the value of the country’s equities, lifting Shenzhen’s risky startups and state-backed giants alike. The rebound has been so quick and widespread that it’s already triggered signs of overheating in four of China’s major benchmarks. The CSI 300 Index’s 15 percent rally is its best start to any year in a decade, and turnover across all exchanges is near the highest since March.

While valuations have been low for months, Chinese equities really took off only after another set of weak economic data made monetary policy easing almost a certainty. Gains intensified when the new securities watchdog eased restrictions on trading, encouraging an increase in leveraged bets. Ample liquidity and a streak of foreign buying have fueled volumes.

“It’s essentially a reflection of change in investor expectations,” said Wang Chen, a Shanghai-based partner with XuFunds Investment Management Co. “The rally’s been driven by a return in risk appetite and a valuation catch-up.”

Bull markets in China tend to be state sponsored. China’s stock market is dominated by the actions of huge numbers of retail investors who are accustomed to taking cues from the government on when to participate.

A rally in Chinese equities steepened Monday as bumper credit figures for January added to signs of increased stimulus.

The Shanghai Composite Index jumped 2.7 percent by the close, taking its rebound since a Jan. 3 low to 12 percent, as turnover on mainland exchanges reached a 10-month high. The small cap ChiNext index in Shenzhen, typically the most speculative part of the market, soared more than 4 percent. The surge weighed on government bonds, with the 10-year yield climbing the most in two months.

The nation’s equities, which were the world’s worst performing in 2018, are starting to take off as the new securities regulator eases curbs on trading and an economic slowdown spurs monetary easing. In a sign of how broad the rally has been, the relative strength of four major indexes have all climbed above 70 -- a level that signals to some traders an asset may be overheating. The last time that happened was May 2015, when the equity market was in a bubble.

I posted this chart of the impact tightening measures have had on the Chinese shadow banking sector a month ago. It is a clear signal both of the reasons for the slowdown in economic activity and the rationale the authorities now have to declaring the policy a success. It is increasingly likely that the Chinese authorities are now willing to start stimulating the economy again.

President Donald Trump said he is open to letting a March 1 deadline to raise tariffs on Chinese products pass without penalty if the two sides are near an agreement, sending a conciliatory signal as talks to resolve a trade war between countries continue.

“If we’re close to a deal where we think we can make a real deal and it’s going to get done, I could see myself letting that slide for a little while,” Trump said to reporters during a cabinet meeting on Tuesday. “But generally speaking I’m not inclined” to delay raising tariffs, he added.

Negotiators from the world’s two largest economies began their latest round of talks this week ahead of the March 1 deadline for additional U.S. tariffs on Chinese goods. Trump has threatened to more than double the rate of tariffs on $200 billion in Chinese imports.

It would really be bad form to introduce new tariffs while productive discussions are still ongoing so it is quite likely the March 1st deadline will be exceeded. That does not guarantee a deal will be struck but it is in the interests of both parties to make some form of agreement. What is almost certain is there will be an agreement to hold further talks.

“Water keeps the boat afloat but can also sink it” is a Chinese proverb that neatly summarizes the nation’s current economic predicament. The debt that has hydrated the Chinese financial system for the past 10 years is now drowning it.

During the darkest days of the financial crisis in 2008, China launched a 4 trillion renminbi ($593 billion in today’s dollars) infrastructure plan that was accurately described as pulling the global economy out of recession. This infrastructure stimulus plan never ceased, and by 2017 the 4 trillion of spending ballooned to 14 trillion, according to China’s National Bureau of Statistics.
 
At first, China benefited from the economic reforms of the 1990s, its ascension into the World Trade Organization and the resultant inflow of foreign investment by Western companies. By 2009, the previous decade of strong growth meant wages and price levels had risen such that China was no longer a low-cost manufacturer. This made it implausible that exports could drive economic growth. Therefore, China’s central bank printed money to fund a gargantuan stimulus program. 

History tells us that growth that is funded by excessively rapid credit and money creation can lead to a variety of asset bubbles and to financial, credit and currency crises. A broad measure based on data from the People’s Bank of China and other agencies that includes both bank assets and shadow banking assets such as wealth management products, trust beneficiary rights and trust loans, places China’s total credit at $48 trillion, about 3.7 times its gross domestic product. That compares with $24 trillion for the U.S. despite China having an economy that is 37 percent smaller. China’s decade of rapid credit creation and investment spending has led to soaring property values, despite high vacancy, and low wage levels. These led to tepid export growth and a stagnating economy as the export industry lost competitiveness.

China has a mountain of debt that is concentrated in the regional banking sector and municipal governments. In attempting to wean the economy off of reliance on stimulus they have closed off successive avenues of credit ranging from interbank loans, P2P lending/shadow banking, US Dollar denominated debt. That withdrawal of credit has been one of the primary contributing factors in the underperformance of Chinese assets over the last 18 months.

On Wednesday, a top aide to Mr. Gou said high labor and production costs in the U.S. would make it difficult for Foxconn to compete with rivals if it manufactured LCD displays in Wisconsin. Louis Woo, a special assistant to Mr. Gou, said Wednesday that roughly three-quarters of Foxconn’s Wisconsin jobs would be in research, development and design, instead of manufacturing.

The back and forth came after the Taiwanese contract manufacturer fell short of a job-creation target in Wisconsin last year to obtain tax credits, amid a tight U.S. labor market. The Wall Street Journal reported in November that Foxconn considering bringing in engineers from China to Wisconsin as it struggled to find personnel locally.

Wisconsin state lawmakers lauded Foxconn’s announcement Friday. “We want to thank President Trump for his commitment to Wisconsin workers—our state has an ally in the White House,” said state Assembly Speaker Robin Vos and state Senate Majority Leader Scott Fitzgerald, both Republicans.

The performance of the share epitomises just how exposed the company is to the deteriorating relationship between the USA and China, hence the willingness to persist with building its factory in Wisconsin.  

China’s authorities have given international investors an early Spring Festival gift: ready access to almost all areas of the country’s capital markets.

Proposed changes announced late Thursday as part of a slew of new regulations include letting offshore funds trade more types of futures and options. Just days before the biggest holiday in the Chinese calendar, regulators also had something for domestic investors, including scrapping an automatic margin call threshold, allowing more types of collateral for certain loans and lowering capital requirements for riskier assets.

The measures targeting overseas firms will greatly expand the scope of the Qualified Foreign Institutional Investor program, one of the key channels into China, highlighting the authorities’ determination to open up their financial system and meet demands from international institutions for broader access.

The moves will give foreigners the same range of investment options as local players, said Yang Hai, an analyst at Kaiyuan Securities Co.

“Institutions looking to hedge and even short-sell Chinese stocks are likely to enter the market in future,” as a result of the changes, said Yang. “I think it has something to do with the China-U.S. trade negotiations, but it’s also about the financial opening promise.”

China is willing to open up its financial system to overseas investment but not its technology, communications, online retail or other sectors. There is a clear reason for that delineation. The risks to China’s economy reside within the financial system. The most basic premise of insurance is to pool risk. By giving overseas investors access to the financial system the risk from overleverage is shared and therefore the risk attached to the domestic market is reduced. The same rationale does not apply to other sectors which is why opening up continues to remain slow.

Iron ore investors are attempting to gauge the fallout from the dam burst at one of Vale SA’s mines, amid concerns the disaster will have ramifications beyond the affected operation in Brazil that could tighten the market in the short term and offset weakness from a slowdown in China.

Futures on the Dalian Commodity Exchange extended gains on Tuesday to head for the highest close in more than a year, after the benchmark price for immediate delivery surged to $78.80 a ton on Monday, the highest level since March. Shares of Australia-based miners rallied, with gains for BHP Group, Rio Tinto Group and Fortescue Metals Group Ltd.

In Brazil, “it seems likely that there will be an extensive increase in safety tests over the coming weeks and months,” Capital Economics Ltd. said in a note, raising its end of first quarter forecast to $75 a ton. “These tests may highlight other vulnerabilities in the system that could lead to temporary
cutbacks at one or more mines until the issues are addressed.”

This is not the first time a dam breach has impacted Brazilian supply and led to loss of life. In fact, BHP and Vale have only just reached a settlement with the communities affected by the Samarco accident in 2015. 

U.S. Treasury Secretary Steven Mnuchin said that if China presents enough trade concessions to President Donald Trump, there is a chance that the administration may seek to lift all tariffs. “Everything is on the table,” Mnuchin said early Tuesday during an interview on Fox Business News “Mornings With Maria” program. The Treasury chief is set to meet with top Chinese officials in Washington on Wednesday and Thursday alongside U.S. Trade Representative Robert Lighthizer about a month before the U.S. is set to escalate the trade war with China with fresh tariffs.

Trump and China’s Xi Jinping gave their officials until March 1 to work out a deal on “structural changes” to China’s economic model. If they fail, Trump has promised to raise the tariff rate on $200 billion in Chinese imports to 25 percent from 10 percent. The collapse of talks would dash hopes of a lasting truce that would remove one of the darkest clouds hanging over the world economy.

 

Considering what is at stake in terms of economic growth for both China and the USA and the impact a deterioration in relations would have on an already edgy stock market, at least a commitment to continue talking is likely. It would be unreasonable to raise tariffs further while that is ongoing.

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

There are two particularly pervasive views among institutional investors right now. The first is that emerging markets are due a period of outperformance and are cheap on relative value measures, particularly versus the USA. The second is the Dollar is going down in a big way from here, which of course would boost the prospects for emerging market currencies

China’s gaming industry, which generates more than $30 billion of revenue, was hammered in 2018 after regulators froze approvals for new games, preventing companies from making money off their hits. That spurred Tencent’s first profit drop in at least a decade and helped wipe about $200 billion off its market value at one point. Regulators are now working through a backlog of thousands of games that accumulated as a result -- more than 350 have been cleared since December.

“Although the news flow on game approvals remains positive, we view the most important games in the pipeline are PUBG and Fortnite,” Mizuho analysts led by James Lee wrote. “These games are likely in the back of the queue due to political tension with Korea and the U.S.”

Computer games are engrossing but more importantly the trend of online play creates diverse communities of people that identify with one another outside of racial, class, gender, age or other stereotypes. The banning of the Nei Han Duan Zi jokes site last April was initiated because it offered an outlet for people who laugh at authority and it had become a forum for nonconfirmism. The banning of new computer games was less about protecting childrens’ eyesight and more about controlling social interaction. 

...We're miles and miles from getting a resolution and that shouldn't be too surprising. Trade is complicated. There are lots and lots of issues, not just how many soybeans and how much LNG but even more importantly, structural reforms that we really think are needed in the Chinese economy. And then, even more important than that, enforcement mechanisms and penalties for failure to adhere to whatever we agree to.

People shouldn't think the events of next week will be the solution to all of the issues between the United States and China. It's too complicated a topic. Too many issues. That's different from saying we won't get to a deal. I think there's a fair chance we do get to a deal.

How confident is China in its claims to be a global superpower? That’s the only real question in measuring how likely they are to agree a meaningful trade deal with the USA.

In other words, in the past year, banking-system liquidity has risen by about a fifth, but net credit growth has fallen by about a third. The reason is clear. Shadow finance outstanding fell by a full 10% in 2018—by far the sharpest contraction on record.

Regulators realize they have a problem. They are now trotting out new central bank lending facilities to goad banks into extending credit to small enterprises. And the economy still has some cushions. Infrastructure investment is rising again. Consumers are struggling, but less than headlines would suggest.

Both of these bulwarks aren’t as strong as a couple of years ago—consumers are more indebted and a separate campaign against off-balance sheet infrastructure fundraising is still crimping investment. If the property market falls apart, China will be in serious trouble.

China’s inefficient financial system has long needed surgery. By excising the shadow banking system without a proper transplant to replace it, regulators risk killing the patient.

China’s headline government debt is comparatively small by international standards. However, its private sector debt is larger than the USA’s government debt. By first cutting off access to funding from the state banks, then cutting off shadow banking, then banning US Dollar loans, successive windows for funding have limited access of businesses to capital.

China has offered to go on a six-year buying spree to ramp up imports from the U.S., in a move that would reconfigure the relationship between the world’s two largest economies, according to officials familiar with the negotiations.

By increasing annual goods imports from the U.S. by a combined value of more than $1 trillion, China would seek to reduce its trade surplus -- which last year stood at $323 billion -- to zero by 2024, one of the people said. The officials asked not to be named as the discussions aren’t public.

The offer, made during talks in Beijing earlier this month, was met with skepticism by U.S. negotiators who nonetheless asked the Chinese to do even better, demanding that the imbalance be cleared in the next two years, the people said.

Economists who’ve studied the trade relationship argue it would be hard to eliminate the gap, which they say is sustained in large part by U.S. demand for Chinese products.

On the face of it this is good news because it at least suggests the USA and China are engaging in productive discussions and some initiatives to end of the impasse are being discussed. The stock market continues to unwind the overextension relative to the trend mean as it prices in optimism that a deal with be struck.

China’s double-digit economic growth has slowed recently, but it served to fund several successive defense modernization Five-Year Plans. As international concern over Beijing’s human rights policies stymied the PLA’s search for ever more sophisticated technologies, China shifted funds and efforts to acquiring technology by any means available. Domestic laws forced foreign partners of Chinese-based joint ventures to release their technology in exchange for entry into China’s lucrative market, and China has used other means to secure needed technology and expertise. The result of this multifaceted approach to technology acquisition is a PLA on the verge of fielding some of the most modern weapon systems in the world. In some areas, it already leads the world.

Chinese leaders characterize China’s long-term military modernization program as essential to achieving great power status. Indeed, China is building a robust, lethal force with capabilities spanning the air, maritime, space and information domains which will enable China to impose its will in the region. As it continues to grow in strength and confidence, our nation’s leaders will face a China insistent on having a greater voice in global interactions, which at times may be antithetical to U.S. interests. With a deeper understanding of the military might behind Chinese economic and diplomatic efforts, we can provide our own national political, economic, and military leaders the widest range of options for choosing when to counter, when to encourage, and when to join with China in actions around the world.

China is building aircraft carriers and a daisy chain of military bases from the Persian Gulf back home. No one would engage in that kind of expense unless they wish to project power and protect their interests internationally.

China’s government is turning increasingly to tax cuts as the first line of defense against a slowing economy, as credit data released Tuesday showed some vindication of its gradual stimulus strategy.

Further evidence of the dominance of fiscal measures emerged, as senior policy officials pledged that tax reductions on a “larger scale” are in the pipeline, amid worsening output and trade data. JPMorgan Chase & Co. economists estimate the total impact will be around 2 trillion yuan ($300 billion), or 1.2 percent of gross domestic product.

That’s a departure from the infrastructure binges coupled with massive monetary stimulus that were deployed in the aftermath of global financial crisis. Beijing is trying to put a floor under the economic slowdown without another debt blowout, with some success: Credit growth exceeded expectations in December, and the central bank has managed to curb riskier shadow banking throughout the year.

"At the moment the room for monetary policies is limited, and fiscal policies such as tax cuts are the crucial tool," said Cui Li, head of macro research at CCB International Holdings Ltd. in Hong Kong. The high leverage and property prices have limited the chances of massive monetary stimulus, she said.

"But as a pro-growth measure, tax cuts will take effects at a slower pace compared to infrastructure binges," she said.

The influence of the consumer on China’s economic future is helping to shape the policy response to the slowdown. Consumer spending now makes up a lot more of the economy than it did a decade ago. Meanwhile the consumer is considerably less levered than the corporate and semi-state sectors, so fiscal easing is less likely to create a disruptive bubble in the short term.

Chinese shipments are already under pressure from slowing demand from top trade partners -- Europe’s recovery is under question, with Germany triggering recession fears, Japan is facing a tougher 2019 and the U.S. itself forecast to see waning growth after a robust 2018. China’s exports to the U.S., European Union, Hong Kong, Japan and Taiwan all fell from a year earlier. South Korea’s exports--often viewed as a bellwether for world trade--fell in December.

"There is a clear downward trend," said Zhou Hao, an economist with Commerzbank in Singapore who was among the few to accurately forecast a December contraction in exports. "This is not just due to the trade war and tariffs. On top of those, the major drag is slowing global demand."

While China is no longer as dependent on trade, as the world’s largest exporter, factory output, profits and employment still hinge on demand from overseas. Its domestic appetite also affects production by commodity and machinery exporters around the world. Stabilizing trade is one of the goals the leadership set for 2019, on top of supporting employment, investment and the finance sector.

One of the primary reasons China was so willing to engage in outsized stimulus in response to the credit crisis was because of the impact the loss of demand in the USA and Europe has on the economy. The collapse in the oil price contributed to the loss of demand from the Middle East and other commodity producers. The loss so quickly of its traditional sources of foreign income both resulted in the stimulus and the commitment to support the growth of the domestic economy.

The 40th anniversary of Deng Xiaoping’s opening up of the Chinese economy, and the end-of-year Central Economic Work Conference last month, suggest that Mr Xi is prepared to accede to change but not to anything that threatens China’s core interests. He cannot risk caving in to US pressure. Foreign companies and SOEs will still be required to buy and prioritise locally. Local governments and tech companies are bound to support the security, innovation, and industrial transformation of the state. Industrial policy designed to boost China’s technological and military capacity is not up for negotiation. Changes to intellectual property laws are aimed more at small businesses rather than SOEs and big technology companies. Changes in foreign ownership caps and technology transfer will have to go some way for foreign companies to back away from reconsidering supply chain strategies. So, while we can anticipate some flexibility in the optics of Mr Xi’s negotiating stance, no one really doubts that he is firmly in control, and remains committed to both the Made in China and Belt and Road strategies, which are enshrined in the party’s constitution.

Liu He, Xi’s top economic advisor, turned up at the talks between the US and China today despite the fact they were to be led by mid-level officials. That’s a signal China is taking these negotiations seriously.

The simple fact is that if China wants to achieve its ambitions of becoming a global super power in a military, economic, technological, political and cultural sense it needs to placate the USA today so that it can show its true strength later. That, in fact, was exactly the strategy Deng followed when he advised the Party to hide its strength and just play along with the global economy in opening up.

This may in part be a reaction to the bad PMI data and the equity market sell-off we have seen," said Michelle Lam, a greater China economist at Societe Generale SA in Hong Kong.

“They’re trying to restore market confidence and need to ease credit conditions to boost lending to the private sector and because of high seasonal demand for cash.” China’s manufacturing purchasing managers index fell into the contraction territory last month, the weakest since early 2016. Early indicators for December signal the economic slowdown is deepening, after official data showed industrial production growth was the weakest in a decade and industrial profits fell
for the first time in almost three years in November.

Stimulus Pledge
Chinese financial stocks surged Friday as Premier Li Keqiang visited the nation’s biggest banks and pledged more support for the economy. Li said China will strengthen the scale of its counter-cyclical adjustments of macro policies and further cut taxes, while urging banks to take full advantage of tools including reserve ratio cuts, and to support private and small businesses’ financing needs.

“How much can this help the economy remains to be seen,” said Tao Dong, vice chairman for Greater China at Credit Suisse Private Banking in Hong Kong. “The central bank has been handing liquidity to the banks, but the banks are unwilling to lend. This is a classic case of banking disintermediation amid the
down cycle.”

China’s bank reserve requirements have been cut significantly over the last few years with little sign just yet that the banks are willing to voluntarily take on more risk. That is particularly true for the corporate sector now that defaults are a reality.

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

Further evidence of slowing Chinese growth weighed as a closely-watched manufacturing gauge had its lowest reading since May 2017.

“There are a lot of uncertainties lying ahead,” said Banny Lam, head of research at CEB International Investment Corp. “The markets will likely be stuck in a downtrend over the next few
weeks.”

Property stocks were among Wednesday’s biggest decliners on the Hang Seng Index, with China Resources Land Ltd. and Country Garden Holdings Co. both falling more than 6 percent.

“Some funds are readjusting their positions for the new year and may be dumping stocks in sectors with an uncertain outlook like property and health care,” said Linus Yip, a Hong Kong-based strategist with First Shanghai Securities Ltd. “That’s why we’re seeing a sell-off.

Hong Kong has some of the highest property prices in the world which are a function of extraordinarily low interest rates, abundant and persistent demand from well-heeled mainland residents. Tightening liquidity is a significant threat to that trend persisting while ebbing demand from Chinese residents amid downward pressure on the domestic economy is also a concern.

Many thanks for another great year of top-class service. All the very best for 2019 and beyond. The following article in today's Observer gives on-the-ground evidence of the slowdown in the Chinese economy. 

Thanks for your well wishes, your kind words of encouragement and Happy New Year!

Here is a section from the article:

“People have started to reduce or even stop spending money because they don’t expect the economy will perform well,” said Ye Tan, an independent economist based in Shanghai. “Companies and individuals are wary about the economy.”

Going into 2019, China faces not just a slowing economy but also a protracted trade war with the US, a pile of debt that threatens the world economy along with the Chinese financial system, and a populace demanding better environmental, labour, and health protections.

Next year, China’s leaders face some of the most difficult policy decisions they have had to make in years. Analysts say they are confronting a choice between pushing headline growth through Beijing’s traditional levers of infrastructure spending funded by debt, or painful reforms that lower financial risk but raise the possibility of unemployment, and ultimately social instability.

Officially, China’s economy is humming along. Economic growth is expected to slow to 6.3% next year, after reaching 6.6% in 2018. The economy expanded by 6.5% in the third quarter, the country’s slowest quarter since 2009.

Yet economic indicators from auto sales to manufacturing activity are all flashing red. In November, growth in China’s manufacturing sector stalled for the first time in more than two years. Annual auto sales in the world’s largest car market are on track to contract for the first time since 1990.

China has also said it will suspend additional tariffs on U.S.-made vehicles and auto parts for three months starting on Jan. 1, adding that it hopes both sides can speed up negotiations to remove all additional tariffs on each other’s goods.

Bloomberg, citing two people familiar with the matter, reported on Wednesday that a U.S. trade team will travel to Beijing the week of Jan. 7 for talks.

A person familiar with the matter told Reuters last week that talks were likely in early January.

In yet another reconciliatory sign, China issued on Tuesday a so-called negative list that specifies industries where investors - domestic or foreign - are either restricted or prohibited.

The unified list is seen as another effort to address concern among Western investors that there is no level-playing field in China. Investment in key Chinese sectors, however, is still prohibited.

Gao said China would “comprehensively” remove all market access restrictions for foreign investors by the end of March, in areas not included in a foreign investment “negative” list published in June.

China has a lot more to lose from a trade war than the USA. While it is difficult to get accurate statistics on the health of the economy the simple fact that car sales are declining at a rather rapid pace is a clear signal the Chinese consumer is at least holding off on making purchases. Here is a link to an article from the Wall Street Journal covering the story and here is a section: 

In the frenzy, some companies became complacent, assuming growth would be endless and easy to capture, according to Mr. Gong and other analysts. Then the growth evaporated. Sales grew 3% in 2017 and declined 2% in the first 11 months of 2018.

China now has enough factories to build 43 million cars but will produce fewer than 29 million this year, according to consulting firm PwC. While foreign and domestic auto makers alike find themselves under pressure, the slowdown has hit those that misread the market hardest of all.

Secretary of State Michael Pompeo and Homeland Security Secretary Kirstjen Nielsen said in a statement they were “concerned” that the alleged operation violated a 2015 agreement China made with the U.S. to stop supporting cyber theft of intellectual property and trade secrets.

The indictments against the two, unsealed in federal court in Manhattan on Thursday, underscore one of the primary U.S. grievances in the ongoing trade fight between the Trump administration and Beijing: the systematic theft of U.S. intellectual property and forced technology transfers from companies doing business in China.

Those complaints are a central issue in negotiations U.S. and China are working under a 90-day deadline President Donald Trump and Chinese President Xi Jinping set after agreeing Dec. 1 to halt additional tariffs and trade penalties. Since July, the two countries have imposed tariffs on a combined $360 billion in each other’s imports, a bruising conflict could undermine the global economy at a time when growth is leveling off.

The hackers, known in the cybersecurity community as Advanced Persistent Threat 10, stole information from companies in an array of industries, including banking and finance, telecommunications, biotechnology, automotive, health care and mining, according to the indictment.

The group hacked the U.S. Navy, making off with the personal data of more than 100,000 personnel, and successfully infiltrated computers linked to NASA’s Jet Propulsion Laboratory, the indictment said. Zhu and Zhang were indicted in abstentia.

Industrial espionage has been a major part of China’s technological evolution policy for the last decade and longer. In fact the data collection underway has been on a scale that dwarfs that of any other country with the possible exception of the USA itself. Here is a link to an article from the New York Times highlighting how China has been listening to European diplomatic communications for years. Here is a section:

Unlike WikiLeaks in 2010 or the Russian hack of the Democratic National Committee and other Democratic Party leaders in 2016, the cyberattack on the European Union made no effort to publish the stolen material. Instead, it was a matter of pure espionage, said one former senior intelligence official familiar with the issue who spoke on the condition of anonymity.

It also displayed the remarkably poor protection of routine exchanges among European Union officials after years of embarrassing government leaks around the world.

In this case, the cables were exposed after a run-of-the-mill phishing campaign aimed at diplomats in Cyprus pierced the island nation’s systems, said Oren Falkowitz, the chief executive of Area 1.

“People talk about sophisticated hackers, but there was nothing really sophisticated about this,” Mr. Falkowitz said. After getting into the Cyprus system, the hackers had access to passwords that were needed to connect to the European Union’s entire database of exchanges.

Area 1’s investigators said they believed the hackers worked for the Strategic Support Force of the People’s Liberation Army, part of an organization that emerged from the Chinese signals intelligence agency that was once called 3PLA.

Expectations that Xi’s speech would give stocks a boost (or at least, prevent a sell-off) were thwarted, and since “nothing special” was announced, Asian shares are following the overnight sell-off in the U.S., said said Castor Pang, head of research at Core Pacific-Yamaichi International HK.

Francis Lun, chief executive officer of Geo Securities, agreed. Investors were disappointed by the speech as they had been expecting some comments on economic stimulus or the further opening-up of the Chinese economy, he said. “But he didn’t mention it. That’s why A shares dropped 1 percent and also dragged down Hong Kong stocks.”

Xi Jinping doused hopes he would be a reformer by denouncing Deng’s policy of hiding the nation’s strength and playing nice with the international community. Instead he has asserted China’s intention to be more assertive internationally, to become independent of the Dollar’s patrimony and to become independent technologically.

They would be pricing in various economic realities: the slowing rate of U.S. economic growth, the U.S. government's exploding debt, the diminished Treasury revenue caused by the 2017 tax cuts, and the Fed's pursuit of a monetary policy keeping rates well above their average for the decade.

Investors see growth slowing, and it shows. Extreme fluctuations in the stock and bond markets the past month reflect investor anxiety over the transition from a brightening economy to the creeping sense that the best of this cycle has come and gone.

U.S. government debt is also moving in the wrong direction. Since 2016, when the federal budget deficit as a percentage of gross domestic product declined to a decade-low of 2.2 percent from more than 10 percent in 2009, the deficit nearly doubled to almost 4 percent. GDP increased to a record $19.39 trillion at the end of 2017 as the annual rate climbed to 2.2 percent from 1.8 percent in 2007. But U.S. growth will deteriorate to an annualized 1.9 percent by 2020, according to economists surveyed by Bloomberg, putting more pressure on the widening deficit. Revenue isn't stepping in to close that gap. The Trump tax cuts are estimated to increase these deficits by $1 trillion during the next 10 years.

China can borrow at cheaper rates than the USA right now. Is that a big contrary indicator or is it the shape of things to come?

There’s still no official statement from Beijing that the deal reached Saturday to not raise tariffs is only for a 90-day period and is dependent on the outcome of talks. China’s government has been slow to formulate its response to the summit as senior officials were still out of the country with Xi,
Bloomberg News reported.

The Global Times is affiliated with the state-run People’s Daily, and published a separate Chinese-language editorial on Tuesday noting that the U.S. had made no mention of Beijing’s “Made in China 2025” plan in any statements after the Xi-Trump meeting, nor criticized China’s industrial policy. China’s government has yet to issue official comment on those details.

The day after Xi and Trump met, the WeChat account of the People’s Daily’s overseas edition published an article detailing some of what was discussed at their talks. The article was by Mei Xinyu -- a researcher at a think tank under the Ministry of Commerce -- and cited a White House statement.

It explained that China and the U.S. had agreed to work together on issues including widening market access, protecting intellectual property rights, avoiding forced technology transfers and jointly fighting against cyber theft.

The China Daily also published a commentary on Tuesday noting the 90-day period, explaining it was a truce and saying the U.S. would likely escalate the trade war if no permanent deal was achieved.

If we look at history, all emerging economies have engaged in some form of industrial espionage. China is bigger than other emerging market in terms of both population and market scope and likewise its concerted effort to acquire know-how by any means necessary has been epic in scale. A true signal China has all it needs in terms of technology expertise, as well as having the confidence that it can innovate on its own quickly, would be if did in fact start to uphold intellectual property rights. Quite whether that would be good or bad news is something I suspect has not yet been debated in government circles.

For the economic reasons discussed here, the most likely outcome was in the middle of that range: a cease-fire with a pathway to a more decisive de-escalation of tensions – or, to use a recent historical parallel, an agreement similar to the one that followed the White House visit of EU President Jean-Claude Juncker in July. And that is what materialized, with the important addition of a three-month deadline for progress.

At the end of almost three hours of what the White House called “highly successful” discussions, the U.S. agreed to refrain for 90 days from implementing additional tariffs on $200 billion of imports from China. In return, China promised to use the time to make progress in three areas of concern to the U.S. and other countries: relaxing an array of nontariff barriers, including joint-venture requirements, that result in forced transfers of technology, operational models and other proprietary information and business practices; combatting intellectual property theft and other cyber interferences; and reducing the bilateral trade surplus by importing “very substantial” quantities of certain goods from the U.S.

The G-20 ended as expected with smiles all round but with not a great deal to report other than a hiatus in the trade war and commitment to go back to talks. There is a little chance of China making anywhere close to the concessions demanded of the USA so it is quite likely the market will be back on tenterhooks by the time late January comes around.

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

By this stage subscribers much be wondering why I am posting so many reports that express a bearish view. The simple fact of the matter is I am reposting these reports in an effort to highlight the fact that the last time my inbox was so filled with bearish reports was in the immediate aftermath of the credit crisis.

It seems that the one thing every analyst has learned from the credit crisis is to be hyper alert to any sign of trouble lest they miss out on calling the next big decline. It occurs to me that the investment community is falling into the trap of fighting the last war all over again, even though we are now in uncharted territory in terms of both monetary policy and the quantity of debt outstanding.

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.

Let me first set up the background; I believe we are in a secular bull market that will not peak for at least another decade and potentially twice that. However, it also worth considering that secular bull markets are occasionally punctuated by recessions and medium-term corrections which generally represent buying opportunities.

2018 has represented a loss of uptrend consistency for the S&P500 following a particularly impressive and persistent advance in 2016 and 2017. Many people are therefore asking whether this is a medium-term correction or a top. There is perhaps no more important question so let’s just focus on that for the moment.