Thu, 26th May 2016

Anirudh Sethi Report


Archives of “china” Tag

Moody’s downgrades Macau sovereign debt rating

Moody’s has downgraded its rating for sovereign debt issued by the Chinese territory of Macau on concerns about the Asian gaming centre’s weakening economy.

The ratings agency lowered Macau’s government issuer rating from Aa2 to Aa3 and assigned a negative outlook for the Chinese special autonomous region, citing uncertainty surrounding its growth and capacity for policy response, in addition to a falling fiscal and current account surpluses.

While Macau’s revenues have suffered extensively since the launch of mainland China’s anti-corruption campaign, its credit rating outlook had remained stable until now. The agency also lowered Macau’s long-term foreign currency bond ceiling to Aa2 from Aaa.

Moody’s said Macau’s growth “remained highly volatile,” which, coupled with a limited policy response to falling gaming revenues, had left its credit profile weaker than other governments with credit ranked Aa2.

Our expectation of a decrease in gaming revenues this year and next suggests that Macao’s economic, fiscal and external metrics will likely weaken considerably from prior robust trends. This puts overall sovereign credit risk at levels more consistent with a Aa3 rating.

The agency left the door open for revising its outlook back to stable “upon evidence that a growth recovery will endure over the medium term, and fiscal and external buffers are likely to remain intact.”

ALERT- China Furious After US Launches Trade War With 522% Duty

Now that China’s brief infatuation with “rationalizing” excess capacity in its massively glutted (and insolvent) steel sector is over after lasting all of 2-3 months, China is back to doing what it did in late 2015 (and what it has always done) when as we reported, a surge in Chinese exports led to the first salvos in the trade war between China – the world’s biggest exporter of various steel products and is responsible for half the entire world’s steel output – and countries who are importing dumped Chinese products at the expense of their own steel and mining industries.

Nowhere has this trade tension been more obvious than in the UK, where in recent months angry, protesting steel workers have been demanding rising protectionist steps against a country they, rightfully, see as unleashing a global commodity deflation driven by out of control, and unprofitable by highly subsidized, production by Chinese steel mills.

The US was not left unscathed: we reported in December that “The Trade Wars Begin: U.S. Imposes 256% Tariff On Chinese Steel Imports” and since then things have progressively turned worse, finally culminating overnight with an outburst of anger from Chinese officials who, after attempting to flood not just the US but also the entire world with their commodity in general and steel in particular, exports…

China’s Debt Bomb: No One Really Knows The Payload

No one knows if it’s a hand grenade or a nuclear warhead…

The ramp up in Chinese debt accumulation has been a leading concern of investors for years. The average total debt of emerging market economies is 175% of GDP, and skyrocketing corporate non-financial debt has launched China far beyond that number.

The real question is: by how far?

The answer is disconcerting, as VisualCapitalist’s Jeff Desjardins warns, because nobody really knows.

If the Chinese debt bomb is detonated, the impact on markets is anybody’s guess. Kyle Bass says the losses would be 5x that of the subprime mortgage crisis, while Moody’s says the bomb will be safely disarmed by authorities far before it goes off.

In today’s chart, we look at various estimates to the size of China’s debt bomb, its payload, and what might spark the fuse…

China has deployed more troops near Indian border, says Pentagon

China has increased defence capabilities and deployed more troops along the Indian border, the Pentagon has said, as it warned of increasing Chinese military presence including bases in various parts of the world, particularly Pakistan.

“We have noticed an increase in capability and force posture by the Chinese military in areas close to the border with India,” Deputy Assistant Secretary of Defence for East Asia Abraham M Denmark told reporters during a news conference here after Pentagon submitted its annual 2016 report to the US Congress on ‘Military and Security Developments Involving the People’s Republic of China’.

 However, Denmark said it is difficult to conclude on the real intention behind this.
“It is difficult to say how much of this is driven by internal considerations to maintain internal stability, and how much of it is an external consideration,” he said in response to a question on China upgrading its military command in Tibet. Referring to US Defence Secretary Ashton Carter’s recent trip to India, Denmark said he had a very positive and productive visit. “We’re going to continue to enhance our bilateral engagement with India, not in the China context, but because India is an increasingly important player by themselves and we are going to engage India because of its value,” he said.

ALERT- Moody’s on China – debt has increased to around 280% of GDP

Reuters reporting on Moody’s China commentary:

  • Many sovereigns, including China, are exposed to contingent liability risks from the banking system and state-owned enterprise debt
  • “Across all sectors, debt in China has increased to around 280% of GDP”
  • In china, estimates that portion of SOE liabilities that could potentially require restructuring amounts to 20-25% of GDP
  • Believes that without reform of state-owned enterprises in China, contingent liabilities would likely rise

Some bearish commentary from Moody’s on China.

Bank of China ekes out 1.7% profit growth in Q1 (Net Income for qtr $ 7.2 billion )

Profit growth at Bank of China — one of the country’s big four state-owned banks — remained lacklustre in the first quarter, continuing a trend from last year when lenders had to weather a year of central bank rate cuts, jitters over the strength of the Chinese economy and rising bad loans.

Net income at the bank, which earlier this year warned the Chinese economy is at a“critical juncture”, edged up by 1.7 per cent in the first quarter to RMB46.6bn ($7.2bn).

Analysts have been warning that an era of easy profits for Chinese banks is drawing to a close, with Chen Long of research group Gavekal Dragonomics saying last month:

The headwinds that Chinese banks face will last for a long time.

In addition to lower sources for profit, they will also have to prepare themselves for losses on bad loans.

ALERT : China clamps down on commodities fever

China moved to clamp down on excessive speculation in commodities on Monday after weeks of frenzied trading boosted prices and ignited fears of another bubble in its domestic markets.

Activity on China’s largest commodity exchanges has surged in recent days with turnover in key steel contracts exceeding the combined volume of the Shanghai and Shenzhen stock exchanges on one day last week.

Investors around the world have zeroed in on the latest trading binge as the prices of many commodities have risen sharply, with iron ore gaining almost a third in just two weeks. Cash has started to flow into raw materials in part because Chinese officials imposed curbs on equities trading last year.

“China’s latest speculative spike has stunned global markets,” said Tom Price, a Morgan Stanley analyst.

Shanghai steel futures have risen more than 50 per cent this year and more than a fifth this month. Iron ore traded on the Dalian Commodity Exchange hit its highest level since September 2014 last week.

The surge led the country’s largest commodity trading venues — the Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodities Exchange — to curb activity by lifting transaction costs, margins and daily trading limits on some contracts.

ALERT : China wants laws to regulate ratings agencies

Shanghai Securities News reports (via MNI) on a comment piece from State Information Center researcher Cheng Weili

  • China needs to introduce laws to regulate international ratings agencies
  • Accuses them of using ratings mechanism to create trading opportunities
  • Ratings actions too subjective & suspicion of manipulation
  • Said ratings companies had failed to previously warn of large bankruptcies and past financial crises
MNI helpfully add … Cheng’s comments came after Moody’s and Standard & Poor’s lowered China’s sovereign credit outlook from stable to negative in March.
Yes, quite.

China delayed release of GDP numbers that show growth was slower

If you were around in the pre-Doha world (i.e. last Friday) you would have seen the Chinese Q1 GDP data

What you didn’t see, though, was the q/q GDP growth data. That was delayed and only released more than 24 hours later
That piece of the puzzle came in at 1.1%, which is the slowest since the government started releasing seasonally adjusted quarterly figures in late 2010
Says the WSJ:
  • Economists like quarter-over-quarter GDP because it gives a better sense of an economy’s current direction than year-over-year
  • Convert that 1.1% quarterly figure into annualized terms, and it implies a GDP growth rate of 6.3%, quite a bit slower than the headline 6.7%.
  • In the past these two figures have matched quite closely
  • The 0.4-percentage-point variance is the largest on record

Shadowy tax havens inflame Chinese power struggle

Power struggles in communist China always play out behind the scenes in the form of nasty life-or-death party infighting.

     The political saga that has evolved around President Xi Jinping the past few years or so is no exception. 

     Since being inaugurated, Xi has wielded a sweeping anti-corruption campaign against political foes.

Zhou Yongkang

     Many influential figures, including Zhou Yongkang, have fallen victim to Xi’s anti-corruption drive. Zhou is a former member of the Politburo Standing Committee, the Chinese Communist Party’s top decision-making body.

     Bo Xilai, Zhou’s highly ambitious and flamboyant ally and a former party chief in the city of Chongqing, was purged while Xi was still preparing to take over from Hu Jintao.

     Xi became the Chinese Communist Party’s general secretary in the autumn of 2012. He then assumed the country’s presidency in the spring of 2013.