Another day, another record low for the Baltic Dry Index, which tells you a lot about shipping but not much about anything else. (No, the world isn’t going to end.)
The index, which tracks the price of shipping bulk commodities like coal and iron ore, is falling for the 21st straight day
It has dropped below the 500 mark for the first since it started in 1985, shining a light on the relentless pain of the dry bulk shipping industry, which has been rocked by overcapacity and the slowdown in the Chinese economy.
The index used to be brandished as a proxy for global trade growth, but the problem of dry bulk overcapacity is currently severe enough to outweigh any acceleration in trade.
Chinese growth has slowed this year, with the third quarter slipping to its weakest in six years. This has sapped the key source of demand for dry bulk ships.
But while demand has ebbed, supply has continued to surge. Ships ordered several years ago, when China’s economy was growing at breakneck pace, are only just coming onto the market.
Overnight we got the credit data out of China, I’ll just clarify what it was as a typo on site has it wrong by an order of magnitude; and I’ll give a few words on what it means, why its important and its impact on the yuan fix.
This data was expected this week, but the timing was unknown. We got it last night:
October new yuan loans, 513.6bn (a huge miss)
expected 800bn, prior was 1050bn (yuan amounts)
Aggregate financing RMB for October, 476.7bn (a huge miss)
India is quietly assuming the mantle of fastest-growing major emerging-market economy, but it is too small on economic parameters to replace China as a new global growth locomotive, a new report says.
According to global financial services firm BNP Paribas, the hope that India can replace China as a key locomotive of global demand is “misplaced”.
China posted a 6.9 per cent GDP in the third quarter of this year to register its weakest growth since the 2009 global financial crisis. India is projected to grow faster than China in the near future.
As per Moody’s Analytics, India’s GDP grew in September quarter by 7.3 per cent, while for the full fiscal it would be 7.6 per cent. India’s GDP grew by 7.3 per cent in FY15.
“Those hoping that a more buoyant India can effectively replace the ailing Chinese economy as a new global growth locomotive are likely to be disappointed, however, at least for the foreseeable future,” BNP Paribas said in a research note.
China’s Naval Commander, Admiral Wu Shengli, has warned the US Chief of Naval Operations, Admiral John Richardson, that any “dangerous, provocative acts” of the US Navy could spark war in the South China Sea.
“If the United States continues with these kinds of dangerous, provocative acts, there could well be a seriously pressing situation between frontline forces from both sides on the sea and in the air, or even a minor incident that sparks war,” Reuters quoted a Chinese naval statement as saying following a video teleconference between the admirals on Thursday.
“I hope the US side cherishes the good situation between the Chinese and US navies that has not come easily and avoids these kinds of incidents from happening again,” Wu said.The two naval officers held talks after a US warship sailed within 12 nautical miles of one of Beijing’s man-made islands in the contested Spratly archipelago on Tuesday despite repeated warnings from China that such overt action would be taken as a deliberate provocation in an already strained relationship between the two countries.
Both officers agreed on the need to stick to protocols established under the Code for Unplanned Encounters at Sea (CUES).
“They agreed that it’s very important that both sides continue to use the protocols under the CUES agreement when they’re operating close to keep the chances for misunderstanding and any kind of provocation from occurring,” Reuters quotes one US official as saying.
Admiral Wu Shengli said he believed the Chinese and US navies had plenty of scope for cooperation and should both “play a positive role in maintaining peace and stability in the South China Sea”.
Several days ago, Citi announced that it “expects the upcoming IMF review (scheduled for early-November) will probably lead to China’s inclusion in the SDR basket from late-2016. But we expect that the CNY will over time weaken versus the USD either way — either because of a poor outcome from SDR review or (if China joins the SDR) because of gradual (and limited) FX liberalization.”
While it remains to be seen just how negative the impact on the CNY would be as a result of any possible SDR inclusion, and the definition of China’s currency as a reserve currency, it now appears virtually assured that the IMF will include the CNY in its SDR basket, “validating efforts by President Xi Jinping to push through policies aimed at making the world’s second-biggest economy more market oriented, boosting China’s prestige as it prepares to host Group of 20 gatherings next year.”
Just a few short weeks after The IMF appeared to snub China by delaying its decision on Yuan inclusion in the SDR basket, Bloomberg reports that Otaviano Canuto, executive director at the IMF for 11 countries including Brazil, said “prospects for approval seem to be favorable,” adding that the story “is going in the direction of the renminbi becoming a necessary component of the SDR.” China is taking that as a ‘yes’ and is preparing statements celebrating IMF SDR approval.
International Monetary Fund representatives have told China that yuan is likely to join the fund’s basket of reserve currencies soon, according to Chinese officials with knowledge of the matter.
IMF has given Chinese officials strong signals in meetings that yuan is likely to win inclusion in current review of Special Drawing Rights, said three people who asked not to be identified because talks were private
Chinese officials are so confident of winning approval that they have begun preparing statements to celebrate the decision, according to two people
Board has requested that IMF staff members look into some operational challenges of including yuan in the basket, such as ability of fund’s 188 member nations to quickly convert SDRs into yuan, according to another person familiar with the matter.
“We realize that although we’ve done a lot, it’s really first up to the staff, and second up to the board, to make a final judgment,” Jin Zhongxia, China’s representative to the IMF executive board, said in interview Friday. “We have to fully respect their decision”
Capital outflows from China topped $500bn in the first eight months of this year, according to new calculations by the US Treasury that highlight the shifting fortunes in the global economy.
The outflows, which peaked at some $200bn during the turbulent month of August according to the new estimates released on Monday, have also contributed to a shift by Washington in its assessment of the valuation of China’s currency, the renminbi
In its latest semi-annual report to Congress on the global economy, the US Treasury dropped its previous assessment that the RMB was “significantly undervalued”.
Instead, the Treasury opted to declare that the Chinese currency “remains below its appropriate medium-term valuation”.
The move reflects the cautious welcome that the Obama administration has given Beijing’s efforts in recent months to prop up the renminbi since announcing August 11 that it would allow a greater role for the market in setting the currency’s exchange rate.
In just three months – July, August and September – the People’ Bank of China spent a total almost $230bn to support the currency, the US Treasury said.
China is bracing for its second bond default by a central government-owned company, offering one of the biggest tests yet of Beijing’s willingness to impose market discipline on lossmaking state groups.
A unit of one of the elite club of 112 big enterprises directly owned by the central government, China National Erzhong Group employed a workforce of more than 13,000 in 2012, when it had assets of Rmb25bn. But a slowing economy saddled with industry overcapacity has hobbled the heavy industry group, leading to losses of Rmb8.4bn in 2014.
Its looming default comes just a week after Beijing unveiled guidelines for an overhaul of state-owned enterprises aimed at improving their financial performance. SOEs control broad swaths of the economy but are heavily indebted and trail their privately owned counterparts in efficiency and profitability.
China National Erzhong Group, which makes smelting and forging equipment for use in the power generation and aviation sectors, is a case in point. A subsidiary was delisted from the Shanghai Stock Exchange in May after four straight years of losses.
“Under the influence of the macroeconomic environment, the demand for the company’s main products remains depressed, and our industry is suffering from severe overcapacity, making competition unusually fierce and causing the price of our products to slide lower,” Erzhong said in a filing late on Monday.
The company suspended trading of Rmb1bn in five-year notes sold in 2012, citing “uncertainty” about whether it could meet a Rmb56.5m ($8.9m) interest payment due next week.
Chinese businesses are increasingly investing in the U.S. The amount invested rose to a record high in the first half of this year, thanks largely to the real estate and financial sectors.
Of course, there are no guarantees that the growth will continue. Washington is believed to be preparing to impose economic sanctions on China, in retaliation for a series of cyberattacks on the U.S., which suspects Chinese government involvement.
According to Rhodium Group, a U.S.-based research firm, Chinese investment in the U.S. for the first six months this year came to $6.35 billion, a 51% jump from a year earlier. Of the 88 direct investment deals in acquisitions and investments in factories and other facilities, the biggest was the purchase of the renowned Waldorf Astoria hotel in New York, worth $1.95 billion, by Anbang Insurance Group.
Commercial properties and hotels were the major target of the Chinese acquisitions. The financial and insurance sectors followed. During the period, Fosun International acquired a 20% stake in U.S. insurer Ironshore. Billionaire Guo Guangchang, who heads the Shanghai-based conglomerate, is known to be an admirer of Warren Buffett.
Investment in information technology has also remained positive, including deals by internet giants, such as Alibaba Group Holdings and Tencent Holdings, as well as venture capitalists. These businesses tend to buy IT startups.
Over the last 20 years, the world economy has relied on the Chinese economic growth engine more than it would like to admit. The 1.4 billion people living in the world’s most populous country account for 13% of global GDP, which is significant no matter how it is interpreted. However, in the commodity sector, China has another magnitude of importance. The fact is that China consumes mind-bending amounts of materials, energy, and food. That’s why the prospect of slowing Chinese growth is likely to continue as a source of nightmares for investors focused on the commodity sector.
China’s economic structure trending to positive direction
H1 jobs data proves China growth in reasonable range
China will promote reform and restructuring
China will also enhance targeted control
China is prepared to take pre-emptive measures
Now we’ve had the story on China changing the way they calculate GDP, we should keep our ears open for any subtle changes in rhetoric from China’s bigwigs. So far we’ve had a couple of remarks on this “downside pressure”