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Sat, 25th March 2017

Anirudh Sethi Report

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Archives of “Economy of the People’s Republic of China” Tag

Apple CEO Tim Cook calls for more global trade with China

Apple Chief Executive Tim Cook expressed support for globalisation and said China should continue to open its economy to foreign firms, while speaking at a forum in Beijing on Saturday.

“I think it’s important that China continues to open itself and widens the door if you will,” said Cook, speaking at the government-sponsored China Development Forum.

 Cook’s comments come amid rising tensions between the U.S. and China, with protectionist rhetoric from U.S. President Donald Trump sparking concern of increased trade friction between the two countries.

“The reality is countries that are closed, that isolate themselves, it’s not good for their people,” said Cook, in a rare public speech.

Apple said on Friday it will set up two new research and development centres in Shanghai and Suzhou in China.

It has pledged to invest more than 3.5 billion yuan ($508 million) in research and development in China.

Apple has been singled out in Chinese media as a potential target for retaliation in the event of a trade war.

The Global Times warned last November if Trump triggered a trade war with China, Beijing would then target firms from Boeing to Apple in a “tit-for-tat” approach.

China claims transparency on defense spending in its budget

Apart from saying its military budget will grow “roughly 7%” this year, China dropped no more hints on how much it was planning to spend on defense and foreign affairs amid rising tensions on both sides of the Pacific.

In the budget, the item “national defense” is substantiated by a guiding principle devoid of specific figures, while “foreign affairs” as an accounting item is not mentioned in the report.

 The Ministry of Finance said in the English version of the document that the department will ensure adequate funds to support China’s aim of “building a solid national defense and strong armed forces that are commensurate with China’s international standing and are suited to our national security and development interests.”

The two figures are usually disclosed in the country’s most important political event known as the “Two Sessions” every March, where its rubber-stamp legislature National’s People Congress and advisory Chinese People’s Political Consultative Conference converge.

Despite that, state mouthpiece Xinhua said on Monday that China’s total military budget for 2017 is 1.044 trillion yuan ($151.4 billion), citing an official at the Ministry of Finance. This compares with last year’s 954.35 billion yuan.

Premier Li Keqiang’s state-of-the-nation address and budget announcement on Sunday was the first time in decades that specific spending figures were not mentioned.

Trump takes the world on a wild trade ride

Anyone who has taken their children to Disney world in the U.S. has felt the pressure to go on “Mr. Toad’s Wild Ride.” Based on the character from the children’s classic, “The Wind in the Willows,” Mr. Toad is the reckless scion of the largest building in the forest, Toad Hall. Fabulously wealthy, he buys a car to impress his friends, although he has no idea how to drive. He loads his companions into the vehicle, liberally honking the horn as he careens on a path of destruction, heedless of the damage he does and exhilarated by the fear he engenders.

U.S. trade policy is now on “Mr. Toad’s Wild Ride,” with the difference being that the Disney version ends where it began, with no harm done. The Trump administration’s lack of predictability and indifference to global risk is the new normal. Nowhere does President Donald Trump’s trade policy carry a greater risk than in the interplay of the world’s two largest economies, the U.S. and China.

 Out of disbelief or disorientation, markets have examined the Trump challenge to U.S.-China trade and concluded it is manageable. That conclusion ignores the consequences of a decisive turn in U.S. policy toward Trump’s version of “America First” isolationism and trade protection, coupled with his apparent animosity toward China and his failure to view the relationship within a wider context.  Further, it rejects the belief that the direction of Trump’s China and trade policy is real and durable, even though it was central to the argument that won him the presidency. 

Even before he seeks new legislation from Congress, Trump has an impressive range of options in dealing with Chinese trade issues. These include:

– Imposing tariffs on all Chinese imports.

Japan resurfaces as No. 2 contributor to US trade deficit

Japan accounted for $68.9 billion of the U.S. trade deficit on goods in 2016, re-emerging as the second-largest contributor for the first time in three years for a potential flashpoint when the leaders of the two nations meet Friday.

The overall U.S. trade deficit on goods shrank by 1.5% to $734.3 billion last year on a Census basis, according to Department of Commerce data released Tuesday. Exports fell 3.2% to $1.45 trillion on a strong dollar, but imports decreased 2.6% to $2.18 trillion.

 The country logged a $247.8 billion surplus on services, bringing the overall U.S. trade deficit to $502.3 billion on a balance of payments basis.

The goods deficit with Japan remained roughly flat and accounted for 9% of the U.S. total. The deficit on motor vehicles and parts — an area in which President Donald Trump claims Japan engages in unfair practices — jumped to $52.6 billion from $48.9 billion in 2015, making up nearly 80% of the total American deficit with Japan.

Japanese automakers are increasing production in North America. But cars sold from Japan to the U.S. tend to be higher-end models, and the average price per unit is rising.

China was the top contributor to the U.S. trade deficit on goods, accounting for $347 billion, or 47%. Germany ranked third and Mexico fourth. Trump, seeking to curb the deficit, has accused Japan, China and Germany of manipulating their currencies. The president also demands a renegotiation of NAFTA with Mexico.

China press (Xinhua): “China collapse” would be good for no one

A commentary piece in Xinhua that outloines current challenges facing the Chinese economy:

  • Such as a weak global recovery, rising trade protectionism, domestic debt overhang & excess capacity
But still, it says:
  • China’s contribution to world growth in 2016 is again poised to top that of all other countries, exceeding the figure for all developed economies combined
  • The IMF has projected China’s growth to be 6.6 percent with global growth at 3.1 percent in 2016
  • However, China’s growth last year appears set to hit 6.7 percent
It concludes with a projection on growth at 6.5%
( Xinhua News Agency is the official press agency of China, it is a ministry-level institution subordinate to the central government and its head is a member of the Central Committee of China’s Communist Party.)

China’s FX reserves end-Dec USD 3.011trln vs USD 3.052trln prev

Chinese FX reserves data published a short while ago 7 Jan

  • total reserves now near 6-year lows
  • gold reserves USD 67.878bln vs 69.785bln prev
  • gold reserves 59.24mln troy oz vs 59.240mln prev

A drop in reserves of $41bln, albeit less than the $51bln expected versus a $69bln drop in November and the 6th straight month of declines.

The PBOC has now been forced to reduce its reserves by half a trillion USD since Aug 2015 after it devalued the yuan in a surprise move.

Plenty of fun and games this past week for the offshore and onshore yuan with o/n depo rates surging above 95% at one point.

Yesterday the PBOC hiked CNY by the biggest amount in 11 years vs USD and the onshore pair closed at 6.9230. The Chinese MOFCOM also had this to say on outflow curbs.

These Are Barclays’ 13 Commodity “Black Swan Threats” For 2017

In a special report by Barclays’ Michael Cohen, the analyst lays out what he believes are the 13 commodity “black swan threats” for the current year, divided into two “shock” categories: supply and demand, split evenly between bearish and bullish.

Investors, Barclays warns, will have to balance the risks of unforeseen macroeconomic shocks and their effect on demand (bearish price) with potential geopolitical shocks disrupting the supply side of the market (bullish price). A tightening commodity inventory picture, especially in oil, will likely exacerbate how the market prices supply risks even if no physical supply disruption occurs.

The potential threats, which range from a trade war with China, to a default in Venezuela, to riots in Chile, all have a common denominator: politics: “we assess several black swan threats to the supply, demand, and transit of commodities that could potentially move markets in 2017. Our analysis illustrates an important point: politics are likely to matter just as much as economics” and not just any politics: “in particular, the new politics of populism and protectionist trade policies have the potential to disrupt global supply and demand assumptions for various commodities.”

Those who have been following Trump’s twitter feed are all too aware of this.

While we realize the futility of “identifying” black swans in advance, something which is by definition impossible, nonetheless here is what Cohen warns:

In 2016, few people predicted a Trump election or Brexit, not to mention that the Chicago Cubs would win the World Series or that Leicester City would take the Premier League title. And commodities markets were not without their own set of surprises as well. OPEC cut production with non-OPEC countries for the first time in 10 years. Weather whipsawed natural gas, and Trump’s election inspired a late metals complex rally on the basis of hopes for new infrastructure spending. In fact, when all was said and done, 2016 was a pretty good year for commodities, with the asset class posting its first annual advance since 2010.

Commodity market black swan events come in many forms, and the market may take years or an instant to price them in. Technological innovation caused the US shale gas revolution, the Great Recession caused structural demand destruction, while geopolitical strife has disrupted commodity supplies overnight. We all know that markets will surprise in some fashion in 2017, so we attempt this review to shine  a spotlight on the specific commodity market risks that clients should watch.

Where could the surprises come from: “Watch these spaces: China, Russia, the Middle East and Turkey are likely to surprise the commodity complex in 2017.”

Below is the summary list of the proposed “black swans”

Breaking down the list, Barclays says that generally “it sees risks skewed to the upside in 2017, based on several supply-side risks.”

Given the scenarios laid out below we view supply driven disruptions in 2017 as being more likely than demand side Black Swan events. Although commodity price disruptions may mean higher prices in the short-term there is a risk they result in lower medium-long-term prices. A supply disruption that results in a higher futures curve could result in the sanctioning of new projects or increased producer hedging activity, eventually putting downward pressure on prices in the long-dated contracts. There are, of course, supply-side risks that would be bearish for the market as well, such as higher production from Libya or the Neutral Zone.”

Demand events less likely but more structurally impactful. Given the relative liquidity in global commodity markets we see supply related outages being shorter in duration compared to potential demand side risks. We see demand side events, such as those driven by economic weakness, as less likely but events that would have a longer term structural impact on commodity prices to the downside.

As noted above, the two big categories laid out by Barclays are as follows:

People’s Bank of China sets yuan reference rate at 6.9526 (vs. yesterday at 6.9498)

CNY mid rate for the day, little bit weaker for the yuan

Open  market operations (OMOs):
  • inject  10bn yuan via 7-day reverse repos
  • inject  10bn yuan via 14-day reverse repos
Small injections (which mean today is a net drain); watch for more stress in HK yuan borrowing markets today. Yesterday saw surging rates for overnight (and longer) yuan borrowing. Likely we’ll see the same again today.
By limiting injections into money markets the People’s Bank of China makes borrowing yuan more expensive and therefore shorting yuan more expensive. The PBOC is trying to discourage yuan shorts. 

Bitcoin Surges Above $1,000 As China Unveils New Capital Controls

As noted yesterday, for the first time in three years, and only the second time in history, bitcoin rose above $1,000 in Yuan-denominated Chinese trading, however it was limited to the lower side of this “round number” psychological barrier in US trading, as BTC flirted with $999.99 for most of the day on the popular Coinbase exchange, without crossing it.

Overnight, however, Chinese demand proved too great and US markets had no choice but to arb the difference. So with Bitcoin trading in China at an implied price of over $1,050 at this moment, bitcoin finally soared above $1,000 in the US as well, trading just around $1,024 on Coinbase as of this moment.

 

PBOC sets USD/CNY central rate at 6.9435 (vs. yesterday at 6.9489)

Little change for the People’s Bank of China yuan reference rate today

In open market operations:
  • to inject 100 bn yuan via 7-day reverse repos
  • to inject 70 bn yuan via 14-day reverse repos
  • to inject 50 bn yuan via 28-day reverse repos