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Wed, 24th May 2017

Anirudh Sethi Report

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

Nasdaq’s “Big 5” Stocks Near $3 Trillion Market Cap

Since President Trump was elected – much to the heart-crushing chagrin of the billionaire class in Silicon Valley and its epic funding of Hillary – the big 5 stocks of the Nasdaq (Alphabet, Amazon, Apple, Facebook, and Microsoft) have gained a stunning $675 billion in market cap.

This pushes them near $3 trillion and well over 10% of the entire US equity market…

For context, Bloomberg notes that is more than the total value of stocks in any single equity market worldwide except the five largest: the U.S., China, Japan, Hong Kong and the U.K.

China Reserves Jump Most In 3 Years to $ 3.03 Trillion

In all the drama surrounding the French elections, few noticed the PBOC’s announcement that China’s FX reserves rose for the third straight month in April, increasing by $20.45 billion to $3.03 trillion, more than the $11 billion expected and the single biggest monthly increase in three years going back to April 2014, on the back of a weaker dollar and increasingly more draconian capital controls on outflows.

Cited by the WSJ, some economists attributed April’s increase to a dollar that continued to decline in the past month especially after Trump said the U.S. currency “is getting too strong.” The value of other currencies in China’s reserve basket, including the euro, the British pound and Japan’s yen, similarly played a significant role in the rise, said Yan Ling, an economist with China Merchants Securities.

Besides USD softness (USD has weakened against the CFETS basket by over 2% year-to-date through April) and perhaps stronger RMB sentiment, the capital flow management measures introduced over the last several months have also contributed to the slowdown in outflows, Goldman speculated in a Sunday note. That could reverse, as there may be incremental relaxation of the capital account as the flow situation has improved and an overly tight capital account could hinder legitimate international trade and the authorities’ long-term RMB internationalization goals.

Yuan falling out of favor in global trade

Overseas use of the yuan for trade and other payments has fallen dramatically as government efforts to stem capital outflows sideline Chinese President Xi Jinping’s ambition to take the currency global.

Yuan trade settlement had surged after Beijing first allowed it in 2009, with the proportion of Chinese cross-border trade settled in the currency peaking at 27% in 2015. But its share fell to 19% in 2016, marking the first year-on-year decline, and slumped further to 14% in January through March of this year. Excluding trade with Hong Kong, where the yuan is often used, would likely push the figure even lower.

 The decline is not limited to trade. Cross-border yuan settlements in Shanghai totaled 441.3 billion yuan ($63.9 billion) in the January-March quarter, down 23% from a year earlier, data from the People’s Bank of China shows. This figure encompasses trade as well as other payments ranging from capital transactions to costs for studying abroad. Settlements have fallen by more than half on a quarterly basis since July-September 2015, when they reached 1 trillion yuan.

The yuan was used for just 1.8% of international payments in March, ranking sixth behind the U.S. dollar, euro, pound, yen and Canadian dollar, according to the Society for Worldwide Interbank Financial Transactions, or SWIFT. The Chinese currency had placed fourth in August 2015 with a 2.8% share, overtaking the yen.

Overseas yuan holdings are shrinking as well. In Hong Kong, the largest yuan hub outside mainland China, yuan deposits hit a six-year low of 507.2 billion yuan at the end of March. This represents a drop of nearly half from 1 trillion yuan in December 2014.

This trend stems mainly from stepped-up capital controls. The Chinese government has gradually imposed stricter curbs since 2015, aiming to rein in outflows and the ensuing softening of the yuan. A measure implemented last November made advance approval necessary for currency conversions or overseas transfers — including in yuan — exceeding $5 million.

China banks’ shadow assets exceed Mexico’s economy

It may be too soon to say that glimmers of hope can be seen in the quality of Chinese bank assets, considering they have off-balance-sheet assets that are collectively larger than the world’s fifteenth-largest economy.

The country’s six biggest commercial banks revealed this week that their off-balance-sheet assets — likely held through trusts and wealth management products — were worth 7.78 trillion yuan ($1.13 trillion) as of March — more than Mexico’s 2016 nominal gross domestic product of $1.06 trillion, or about a tenth of China’s economy.

 Bringing these previously hidden assets to light immediately boosts their already substantial balance sheets by 7-9%, and smaller banks’ by 11-13%.

The six are Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communications, and Postal Savings Bank of China.

Yet these “second” balance sheets also prompt questions on the significance of banks’ reported declines in nonperforming loan ratios as well as the sufficiency of their capital, since they were all under pressure to set aside more provisions for losses on impaired loans.

China greasing economy with $55bn in tax breaks

China’s State Council on Wednesday approved 380 billion yuan ($55.1 billion) in tax relief that will mainly favor farmers and small businesses in a move that is seen as both economic and political.

The second large-scale tax cut to follow last year’s comes as China’s economy is forecast to slow down in the latter half of 2017, during which the Communist Party will convene its 19th National Congress and reshuffle top leadership.

China will modify its value-added tax this July by removing the 13% bracket while retaining the 6%, 11% and 17% tiers. The 13% rate currently applies to farm products and natural gas, but they will move to the 11% category. Farmers as well as households that purchase rice and vegetables will likely benefit from this change.

For smaller companies, those that pay 300,000 yuan or less in annual taxable revenue qualify for preferential tax treatment. The ceiling will be lifted to 500,000 yuan. Furthermore, small businesses and startups will be allowed to deduct 75% of research and development costs, up from 50%. These tax breaks will remain in effect until the end of 2019.

The Chinese government enacted about 500 billion yuan worth of corporate tax cuts in 2016. Helped also by a surge in infrastructure spending, the real economy grew 6.9% during the January-March period this year, marking the second quarter of economic acceleration. However, the People’s Bank of China, the country’s central bank, has been gradually raising market interest rates in order to rein in the real estate bubble.

Japan – Trade balance for March: Y 614.7bn (expected Y 608.0bn)

Here’s the Trade balance for March, from the Ministry of Finance
Y 614.7bn
  • expected Y 608.0bn, prior was Y 813.5bn
Trade balance (adjusted): Y 172.2bn
  • expected Y172.0 bn, prior was Y 680.3bn
Exports for March y/y:  12.0% big BEAT
  • expected 6.2%, prior was 11.3%
  • fastest rise in exports since January of 2015
  • exports to US +3.5% y/y
  • to China +16.4% y/y
  • to Asia +16.3% y/y
  • to EU +1.4% y/y
Imports for March y/y:  15.8% and another big BEAT
  • expected 10.2%, prior was 1.2%
The improvement in Japanese exports continued in March.

China’s A-shares have better shot at MSCI index

Shanghai and Shenzhen shares have a greater chance at joining a major emerging-market stock index after recent market reforms, though a smaller pool of issues under consideration means entrance will do less than investors and China’s government would like.

MSCI of the U.S. is soliciting institutional investors’ input on whether to include A-shares, or yuan-denominated shares listed on the Chinese mainland, in its Emerging Markets Index. Citigroup gives China’s bid a 51% chance of success, in light of recent reforms.

 These odds are a good deal better than when the question was first considered in 2014. A-shares have been kept out of the mix three years running amid concerns that China’s capital markets are insufficiently open.

The so-called Qualified Foreign Institutional Investor, or QFII, scheme was one key factor. This scheme was long foreign institutions’ only option for buying A-shares. Each entity’s dealings were subject to strict quotas, and the value of remittances was capped at 20% of net assets each month. MSCI naturally refused to include shares in its index that could not be freely bought and sold, and Beijing was slow to change the system to address those concerns.

The index operator has also looked askance at Chinese listed companies’ ability to halt trading of their shares at will — an option that, at one point, roughly 50% of companies had taken. A need for prior approval to create products incorporating A-shares also left MSCI leery.

China’s top securities regulator vows to punish “iron roosters” with no dividend payout

China’s top securities regulator urged listed companies to reward investors with cash dividends, vowing to punish stingy “iron roosters.”

Liu Shiyu, Chairman of the China Securities Regulatory Commission (CSRC) also warned listed firms against raising money for blind investments, or designing complicated share structures that facilitate insider trading and other malpractices.

 “Paying cash dividends is a basic way to reward investors … and the ultimate source of a stock’s intrinsic value,” Liu said in a recent speech, a transcript of which was posted on CSRC’s website on Saturday.

CSRC will take “tough measures” against those “iron roosters” who haven’t plucked a single feature for many years, even though they have the ability to pay dividends, Liu said.

Liu, installed as head of China’s securities watchdog following the 2015 stock market crash, has made investor protection his priority, having stepped up a crackdown on market manipulation and tightened disclosure rules.

China Starts 2017 With Highest Number Of Corporate Defaults In History

Back in October 2015, roughly around the bottom of the recent commodity cycle, we reported a stunning statistic: more than half of Chinese companies did not generate enough cash flow to even cover the interest on their cash flow, and as we concluded “it is safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can’t even generate the cash to pay down the interest on their debt, let alone fund repayments.

While commodity prices have staged a powerful bounce over the past 18 months, and despite the government’s powerful drive to avoid major defaults over concerns about resulting mass unemployment, the inevitable default wave has finally arrived, and as Bloomberg reports overnight, “China’s deleveraging push has racked up the most defaults on corporate bonds ever for a first quarter, and the identity of the debtors is pretty revealing.”

 Seven companies have defaulted on a total of nine bonds onshore so far in 2017, versus 29 for all of last year, according to data compiled by Bloomberg. In a sign of the struggles facing China’s old economic model, most of them depend on heavy industry and construction. While it’s still far from a crisis point, the defaults shows how policy makers’ efforts to reduce the liquidity that had propelled the bond market until late last year is exacting casualties.

Cited by Bloomberg, Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen said that “weak companies can’t sell bonds, which adds to the pressure on their cash flow.” As a result, “the pace of defaults will continue. It will be even more difficult for weak companies to sell bonds because corporate bond yields may rise further — the current yield premium doesn’t provide enough protection against credit risks.”

As discussed in recent months, the Chinese central bank has been curbing leverage in money markets leading to a spike in borrowing costs…

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.