Despite China reporting solid economic data on Monday, with beats across the board in everything from retail sales, fixed asset investment, industrial production and GDP printing at 6.9% and on track for its first annual increase since 2010…
… despite the biggest net liquidity injection by the PBOC since mid June after the central bank injected a net 130 billion yuan, and despite yet another rebound in the Yuan, overnight China’s Shanghai Composite slumped by 1.4%, the most since December as a result of a plunge in the small-cap ChiNext index, which tumbled by 5.1%, and is now down 16% in 2017 to levels not seen since January 2015 following a fresh round of broad deleveraging amid concerns about tougher regulations and more IPOs following a high-level conference over the weekend attended by President Xi Jinping in which China hinted at the formation of a “super-regulator”.
EM FX closed last week on a mixed note, with markets struggling to find a compelling investment theme. The US jobs data this week could provide some more clarity on Fed policy. We still think markets are still underestimating political risk in the big EM countries, including Brazil (Moody’s outlook moved to negative), Mexico (election in state of Mexico), South Africa (ANC debates Zuma’s fate), and Turkey (ongoing crackdown on opposition).
Bank of Israel meets Monday and is expected to keep rates steady at 0.10%. CPI rose 0.7% y/y in April, below the 1-3% target range. With the shekel remaining firm, the central bank is likely to keep rates steady whilst continuing to buy USD/ILS.
South Africa reports April money and private sector credit data Tuesday. Both are expected to pick up modestly from March. It reports April trade data Wednesday. Q1 unemployment will be reported Thursday, and is expected at 27.0% vs. 26.5% in Q4. SARB kept rates steady last week. Next policy meeting is July 20. If current trends persist, we think it will give a stronger signal that it could cut rates in H2. Results of the ANC meeting are not yet known as of this writing.
Chile reports April IP Tuesday. Central bank releases its minutes Friday, while April retail sales will also be reported. The economy remains weak while price pressures remain low. While the bank signaled that the easing cycle is over for now, we do not see tightening until 2018. Next policy meeting is June 15, and rates are likely to remain steady at 2.5%.
Less than a month ago a handful of the world’s policy makers gathered in Washington at the International Monetary Fund (IMF), no surprising headlines were run – but an obscure meeting and a discreet report launched exclusive signals for the next global economic crisis.
The panel, which included five of the most elite global bankers, was held during the IMF’s spring meetings to discuss the special drawing rights (SDR) 50th anniversary. On the surface the panel was a snoozefest, but reading beyond the jargon offers critical takeaways.
The discussion revealed what global central banks are planning for a future crisis and how the IMF is orchestrating policy for financial bubbles, currency shocks and institutional failures.
Why the urgency from the financial elites?
In his opening remarks Obstfeld identified, “There has been increasing debate over the role of the SDR since the global financial crisis. We in the Fund have been looking more intensively at the issue over whether an enhanced role for the SDR could improve the functioning of the international monetary system.”
“The official SDR is something we are familiar with but is there a role for the SDR in the market or a market SDR? What is the SDR’s role for the unit of account?”
Here’s the five most important signals from the world money panel, what they could mean for the international monetary system and the future of the dollar.
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’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.
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.
One week ago, Deutsche Bank analysts warned that the global economic boom is about to end for one reason that has nothing to do with Trump, and everything to do with China’s relentless debt injections. As DB’s Oliver Harvey said, “attention has focused on President Trump, but developments on the other side of the world may prove more important. At the beginning of 2016, China embarked on its latest fiscal stimulus funded from local government land sales and a booming property market. The Chinese business cycle troughed shortly thereafter and has accelerated rapidly since.”
DB then showed a chart of leading indicators according to which following a blistering surge in credit creation by Beijing, the economy was on the verge of another slowdown: “That makes last week’s softer-than-expected official and Caixin PMIs a concern. Land sales, which have led ‘live’ indicators of Chinese growth such as railway freight volumes by around 6 months, have already tailed off significantly. “
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.
With Chinese liquidity markets turmoiling, bonds crashing, and gold premiums soaring, it appears growing concerns over capital controls tightening has sent Chinese fleeing into Bitcoin as a way to escape the mainland restrictions. Bitcoin is up over $30 today to its hghest since Dec 2013…
We first warned of this ‘outlet’ for Chinese capital in September 2015 when Bitcoin was trading around $200… its just topped $830…