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Sat, 22nd July 2017

Anirudh Sethi Report

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Archives of “Shanghai” Tag

China Small Caps Crash To Lowest Since 2015 Amid Deleveraging “Selling Panic”

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…

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… 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”.

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 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.

World’s Biggest Aluminum Producer Faces Default, Warns Of “Dramatic Social Unrest” Without A Beijing Bailout

Step aside China Huishan Dairy Holdings – China’s largest dairy producer which cratered last month after a negative Muddy Waters research report brought attention to a company we knew for one year was collateralizing its cows to fund stock buybacks – and make way for what may be the next Chinese megafraud.

While China Hongqiao Group may be best known for being the world’s largest aluminum producer, it has in recent months featured just as prominently among short-seller reports who have accused the company of being a fraud. As the WSJ’s Scott Patterson writes, questions about China Hongqiao’s finances first emerged in November, when an anonymous short seller wrote on a website called Hongqiao Exposed that the company’s profits are “too good to be true.” China Hongqiao in the March 31 statement called the report “untrue and unfounded.”

A subsequent 46-page report on Feb. 28 by Emerson Analytics, a trading firm focused on Chinese stock-market fraud, disclosed more allegations of fraud involving the Chinese commodity giant.

 Emerson accused China Hongqiao of “abnormally high” profits generated by underreporting production costs and disclosing electricity expenses—one of the biggest costs for aluminum producers—as much as 40% below their true cost. Emerson said it investigated Chinese electricity costs, spoke to former China Hongqiao employees and compared the company’s costs and profits with other comparable companies.

Additionally, China Hongqiao has been more profitable than some Chinese competitors. For instance, China Hongqiao earned an average operating profit margin of 27% in the past five years, compared with minus-1.7% for state-owned Aluminum Corp. of China , known as Chalco, and 5.9% for Alcoa, according to FactSet. “People were always skeptical about how they managed to be more profitable than their peers,” said Sandra Chow, a credit analyst at CreditSights.

Abe tries to keep Trump-Xi talks laser-focused on Pyongyang

Japanese Prime Minister Shinzo Abe on Thursday urged U.S. President Donald Trump to insist on greater Chinese cooperation in the face of threats from North Korea, which tested yet another missile the previous day.

Japan requested the call, which lasted 35 minutes, just ahead of Trump’s scheduled summit with Chinese President Xi Jinping in Florida. Trump assured Abe that the North Korean issue would feature prominently on the agenda when he meets with Xi on Thursday and Friday, U.S. time, according to a Japanese government official.

 Trump and Abe agreed that China has a key role to play in moderating Pyongyang’s behavior, and that a Beijing clampdown needs to go beyond the current suspension of coal imports from the North.

“All options” for dealing with the threat remain on the table, the U.S. president said. 

In an earlier interview with the Financial Times, Trump had declared, “If China is not going to solve North Korea, we will.”

But while Trump’s White House is taking a harder line — going so far as to hint at the possibility of military action — China is reluctant to crank up the pressure.

China Orders Shut Down Of 1,200 Factories After Smog “Red Alert” Declared In Beijing

In addition to its now traditional credit-funded boom-bubble-bust cycle which rotates from asset to asset, and is then promptly recycled courtesy of the nearly $35 trillion in various financial system “assets”, another staple of the “new” Chinese economy are smog alerts following every burst in economic strength driven by “old economy” manufacturing.

That’s what happened overnight, when following months of manufacturing expansion, China’s pollution problem has again caught up, and as a result Beijing’s city government ordered 1,200 factories near the Chinese capital, including a major oil refinery run by state oil giant Sinopec, to shut or cut output on Saturday after authorities issued the highest possible air pollution alert.

Traffic on the city’s roads was lower than usual as residents complied with limits on car use and many of the city’s 22 million residents sat out the haze at home. “I’ll just take a rest and not go outside,” said Wang Jianan, a 23-year-old Beijing resident and teaching assistant. With Christmas just a week away, others resorted to dark humour to help cope with the latest episode of toxic air.

Chinese media reported that at least 388 people have been fined for lighting outdoor barbecues and fires.

Mumbai’s wealth sees it in world’s top 15

Image result for mumbai tumblrIndia’s financial hub Mumbai has been named among top 15 cities globally in terms of total wealth held, while London topped the list, says a report.

According to New World Wealth, the wealthiest cities in the world are London with $2.7 trillion of total wealth, followed by New York City ($2.6 trillion) and Tokyo ($2.2 trillion) in the second and third place respectively.

Mumbai featured on the 14th place in the list with a total wealth held in the city worth $820 billion.

“Home to 45,000 millionaires and 28 billionaires, Mumbai is the economic hub of India. It is also home to the Bombay Stock Exchange,” the report said.

The report further noted that among the 15 cities, Beijing, Shanghai, Mumbai and Sydney were the fastest growing in terms of wealth over the past decade (2006-2016).

5 Main Things To Watch In Today’s Chinese GDP Report

There is one simple reason why when the Chinese Q3 GDP print is revealed shortly, it will be an utterly meaningless indicator – the number, as not only traders but the general public know, is a goalseeked, arbitrary political construct meant to convey not information about the economy, but – at best – about Beijing’s intentions what it may or may not do in the future regarding future monetary or fiscal (which as we showed just hit an all time high) stimulus.

In fact, as Evercore ISI said in the company’s latest look at China, “China’s Real GDP data is opaque; Nearly invariant at 7 – 7.5%; No real, nominal, deflator detail; no income-expenditure cross check, etc. No data pros will answer questions.” In short: it is useless. An alternative, and much more informative index created by ISI, is shown by the red line in the chart below – unlike the blue line, or China’s official GDP data, it reflect the real twists and turns in China’s economy.

A beleaguered Xi Jinping turns to brass for help

DF-21D ballistic missiles are shown during a military parade in Beijing on Sept. 3, 2015.

TOKYO — Chinese President Xi Jinping has conducted an unusual flurry of inspections recently at units of the People’s Liberation Army, as he struggles to weather a political storm.

Xi kicked off the inspections several days before he left Beijing on Sept. 3 for the Group of 20 Summit, held this year in Hangzhou, Zhejiang province, on Sept. 4-5. On Aug. 29, Xi visited the Strategic Support Force, one of the PLA’s new units established as part of his military reform drive. The force differs from conventional combat units and is said to be “a future force.”

 The Strategic Support Force consists of three units: cyber, space and electronic warfare, according to a number of sources, including the Global Times, a newspaper affiliated with the People’s Daily, the mouthpiece of the Chinese Communist Party.

The cyberwarfare unit is made up of computer experts responsible for offensive and defensive action. The space warfare unit oversees China’s spy satellites and the Beidou Navigation Satellite System, the Chinese equivalent of the U.S. Global Positioning System. The electronic warfare unit is responsible for jamming and disrupting enemy radar systems and communications.

Chinese appetite fuels higher pork prices.YTD Up by 10%

Chinese consumers just cannot get enough pork. The richer the nation becomes, the more pigs its citizens want to eat. Despite a seasonal dip in pork consumption during July — the Chinese eat less meat in warmer months — prices are up 10% so far in 2016 compared to the same period last year, and some forecast that pork demand this year will soar by 30% from a year ago.

Prices for the white meat are currently just below the record high of 21.2 yuan ($3.1) per kilogram reached at the end of June 2016, up from the recent low mark of 12 yuan in early 2015, according to official Chinese figures.

 One reason for the price jump is that a large number of pigs died as a result of heavy rains, landslides and flooding in northern China in July, which affected 10 provinces or regions. About 10,000 pigs drowned at a village in Hubei province alone, according to Chinese media reports.

The outlook for domestic pork supply could worsen, as the National Bureau of Statistics has said that five of the provinces hit hardest by the flooding produce a third of China’s pork.

Another factor squeezing pork supply has been the rising price of corn — the key ingredient in pig feed — which rose by 11% from January to May, according to China’s Ministry of Agriculture.