Chinese domestic economic support could hurt US dollar, Treasuries

KEY DEVELOPMENTS

China’s stock market traded in a narrow range last week after initial optimism, triggered by state fund buying, faded. Market sentiment remains fragile until there is evidence of an economic recovery. This might come in further government support, with local rumors that China’s central government will issue $137 billion in bonds to fund critical infrastructures like railways, roads, and clean energy facilities. In addition, Bloomberg reports tht the government will set up a 'stabilization fund' to prop up the stockmarket.

China’s economic data, notably the worsening real estate sector, disappointed last week. Leading developer Country Garden is still looking to restructure significant offshore debt, and house sales continued to plunge despite several rounds of policy support.

Chinese authorities reportedly tightened regulations on mainland clients trading offshore, attempting to restrict capital outflow and ease depreciation pressure on the Chinese yuan. Despite their efforts, the offshore Chinese yuan broke through the $/CNH 7.30 key resistance points and traded down to $/CNH 7.31, with traders believing that the currency would have been weaker absent this support.

GLOBAL IMPACT

China’s continuing economic malaise, with slowing economic growth and possible deflation, will impact global conditions. Many politicians and bankers fear Chinese companies will cut prices to win export market share.

If China makes a major domestic bond issue to support its economy, US Treasuries and the US Dollar would be significant losers, diverting capital back to China and continuing the divestment of US assets already evident.

KEY EVENTS

Markets

• Offshore Chinese yuan started the week stronger, trading down to $/CNH 7.2764, but ended the week lower at $/CNH 7.3133
• Chinese stock markets traded in a narrow range, with the Shanghai and Shenzhen exchanges down 0.2% and 0.3% respectively

Government stimulus to boost domestic economy

• There is widespread spuculation that China’s central government is set to issue 1 trillion yuan ($137 billion) bonds, specializing in expanding the construction of critical infrastructures like railways, roads, and clean energy facilities – boosting economic demand and stabilizing the job market
• Bloomberg also reported that Chinese policymakers are considering setting up a state-backed stabilization fund targeting the equity markets; the report said the fund would increase holding shares of up to hundreds of billions of yuan to help offset the stock market's downside pressures
• The IMF has warned China that relying on more significant budget deficits was unsustainable and would impact medium-term prospects
• China's total non-financial public and private debt-to-GDP rate is about 270% of GDP, according to the IMF’s estimate
• China’s clean energy sector would benefit most from infrastructure-targeted expenditures
• China’s electricity charging stations increased 70% annually, to 2.43 million units in the first three quarters of this year
• Production and sales of EVs maintained strong growth in September, rising 6.6% and 9.5% annually, respectively
• China’s auto exports rose 48% annually in September, led by EV units, according to data from the China Association of Automobile Manufactures

China’s Belt and Road Initiative summit will be held in Beijing this week

• Leaders from 150 countries and 30 international organizations will attend, including Russian President Putin
• China issued a white paper entitled "Belt and Road Initiative: A Key Pillar of the Global Community of Shared Future on Tuesday, reporting achievements over the past ten years and plotting a course for the next decade
• The BRI helps China expand trade and economic connections with more than half of the countries in the world and strengthens political ties, financial integration, and personnel exchanges with more than 100 countries
• China's trade with BRI participating countries reached $19.1 trillion, with an average annual growth rate of 6.4%, with $240 billions of investment from China
• It is a crucial moment to see what certainty this summit could offer to the world in the quickly changing global situation, and another focus to monitor is how it
• A key question, which will be watched closely, is how quickly BRI nations substitute the yuan for the US dollar in their transactions

Export decline slows, trade surplus rises

• China’s trade surplus rose to $77.7 billion in September, up from $68.4 billion in August, reversing a negative trend, but this failed to ease worries that the countries’ trade is decoupling from Western nations
• China’s exports decline slowed, falling 6.2% in September, better than the 7.8% fall expected, and the 8.8% fall in August
• Imports slowed, falling 6.2% in September after a 7.3% fall in August
• Exports to the US fell 9.3% annually in September, a fourteenth month in decline
• Exports to the EU fell 11.6% annually, slowing a 19.6% fall in August
• On the contrary, China’s exports to Russia rose 20.6% annually, up from a 16.3% increase in August (proof that the two countries are working more closely on a range of fronts)
• China’s foreign trade with the Belt and Road countries moderately increased by 3.1% in the first three quarters but accounts for 46.5% of total foreign trade

China’s imports of major commodities slowed

• Softening commodities demand is not a good sign for economic activities in the months ahead, but it was evident in September trade data – with energy import demand slowing across the board
• Crude oil imports grew 13.7% annually to 45.7 million metric tons (MMT) in September, but this was down from a 30.9% increase in August
• Coal imports have risen 27.5% in September, down from 50.5% in August.
• Natural gas imports were essentially flat at 10.1MMT in September, 6.6% down on last month
• China’s iron ore imports were moderately up by 1.45% annually to 101 MMT in September

EU anti-subsidy investigation to widen probes

• Media reports that the EU will investigate China’s steel and aluminum sector could lead to a 25% tariff hike on imports from China, adding to the anti-subsidy probe into China’s EV sales
• Industry insiders believe this was part of a political deal between the EU and the US, as the EU and the US want to end US tariffs on EU's steel and aluminum imports
• Steel and aluminum products accounted for 6% of China’s total exports, with about one-quarter of China’s steel exported to the EU

Worsening real estate crisis, with falling home sales

• China’s real estate sector is worsening as major developer Country Garden looks to restructure its offshore debt, and house sales continued to plunge despite several rounds of policy support.
• Country Garden, with liabilities of 1.3 trillion yuan, is seeking to restructure its debt
• Country Garden’s home sales fell 44% between January and September, pressuring the company’s cash position
• Significant Chinese real estate cut land purchases by 18% annually, hitting local governments that rely heavily on land sales for revenue
• China’s central government has kicked off 1 trillion yuan ($137 billion) program to support local governments

China's small and medium-sized enterprises (SMEs) continue to struggle

• The Small and Medium Enterprises Development Index, based on a survey of 3,000 SMEs from eight significant industries, reported contracting activity in September
• The index fell to 89.2 from 89.4 in August
• Eight major sectors remained lower than 100 points, indicating contraction

No consumer inflation

• China’s annual consumer price index (CPI) was unchanged in September, missing the market expectation of a 0.2% increase, and down from 0.1% in August
• Core inflation, excluding food and energy, rose by 0.8 % annually
• Six out of eight categories saw small monthly price gains, with clothing up 0.8%, food and beverages up 0.2%, and transportation up 0.1%, while the rental prices were flat and services fell 0.1%
• The CPI report reinforces the view that the economy is stagnant, with consumers limiting spending to their basic needs

Factory gate deflation slows

• China’s annual producer price index (PPI) narrowed its decline to a 2.5% fall in September after a 3.0% fall in August and a 5.4% fall in June
• The monthly PPI was up 0.4% in September, after 0.2% in August, showing signs of a recovery in factory gate prices

China’s Sovereign Wealth Fund Backs Banks

• China’s Central Huijin sovereign wealth fund significantly increased its holding of four major Chinese listed banks’ shares and vowed to continue increasing buying in the next half year.
• This move suggested that the government is scaling up efforts to lift market confidence, with more measures likely to follow
• Central Huijin is widely recognized as "the last faithful buyer" in the Chinese capital markets, well known for turning market sentiment

Fewer babies born in China

• China’s population growth problem is a worrying indicator for medium to long-term prospects, so birth data is closely watched
• Population decline will take a heavy toll on China’s growth unless productivity significantly improves
• Chinese mothers gave birth to 9.56 million babies – the lowest total in modern history and the first time the figure dipped below 10 million, according to the official census
• This was 10% down from the previous year’s 10.62 million. The newborn figure peaked in 2016
• Six Chinese central government departments released a guideline document on Monday, aiming to improve the aggregate computing power by more than 50% by 2025, emphasizing the hope that technology will offset slowing population growth

Research by Paul Walton, Financial Writer: [email protected]