China’s equity markets up, yuan unchanged

There was some good news last week out of China last week, despite bad news from the struggling property sector, and record low US confidence in doing business in China. The decline in industrial sector profits slowed, a state-owned fund was set up to invest in emerging industries, and the country plans to double power generation from nuclear by 2035.

On the diplomatic front, Chinese senior leadership paid a surprising visit to former US treasury secretary Henry (Hank) Paulson this week, exchanging views on the economy, trade, and global political issues – seeking to unthaw current frosty relations. China’s 8-day national holiday, which began on Friday and sees financial markets closed, is hoped to create the consumer demand its economy badly needs.

Markets

• Shanghai Composite Index, 3,110.48 market close – 0.83% up on the week
• Shenzhen Composite Index, 10,109.53 market close – 1.34% up on the week
• Offshore Chinese yuan, $/CNH 7.2956 – unchanged on the week after touching a high of 7.3245

Key Events

Stock markets strengthen, yuan trades sideways

• China’s stock market moved slowly on the last trading day before a long Chinese holiday starting Friday, ending up on the week
• The offshore Chinese yuan traded sideways between 7.30-7.31, but briefly touched 7.32
• China’s financial markets are closed next week for the Mid-Autumn Festival and China’s National Day, reopening on October 9

China’s property crisis deepens

• China’s heavily indebted developer Evergrande surprisingly canceled meetings with foreign creditors scheduled for September 25-26, as the company’s housing sales failed to meet expectations and the company struggled to meet creditors’ demands under a restructuring plan
• Evergrande had total liabilities of $327 billion, according to the latest official update in June
• The deeply troubled firm also faced lawsuits, with major uncertainties over its ability for sustainable operation
• It has been the second month since China introduced series of measures to spur home purchases, however, there has yet meaningful change

US business confidence hit’s record low

• The US-China Business Council’s annual survey results showed that US business confidence in China hit a record low for the second consecutive year
• 90% of surveyed US firms expressed worries about market share loss amid squeezes from China’s strategies in prompting domestic champions, over thirty points higher than last year’s survey
• Only a quarter of respondents reported an intention to accelerate investment in the Chinese market, sharply lower from about 50% five years ago
• Customer-related businesses, like food, energy, and consumer goods, were still quite optimistic, while the technology sector, which is the front line of intense competition between the US and China, was largely depressed
• Coca-Cola announced to expand new plants and production lines in China worth over $1.6 billion in the next decade earlier this month, and Starbucks also committed to invest $220 million in China’s coffee market expansion

Chinese leaders visit Hank Paulson

• Chinese senior leadership paid a surprising visit to former US treasury secretary Henry (Hank) Paulson this week, exchanging views on the economy, trade, and global political issues
• China sent high-ranking officials to talk to Paulson: Chinese Vice President Han Zheng, Foreign Ministry Chief Wang Yi, and the governor of the People's Bank of China
• China’s state media, Xinhua News Agency reported the meeting, citing Chinese leaders, saying that the China-US relationship is the most important bilateral relationship in the world today – a strong signal that Beijing is keen to recover stable relations with the US.
• The US and China set up two new working groups to communicate economic and financial matters last Friday
• China and the US are suffering pains raised from decoupling: the US needs to handle its growing debt problem (which China helps to finance);China wants to address shrinking export orders, declining foreign investment, and its faltering property sector

EU trade chief calms Chinese concerns

• EU trade chief Valdis Dombrovskis made a four-day visit to China to seek a trade balance and to calm China that the EU’s de-risking strategy is not about decoupling
• But he also stressed the importance of the EU protecting itself from relying too much on China’s supply
• The bilateral trade balance with Europe fell 7.8% in the first eight months, according to Chinese official data

Yuan global payments rising sharply

• Chinese yuan’s share in global payments rose to 3.47% in August from 3.06% in July and 1.9% at the start of the year, according to SWFIT's latest release
• China has made speedy progress in promoting the yuan’s payment in global energy and commodities trade
• China-led belt-and-road (BRI) investments also play a crucial role in advancing the yuan's global adoption
• Rising demand from countries in the BRICS economic group to diversify their reserves, also accelerates the Chinese yuan's use

Industrial profits decline slows

• Official data last week showed industrial company profits' decline slowed to 11.7% year-on-year between January and August, down from a 15.5% annual fall in the last reporting period
• Industrial firms’ revenues marginally improved to be essentially flat, suggesting that profit recovery was mainly due to lower input costs
• Private firms rapidly recovered from steep losses earlier this year, with their profits improved from a 10.7% fall in July to 4.6% in August
• The private sector plays a significant role in creating job opportunities and prompting robust growth – improved profits will bolster investment and employment by the private sector

China’s central bank talks support for the economy

• China’s central bank vowed to take forceful action to support the economic recovery after a quarterly meeting of its monetary policy committee last Wednesday
• The People's Bank of China (PBOC) will maintain liquidity and support stable credit expansion
• Analysts believed the PBOC will likely put more targeted measures in place to aid the faltering property sector
• China will likely further step up government investment in building infrastructures, urban villages, and social housing

China boosts nuclear power

• China announced a plan to increase the nuclear power capacity from 5% to about 10% of China’s power generation by 2035, and 18% by 2060
• China has 55 nuclear power stations in operation, with 24 nuclear power plants under construction, giving it the world’s second-largest nuclear power generation capacity

Investment in emerging technologies

• China set up a state-owned fund worth 100 billion yuan (nearly $14 billion), targeting to forge strength in emerging industries, particularly in cutting-edge areas
• This initiative was part of the reform of China’s state-owned enterprises (SOE’s), which the Chinese government leans upon to promote breakthroughs in cutting-edge technologies
• This fund will support sectors that are in the early stage of development, including 15 key sectors, such as next-generation mobile communications, artificial intelligence, biotechnology, and new materials
• Research shows that China’s central SOEs already increased annual investment growth rate of over 20% in strategic emerging industries over the past three years

Holiday demand could boost consumer demand

• China’s 8-day national holiday is hoped to create consumer demand, and we have seen a surge in demand for domestic travel and hotel bookings
• Enthusiasm for overseas travel during the holiday is exceptionally strong – China’s biggest travel agency, Ctrip, said outbound trip bookings were up nearly 20 times compared with last year, with southeast Asian countries, Australia, and the UK as popular destinations

Summarized from StoneX research by Paul Walton, Financial Writer: [email protected]