International Focus : Australia and China


Continued rumblings in the China growth story as FDI falls 17% and borrowings continue to soar with Beijing becoming the 8th region to issue their own local government bonds for CNY 10.5 billion (Shanghai and ShenZhen left).

Real estate prices continue to stagnate, falling for 64 cities, flat for 4 and increasing for only 2 cities which is not good for wealth accumulation and is properly reflected in the weaker retail sales and PMI numbers .

Real estate investments comprises 16% of Chinese GDP and Chinese real estate bonds make up 34% of total Asian HY issuance which is causing some investors to fret.

Image taken from BondVigilantes :
China HY Debt

Mortgage debt also continues to grow.
“Aug. 23 (Bloomberg) — Mortgage debt totaled 8.7t yuan as of end-June, up from 7.7t yuan at end-2013, China Business Journal reports, citing an unidentified person at Ministry of Land and Resources.
• Borrowing by government financing vehicles accounts for largest part of total: report
• Overly rapid mortgage growth encourages non-compliant land use by local governments: report”

China is still pretty much off the hook for the week as geopolitics, the FOMC minutes and Jackson Hole took centrestage.

Other news of the week include an under publicised official default in China for Chaori Solar as creditors approved a restructuring plan.

Meanwhile Chinese banks continue to raise funds announcing intentions for more capital raising in Tier 1 securities led by Bank of China’s plans for a record breaking Tier 1 bond sale.

ICBC is reported to be planning CNY 35 billion in offshore Tier 1 bonds and the rest of the field continues to catch up.

I find myself liking the idea of reforms at the expense of growth and strengthening the financial sector is the priority to weathering economic storms ahead.

Yet 6 weeks of rally we have seen in the SHCOMP to a year to date high suggests that the nay sayers will soon have their day especially after Jackson Hole and expectations of an earlier Fed hike that will be talk of the town next week.

shcompWeekly candlestick chart of SHCOMP Index

CNH Bonds Listed in Singapore and HK



Australia’s fortunes are tied with China whether Clive Palmer thinks they are “mongrels” or not.

And the evidence is clear when the PM, Foreign Minister and gang swiftly bow in apology. Thus the AUD/USD dropped dutifully after China’s weaker manufacturing PMI on Thursday.

There is still a shortage of bonds in Australia with Friday’s auction of 4 year government bonds seeing the highest ever bid/cover ratio in a decade of 7.01 times even the bond is just yielding 2.69% .

I find it strange that Russia has included Australia in its food embargo restricting cheese, fish, beef, pork, fruit, vegetables and dairy products, when they will be doubling their Australian assets in 4Q from 0.8% to 1.5%.

It is the world’s (or China’s) Australia. Central bank governor Stevens can say all he likes about the risk of a material fall in the Australian dollar and intervention to stem the currency’s rise remaining an option. I see an impotence on the part of the central bank and the currency, a prodigal child, as we await the RBA meeting on 2 Sep.

AUD CFTC DATAWeekly chart of AUDUSD and the CFTC Market Position

Demand for AUD assets will continue to dominate now with India’s Tata also keen to move into Australian mining and as Fraser Centrepoint races to 96.07% ownership for their Australand takeover and Singapore’s GIC launches a retail mall in Melbourne’s CBD.

On the flip side, Australia remains vulnerable to any slowdown in global commodity demand.

I see little meat left on the table with 10Y bonds at the 3.5% handle and it is a good time to be hestitant with the markets so heavily positioned on a country that is so heavily dependent on others and let’s not get started on the NZD milk story.

RBA Governor Stevens says his monetary policies are ineffective and he is looking for “animal spirits” to boost economic growth.

Pity he is only in charge of the interest rates. And pity the investors too.

AUD Bonds 2014
aud bonds