China Focus : Chinese Lanterns Lighting Up The Night


A short week for China coming in on Tuesday, unfazed by market action and the USDCNH holding its own against the mighty USD duck with the PBOC guiding the USDCNY fixing lower during the week.

CNY PBOC FIXChart : Daily PBOC USDCNY fixing

Perhaps its a buffer to the anemic Chinese growth numbers out yesterday, with industrial output slowing to its weakest since 2008.

Aug Retail Sales +11.9% YOY estimated +12.1%
Aug Industrial Output +6.9% YOY estimated +8.8%
Aug Home Sales -10.9% YOY
Aug Property Sales Value -8.9% YOY
Aug New Property Construction -10.5%  YOY

Earlier this week.

Aug Trade Balance $49.84 bio estimated $ 40 bio
Aug Exports +9.4% YOY estimated 9%
Aug Imports -2.4% YOY estimated 3%
Aug PPI -1.2% YOY estimated -1.1%
Aug CPI +2% YOY estimated +2.2%
Aug Aggregate Financing RMB 957.4 bio estimated 1135 bio
Aug Money Supply M2 +12.8% YOY estimated +13.5%

Slowing credit growth, slowing inflation, slowing imports, slowing output, slowing retail sales, slowing home sales and construction portends for weakness ahead.

I have not been a China fan over the years, mainly for ethical reasons Yet whilst I do not see myself ever becoming a Sinophile (because I still can’t read after 12 years of school), I am finally beginning to see from the China-point-of-view.

This has been a great week for China, not economic wise but in terms of market development and setting up as a major player in global markets in allaying fears to silence their critics.

1. China plans to establish a security fund for its trust industry, which has about $2 trillion under management, as repayment risks accumulate, the China Business News reported.

2. China to Create Economic Dashboard to Sway Focus From GDP Growth

Sept. 12 (Bloomberg) — China will create a dashboard of more than 40 economic indicators to measure the efficiency and quality of growth, in a bid to shift attention away from the pace of expansion of gross domestic product.

In a meeting of the Shanghai Cooperation Organisation (comprising of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan),  President Xi is spearheading a regional security initiative with the main intention to eliminate US meddling in Asian affairs with India and Pakistan getting ready to join the bloc of countries.

China is far from perfection yet with the latest “gutter oil” scandal that is preceded by the “rotten meat” scandal, the continuing ban of Facebook and its spate of antitrust actions against the western conglomerates who had invested heavily in making China today’s global success story.

Yet the world is still tripping over itself in  Alibaba’s IPO, buying second-class shares to be priced at the high end of the range,  which leaves us wondering if critics are putting their money where their mouths are.

But the critics continue to call for China’s doom with BofA expecting a stock market correction in the near term and a former PBoC official calling for an economic crisis.

My view is far more sanguine in that we are in for a period of stable interest rates and exchange rates and that CNY will be, as evidenced in this week’s price action, the safe haven spared from any potential repercussions of any Fed moves.

There is still something artificial about their bond markets as bail outs continue like this one below which sounds absolutely preposterous.

Sept. 12 (Bloomberg) — Yantai, China-based Evergrowing Bank paid 3.7b yuan of principal and 300m yuan of interest to creditors on Aug. 29 for an insolvent shareholder, a unit of Mind Group, People’s Daily reports on website, citing unidentified people.
• Evergrowing Bank is guarantor of loans that the shareholder, which owned a 3.3% stake as of end-2013, and an affiliate borrowed from the Bank of Tianjin and the Tianjin Binhai Rural Commercial Bank in Aug. 2013, the report says

Even minor PBoC officials lament the “no default” mindset of the domestic market.

Sept. 13 (Bloomberg) — China needs to break the hidden guarantees on credit products and financial institutions, Xu Nuojin, deputy director of the statistics and analysis department of the People’s Bank of China, says at a forum in Beijing today
• If a bond defaults, a financial institution bails it out, if a financial institution fails, the government and the people come to bail it out, Xu says
• “Both big and small can’t fail — this must be changed,” he says
• Regulators have to change mindset and should allow investors to make their own decisions
• Bank wealth management products value 13.4t yuan by July, including 4.3t yuan on-balance-sheet and 9.1t yuan off-balance-sheet
• Xu spoke today at a bankers forum organized by China Europe International Business School in Beijing

Thus I am biased against the lessor credits and would favour the more sturdy SOE names, noting the tiers within the SOE hierarchies themselves. And we know that the global markets are taking the Chinese bond market seriously as UK prepares for a CNH issue and Cagamas (rated A3), the Malaysian government’s housing authority, decided to launch their first offshore issue not in USD or EUR or JPY but in CNH.

Osborne Says U.K. Government Plans to Issue Renminbi Bond
Sept. 12 (Bloomberg) — U.K. Chancellor of the Exchequer George Osborne speaks at press conference in London after talks with Chinese Vice Premier Ma Kai.
• Says U.K. plans to be first government outside China to issue bonds in Chinese currency

Buying a CNH bond should be a currency decision as much as for yield play. I would value liquidity foremost which is why Swiber’s 3 year CNH that gives one of the highest coupons this year, is a no go. The bond is currently trading at 98.60/99.30 after its launch at 100 earlier this week.

USDCNH at 6.12 is a tougher nut to crack now that the USD has gone into hyperdrive and I foresee the currency to hold out and marginally strengthen against the USD even as the rest of the world capitulates.

And with the Shanghai-HK Connect set to start in Oct this year, allowing cross border purchases of each other’s shares, I see less fear for an imminent crash.

Chinese lanterns lit up the dark night this week. I still see China as the safe haven in the current market turbulence.

Photo courtesy of Aunty Su

Photo courtesy of Aunty Su


CNH Bond Prices


Part 2