China Focus : The Political Destiny

19 October : Comet Siding Spring set to whizz close to Mars (and disintegrate in the process) after flying about for the past 4.5 bio years (same age as Earth) from the outlying region of the solar system  http://www.bbc.com/news/science-environment-29665247

20-23rd October : Communist Party of China (CPC) will hold its 4th Plenum

Most talked about this weekend :

China’s PBOC Said to Plan About $32.7 Billion Bank Injection
Oct. 18 (Bloomberg) — China’s central bank is said to plan the injection of about 200 billion yuan ($32.7 billion) into some national and regional lenders as Premier Li Keqiang steps up stimulus to support economic growth.

Just before you rush to buy up everything you can on the Shcomp on Monday, do note that  “The central bank has informed 20 banks, mainly joint-stock lenders including including China Guangfa Bank Co. and Industrial Bank Co. to submit applications for funds in the form of three-month loans from the central bank, the Wall Street Journal reported yesterday, citing unidentified banking executives briefed on the matter.” http://www.bloomberg.com/news/2014-10-17/china-s-pboc-to-inject-up-to-32-7-billion-into-banks-wsj-says.html

The 3 month loan is similar to last month’s injection of $81 bio into the 5 major state owned banks which has now been accepted to be a liquidity smoothing event. http://www.bloomberg.com/news/2014-09-17/stealthy-or-normal-analysts-diverge-on-pboc-s-action.html

My opinion is that China is not a hurry for their stock market to rally from here or for growth to over heat again or to revive their property market back to speculative levels.

Indeed we have dismal news this week as China’s forex reserves posted their largest drop on record (since 1996) http://www.reuters.com/article/2014/10/16/china-economy-loans-idUSL3N0S922A20141016  and credit growth remains subdued.

Source : RBS

Source : RBS

 

And the killjoy of stock punters is the announcement of an indefinite delay in the Shanghai HK connect that links both exchanges which was expected on 27 Oct this month (nothing to do with protests, I hope). http://www.bloomberg.com/news/2014-10-17/hong-kong-brokers-frustrated-as-li-signals-delay-to-trading-link.html

What is key this week would really be the 4th Plenum of the Chinese Communist Party where President Xi is expected to tighten his grip on power and one of the big indicator is if he succeeds in expelling disgraced party senior, Zhou Yong Kang, from the party and subject the chap to criminal prosecution after taking down his inner circle. http://www.businessinsider.sg/zhou-yongkang-political-aides-graphic-2014-7/#.VENrcBaKVX8

http://www.straitstimes.com/news/asia/east-asia/story/china-likely-expel-disgraced-security-chief-zhou-yongkang-party-sources-20

His outer circle is now targeted as market’s favorite Agile Property’s boss was placed under custody and now an executive director has gone missing with rumours adrift on the company’s previous connections with Zhou. (Latest news is Kaisa Group denying that chairman has been detained)

The iron grip behind the iron curtain may prove elusive yet because we are quite sure there must be much dissent behind the scenes especially when President Xi will not be doing an audit of his own family wealth whilst rumoured to be battling none other than former leader Jiang Zemin which only a Falungong affiliated newspapers (that is rumoured to be sponsored by the CIA) will dare to publish. http://m.theepochtimes.com/n3/960940-china-uncensored-whats-happening-in-hong-kong-is-not-what-you-think

Indeed the last time any news company dared to publish anything about President Xi was 2 years ago and lived to regret it. http://www.nytimes.com/2014/06/18/world/asia/chinas-president-xi-jinping-investments.html?_r=0

For all of us outside China, President Xi is a media darling and hero against the stuffy old school corrupt cronies and I find myself liking China these days. http://www.nytimes.com/2014/10/18/opinion/crony-communism-in-china.html?_r=1

I like the BofA summary of what to expect out of this 4th plenum.

The bank expects the 4th Plenum to center on four themes:

1. Judicial reforms with focus on separating courts from local governments and professionalizing judges;
2. Hukou and land reforms with emphasis on providing farmers better protection of land ownership rights and allowing farmers to keep land when obtaining urban Hukou;
3. Party organization reforms by creating a more independent party discipline inspection system;
4. Fiscal reforms including creating a more transparent and accountable budget making process and making local governments more responsible for their debt.
Source : http://www.chinamoneynetwork.com/2014/10/17/what-to-expect-from-the-4th-plenum-of-chinas-ruling-party

According to Xinhua News, “governing the country according to the law” to ensure “economic growth, clean government and social justice”. And thus the number of lawyers arrested has been increasing of late.

I believe there are worries  emerging on China although most are on the economic front – worries on growth and credit bubbles, as well as the Hong Kong protests that erupted in riots on the Friday before China’s 4th Plenum.

The CNH/CNY spread has remained negative for an extended period ie. CNH (USDCNH 6.143) weaker than CNY (USDCNY 6.1252) which is an indicator of some degree of risk aversion from the usual China optimism.

CNYCNH

I still believe that China would be a good global safe haven in the future. We cannot be sure of the political factions that will triumph and thus land investors in companies like Agile, in hot soup.

Meanwhile anything state owned would still be decent bets which is why the Bank of China AT1 USD papers went like hot cakes and Singapore’s GIC is taking a stake in the China General Nuclear Power Corp’s IPO.

President Xi will have his hands full next week if he succeeds in expelling former official Zhou, as it will get uglier as criminal prosecution begins. This is as he continues to mete out the “LAW”, investigate and probe away, not to mention “pepper” the protesters in Hong Kong with “spray”. (wondering if pepper spray would work on the dengue mosquitoes in Guangdong – 1,047 new cases in 1 day !!)

CNH UPDATE

For investors, it means USDCNY will be steady and we can relax. Given that most CNH bonds are good names, we can breathe easy and let the USD stuff gyrate with each new rumour on whoever’s chairman is being detained for the week.

The plenum will probably bring some nice goodies for the people and the stock market should be supported, barring any unforeseen mishaps in the rest of the world including Hong Kong.

I do not see much trading opportunity next week as China decides on their political destiny.

Good luck.

CNH Bond Prices (Indicative)