China Focus : The Fortune Cookie
My longtime friend, the Hongkie Babe, manages a sizeable CNH and CNY portfolio for a large fund based in Hong Kong. I decided to ask her the other day what she thought of everything that is going on in China as I often do every few months (mainly because she does not change her mind every 2 weeks, like most of us).
Well this is what she had to say.
- she cannot catch up with the details of the seemingly endless stream of announcements out of China
- she thinks the regulators are not coordinated
- and the regulators are coming out talking all at once, sending contradicting signals to the market
- she hopes the market will have the patience to accommodate all the changes that are going through
For her, there is little meat in the bond market this year and she is not expecting to make the huge returns that she had enjoyed in the past years.
It has been a subdued week in China as the stock market withered early in the week to rally back strongly on Friday and it was definitely not unexpected because most people I know were itching to buy back the stocks that they sold for the reason that they thought the market was overvalued.
Yes. Because this is the longest record for a bull run (market rally that excludes a 20% drop) that China has ever had – 884 days.
But this week is the biggest absolute weekly drop we have seen in 5 years so it is as good an excuse as any to buy for a rebound next week.
SHCOMP Index Weekly Chart
It has been a week of poor economic numbers and I am not sure if any country that counts China as a significant trading partner would worry that their April imports have dropped 16.2% yoy (and iron ore port inventory drops to lowest level since Jan 2014) and their exports are similarly losing steam -6.4%. This compares to a 6 year average of 11.3% export growth and 12.3% import growth. Trade numbers have not looked so bad since 2009.
To add to that, inflation is holding under 2% consistently since Sep last year which makes a growing case for further easing out of the central bank whose efforts have led to a spike in new homes sales for major Chinese cities last month. http://news.xinhuanet.com/english/2015-05/06/c_134215647.htm
This is as money market rates fell for a 10th consecutive week, another record bull run since 2009.
The rating agencies have raised criticism as markets saw another default this week out of Winsway, a popular high yield USD issue, who failed to make a US$13 mio coupon payment. http://www.bloomberg.com/news/articles/2015-05-08/china-defaults-mount-as-coal-company-winsway-misses-bond-coupon
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(Bloomberg) — China’s junk bonds suffered nine times more downgrades than upgrades this year and another issuer faces a final deadline on Friday after the first default by a developer.
A combined 35 rating cuts on the dollar-denominated notes by Standard & Poor’s and Moody’s Investors Service exceeded four upgrades, data compiled by Bloomberg show. Coal importer Winsway Enterprises Holdings Ltd. needs to pay a $13.15 million coupon on its 2016 bonds as a grace-period ends. S&P cut its grade on Winsway, water treatment provider Sound Global Ltd. and Evergrande Real Estate Group Ltd. in the past month.
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http://www.businesstimes.com.sg/wealth/more-downs-than-ups-for-chinas-junk-bonds
Rating Agencies Are Stepping Up The Criticism
*MOODY’S: CHINESE ISSUERS BEHIND NEGATIVE CREDIT TREND FOR ASIA
*MOODY’S: CHINA RETAILERS, PROPERTY COS. TO FACE PRESSURES
*FITCH: CHINA’S SLOWDOWN AS EXPECTED, BUT DOWNSIDE RISKS MOUNT
*CHINA ECONOMY HAS RISKS FROM REAL-ESTATE CORRECTION, FITCH SAYS
*FITCH: PROPERTY EXPOSURE IS BIGGEST THREAT TO CHINA’S BANKS
Even as Japanese government debt breaks a new record at JPY 1.053 quadrillion, Chinese debt is showing no signs of slowing.
Source : McKinsey http://www.bloomberg.com/news/articles/2015-05-08/china-s-very-high-mountain-of-debt
So much information to digest when all we want to do is just to ride the stock market to more profits, like the addicts that we are. And I think all we should do is to watch the headlines for the informal IMF meeting this month for updates on the SDR basket and the potential inclusion of the CNY for Jan 2016 and hang on to our conspiracy theory hopes for the HKD peg to go. https://tradehaven.net/market/fx/we-love-conspiracies-china-peg-going-going-gone/
Remaining bullish on the currency for peg windfalls and SDR status. Bearish on the economy and real estate for the debt burdens. As for the bonds ? Hang on for carry.
For you see, China is much like a fortune cookie – not much nutrition overall and empty on the inside but for an assured bet of an auspicious note !
Leaving with the indicative prices…
