CHINA FOCUS : WAR HEROES AND ENEMIES OF THE STATE

A friend sent me this photo of the Chinese parade on Friday with incongruous blue coloured tanks which I thought would be a good camouflage assuming tanks could fly in the “blue sky” ?

China gave out 30 war medals to honour Chinese and foreign war veterans last week which was a big deal because of what was said.

“Xi said the patriotic spirit that has taken shape through China’s resistance against aggression is the driving force for China’s rejuvenation.

Those who struggled for China’s national independence and development are all national heroes, he said. “Chinese people will never forget their enduring accomplishments.””

I have a feeling that would make those hedge funds shorting the Chinese stock markets away, errr, fall into the “enemies of the state” category ?

We are lucky for the short week in China that ended on Wednesday after all the nasty news that started with last weekend’s FT announcement that “Beijing abandons large-scale share purchases” and a contractionary manufacturing PMI numbers at 49.7, a 3 year low (the service sector remains robust). Yet stocks managed to hold out on news that 50 China brokerages will jointly contribute 100 bln RMB capital to gov margin finance agency to start “new round of market rescue”.

Volatility remains at alarmingly high levels with the 10 day historical vol of the CSI 300 Index holding above 80%, a number that is likely to ease lower in the days ahead as global attention swings to the mid month FOMC and the market views on PBoC fragments into the “more deval” versus the “stand pat” camps on the USDCNY.

1. New PBoC rules on FX forwards aimed a curbing speculation is a sign that Beijing won’t devalue its currency further http://in.reuters.com/article/2015/09/01/us-china-yuan-reserves-idINKCN0R12JH20150901
2. PBOC seen quitting yuan support by end-2015 as reserves shrink http://www.businesstimes.com.sg/government-economy/pboc-seen-quitting-yuan-support-by-end-2015-as-reserves-shrink

“Bloomberg Intelligence estimates that every 1 per cent drop in the yuan triggers about US$40 billion of outflows.”

That is true because in the latest Knight Frank Global House Price Index, Hong Kong is right on top with prices gaining 20.7%, 12 months to Jun 2015, while China lingers near bottom place with prices down 5.7% on the year, a phenomenon that has been attributed to outflows from the mainland. Australia has also been a large beneficiary of this outflow although we cannot say the same for the HSI and ASX.

 

 

 

 

So much for allegations that China is scaring away foreign investors with their efforts to defend their stock markets, it would appear that China is scaring her own citizens to flee their money as well. These unpatriotic citizens would never make good war heroes, huh ?

I am slightly perturbed by all these policy actions and the confusion that it is sowing among investors but the bigger worry is the extent of contagion on global markets. Global markets have taken it to be a major threat to global growth and the panic is spreading as Moody’s points out that “Chinese regional and local government debt update shows credit- negative rise in leverage”.

The threat to global markets is a bigger threat than the threat to the global growth picture and if we put it into context, the SHCOMP is down just 2.3% year to date compared to the 10% drop in the Dow.

If we translate that into mass market effect, US citizens would be more badly affected as “Chinese homes have most of their wealth tied up in property, bank deposits and if they’re really rich, wealth management products. Stock holdings are no more than 5% of household wealth in China, according to Gavekal Dragonomics, compared to one-quarter to one-third in the U.S.” http://fortune.com/2015/09/02/heres-what-you-may-not-know-about-the-chinese-stock-market/

Given that only 7% of the urban Chinese population owns stocks, we would wonder why the urgent desperation to prop up stock prices ? What has propping up stock prices have to do with their stagnating economic growth ? And why are they not defending bond prices as I note only 64 bonds out of nearly 900 in my list holding above 100 in price and the cross currency swap curve has inverted in a bad way on panic hedging ?

 

I cannot find a satisfactory nor rational reason for it, just like I cannot figure out the blue tanks and most people are too frazzled to think too hard about it, perhaps right to dismiss it all as “madness”(or blue tanks).

Well, President Xi will be making his first official state visit to the US later this month (after the FOMC), my expectations are for things to normalise quickly to reward the war heroes, punish the enemies of the state, even if it does not make much difference to the lives of the ordinary Chinese ?

Leaving with the indicative prices.