DRIVING THE DAY
1. Chinese assets are trade war’s first casualty
Welcome to the bear market.
Chinese equities officially entered bear market territory yesterday, with the Shanghai Composite ending the day down 0.5% – marking a 20% drop since the January high.
Get used to it. There’s no relief in sight as the combination of slowing growth, tight liquidity, and the impending trade war will continue to take a toll on Chinese assets.
For its part, the CNY is down 2.6% since June 14. Yesterday it temporarily broke through the 6.6/USD threshold for the first time since December.
This is important: So far there has not be a concerted regulatory response to shore up either growth or asset prices.
Get smart: We have been saying this for a while, but top politicians and central bank officials remain highly committed to the financial de-risking agenda (see next entry).
Don’t expect the stimulus cavalry to be called in this time.
Bloomberg: Bear Market in Stocks, Weak Yuan Show China Problems Piling Up
Shanghai Securities Journal: 人民币兑美元汇率跌破6.60关口
FINANCE and ECONOMICS
2. PBoC tries to thread the needle
The central bank (PBoC) has made two important moves recently:
- It cut banks’ reserve ratio requirements (RRR) (see June 25 Tip Sheet).
- It expanded its medium-term lending facility (MLF) (see June 20 Tip Sheet).
That’s got the market thinking that the PBoC is back to its old stimulative ways.
We disagree. So do sources close to the central bank (Caixin):
- “Financial de-risking is the priority of priorities.”
- “The direction [of deleveraging] is crystal clear.”
- “The key [with respect to monetary policy] now is timing and methods.”
What that means: The bank is committed to deleveraging. But they are also trying to gauge the impact of deleveraging on the economy. They are also trying to see how this whole trade war thing plays out. They will then calibrate policy accordingly.
The dilemma: The bank wants to keep financing conditions relatively tight in order to promote deleveraging. But they also want to make sure that the economy doesn’t tank.
Get smart: Officials have been clear that they remain committed to deleveraging. But the next few months will test the bank’s mettle.
Caixin: 去杠杆叠加贸易战 内忧外患考验政策平衡
FINANCE and ECONOMICS
3. Data dump
One reason that regulators aren’t panicking just yet – industrial profits are still through the roof.
- Profits at China’s large industrial companies grew by 21.1% y/y in May – down a touch from the 21.9% growth in April, but still showing solid performance.
But, but but…maybe regulators should be more worried on this front. The May data doesn’t capture price movements throughout June – and Chinese steel prices have come off in recent weeks.
What’s more, if infrastructure spending continues to decelerate (see May 25 Tip Sheet) then those price declines will deepen in the second half of the year – making profits hard to defend.
Get smart: Officials will be watching this data closely. But the first policy reaction to a further decline in prices will likely be on the supply side – with temporary curbs to output of steel and coal. That’s opposed to a demand-side push, which policymakers have used in the past – i.e. juicing credit and investment.
Indian Express: China’s robust industrial profits keep trade war risks at bay for now
Reuters:Chinese steel, iron ore steady amid demand fears
POLITICS and POLICY
4. The Xi Jinping show
The Communist Youth League (CYL) held its five-yearly national congress on Tuesday.
Every Politburo Standing Committee (PBSC) member was in attendance.
- The CYL is BIG. Its membership tops 81 million.
- Since the 1980s, the CYL has been a powerful force in Chinese politics, with many of its top leaders going on to positions of prominence. Former CYL chiefs include former Party General Secretary Hu Jintao and the current premier, Li Keqiang.
Some more context: Since coming to power over five years ago, Xi Jinping has brought the CYL to heel. He has cut its budget and demoted its former head.
On Tuesday, Xi looked triumphant:
- Xi entered the Great Hall of the People to a standing ovation and rousing applause.
- Hanging from the balcony of the hall was a gigantic banner exhorting the audience to “hold aloft the banner of Xi Jinping Thought.”
- Then PBSC member Wang Huning got up and delivered a speech that was basically an extended paean to Xi’s greatness.
Get smart: The Xi-as-great-man propaganda is getting out of control.
What to watch: Will the constant fawning go to Xi’s head? Will overconfidence lead to bad judgment?
POLITICS and POLICY
5. Xi’s plan for Hong Kong
Vice Premier Han Zheng met with Hong Kong Chief Executive Carrie Lam on Tuesday.
Some context: Han oversees the Hong Kong portfolio.
SCMP thinks the meeting had not been planned:
- “The event appeared to be hastily arranged as Lam made a surprise detour through Beijing on her way back to Hong Kong from a visit to Europe, with the stop in the capital previously unannounced.”
The agenda: The Greater Bay Area development plan that aims to better integrate the economies of Guangdong, Hong Kong, and Macau.
Han wanted Lam to know that this plan comes from the top:
- “Han told Lam that Beijing attached great importance to the bay area plans, which were ‘personally planned, personally pushed’ by President Xi Jinping.”
Big surprise – Lam said she’s on board:
- “I told Han that the plan would undoubtedly inject new momentum into Hong Kong’s economic development, especially in the area of innovation and technology.”
Get smart: Under Xi, Hong Kong is gradually becoming just another Chinese city.