1. Bond defaults on the rise
Defaults in China’s corporate bond market have been on the rise for a while – but thingshave gone into a higher gear in recent weeks (Bloomberg):
- “At least 15 defaults since the start of November have pushed this year’s total to 120.4 billion yuan ($17.1 billion), within a hair’s breadth of the 121.9 billion yuan annual record in 2018.”
It’s got folks wondering what’s going on. Is a widespread credit event lurking just beneath the surface?
Our answer: Yes and no.
China’s economy continues to carry a massive debt load – and the recent financial de-risking campaign is adding to financial stress. That’s a recipe for increased corporate defaults.
But it’s not all bad news:
- “’Rising defaults should be a natural part of [the] credit-market cycle,’ said Anne Zhang, head of Asia fixed income for JPMorgan Private Bank.
- “It is long-term positive for any market to develop a good pricing mechanism for risks.”
We agree with Anne here.
Get smart: The proximate catalyst for a spate of defaults like this is always hard to pin down – let alone predict.
Get smarter: While they can certainly make mistakes, China’s financial officials are aware that addressing financial risks brings some of those very risks to the fore.
Bloomberg:China’s $17 Billion Default Wave Is About to Break a Record
2.China looks to science to stabilizepork supply
Chinese officials’ efforts to contain soaring pork prices are starting to work – and Xinhua wants you to know about it:
- “From Nov. 25 to 29, the average pork price index in 16 provincial-level regions…came in at 40.95 yuan per kg, down 3.5 percent week on week.”
- “This is the third consecutive week that the pork price index has retreated.”
Not that officials are patting themselves on the back or anything:
- “The price retreat came as the Chinese government has been taking multi-pronged measures to boost supply, including increasing subsidies to restore hog production, releasing frozen pork reserves and expanding pork imports.”
Some context: In case you forgot, pork prices more than doubled after African Swine Fever decimated supplies.
Get smart: To ensure long-term supply, Chinese scientists are also looking to breed genetically-engineered super pigs (Bloomberg):
- “Inside a fortress-like megafarm on the outskirts of Beijing, dozens of pink-and-black pigs forage and snooze, unfazed by the chilly spring air.”
- “These experimentally bred hogs are fortified with a gene for regulating heat, buffering them against northern China’s hypothermia-inducing winters.”
You read that right. And according to the long, fascinating piece from Bloomberg it’s a race against the Americans.
Do yourself a favor and click the link below.
ESCN: China’s pork prices continue to retreat
Bloomberg:China’s Mutant Pigs Could Help Save Nation From Pork Apocalypse
3. That shining Macau example
On Tuesday, National People’s Congress Chairman Li Zhanshu spoke at a symposium commemorating the 20th anniversary of the Basic Law of Macau.
Li had nothing but praise for the city (NPC):
- “National identity has a broad and deep foundation in Macau society.”
And for its leadership:
- “The chief executive andkey government officials, as well as the principals of the legislature and the judiciary are all patriots.”
He said that Macau has long been doing well:
- “As early as 2009, Macauformulated the Macau National Security Law…[and] established a specialized agency for the maintenance of national security.”
Li also expects Macau to keep up the good work, by continuing to:
- Improve laws and enforcement to prevent and punish activities threatening regime security – such as treason, calls for secession, incitement to rebellion, or activities undermining the central government
- Prevent the infiltration of outside hostile forces in the city
- Beef up law enforcement to maintain state security
Get smart: It’s hard to miss Li’s not-so-subtle reference to Macau’s troublesome neighbor, Hong Kong.Beijing wants Hong Kong to follow Macau’s example.
4.El Salvador’s diplomatic switch pays off
On Tuesday, Xi Jinping met with El Salvador’s President Nayib Armando Bukele Ortez.
Why that’s a big deal: El Salvador only established diplomatic relations with China in August 2018 (see August 22, 2018 Tip Sheet). Previously it recognized Taiwan.
Xi was all smiles (Xinhua):
- “The establishment of diplomatic ties opens the door of bilateral cooperation, conforms to the trends of historical development and accords with the fundamental interests of both peoples.”
- “You have shown strategic vision as a statesman.”
And Xi offered more than just flowery rhetoric (Reuters):
- “China will help build a large sports stadium, multi-story library and water treatment plant.”
- “China…will also assist at coastal tourist sites, including building streets, parks and a water system along the beaches known as Surf City.”
Bukele was appreciative (Xinhua):
- “’El Salvador abides by the one-China policy and supports China in realizing peaceful reunification,’ said Bukele.”
- “He said his country appreciates China’s assistance and looks forward to cooperation with China in areas of investment, trade, infrastructure construction, agriculture, tourism, culture and science and technology.”
Get smart: Xi is keen to show that switching diplomatic recognition from Taiwan to the PRC is economically and commercially beneficial for the countries that do so.
5.Party looks to take care of army vets
On Tuesday, the Central Military Commission released new guidelines to improve care for retired veterans.
Some context: China has millions of veterans – and they have not been treated all that well in the past. That’s led to numerous high-profile protests throughout the country in recent years (see August 1, 2018 Tip Sheet).
Xinhua has a brief summary of the new guidelines, which call for:
- “…improving the quality of service and support for military retirees, exploring new service and support models, creating a sound living environment for the elderly and ensuring retirees’ access to quality healthcare.”
This move isn’t the only way that authorities are attempting to address veterans’ complaints.
- The government set up a new ministry – the Ministry of Veterans Affairs – in March 2018.
- The legislature is currently drafting a Veterans Protection Law.
Get smart: The Party-state does a decent job of responding to society’s complaints. That’s a big reason why the Party maintains a high-level of legitimacy.
CPC People: 中央军委印发《关于加强新时代军队离退休干部工作的意见》
Xinhua:China to improve service, support system for military retirees
6.You can’t hurry Trump, no you just have to wait
After weeks of telling us that a “phase one” trade deal with China is just over the horizon, US President Donald Trump threw another wrench in the gears on Tuesday.
Trump suggested the timeframe may still be a year out (Reuters):
- “I like the idea of waiting until after the election for the China deal.”
That’s not what markets wanted to hear.
- The Dow Jones dropped 1.4%.
- The Nikkei tumbled 1.2%.
- The SP 500 and Hang Seng each fell 1%.
In case you forgot: The US and China have been hung up on two main issues for nearly two months:
- Chinese unwillingness to commit to gigantic agricultural purchases
- American unwillingness to say whether it will roll back existing tariffs
The clock is ticking:
- The next round of US tariffs is set to take place on December 15.
- At this stage it’s unclear whether they will go forward or not – and that’s just 11 days away.
Get smart: To us, the latest noise feels like just that – more noise than signal. So we’re still cautiously optimistic that a deal will happen and the next round of tariffs will be scrapped or delayed.
But a deal becomes less likely with each passing day.
Reuters: Trump says China trade deal may have to wait amid sticking points in talks
CNN: Asian stocks suffer after Trump says China trade deal might have to wait
Washington Post:Trump says trade deal with China could wait until after 2020 election; Dow plunges 400 points