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Seven Days in China
Taking the pulse of the world’s most exciting economy
June 19, 2018
CER's cheeky recap of the weekly news
In a news-heavy week, the Singapore meeting between Trump and Kim was the clear winner in terms of both number of headlines and lack of substance. Although that’s not quite true. The Trump announcement to end joint military exercises with South Korea without getting anything in return again raised the question of Trump’s motives, but Those In Command here are just pleased that he is In Command there. Bottom, line, it was farcical and the winner by a mile was the CCP. The ZTE deal also went through, and the market value of the company dived as people saw the implications of the fine imposed, the restrictions involved and the possibility of the US Senate pushing for the original ban to be re-instated - effectively a death sentence for ZTE in retaliation for its flouting of UN sanctions on Iran. But stock prices can go up as well as down, and at this point the ZTE drama has to be seen as yet another win for Those in Command in the US-China tussle. Our eyes remain instead on the larger unknowable - the terms of the BRI deals, local government debt, the state of the financial system, and of the property market. In that regard, particularly noteworthy was a comment from Guo Shuqing, head of China’s Banking and Insurance Regulatory Commission (CBIRC), who said the deleveraging drive must be in proportion to what the market can handle. There is what appears to be the shadow of fragility darkly visible behind the opaqueness.  
Some mixed messages amongst the tea leaves this week. The latest Chinese trade data is good, with exports showing double-digit growth. The background to that is the fundamentally solid state of the global economy, particularly the United States. That has good implications in terms of GDP growth prospects for Q2. A raft of tech IPOs are also getting ready to go in the Hong Kong and Shanghai markets that have the potential to reduce even further the fundraising interest in the US markets from Chinese companies. Meanwhile, amazingly, ZTE got a deal out of the United States that allows it to dodge the bullet. It has to pay a huge fine and agree to have US representatives planted inside the company to ensure compliance with sanctions. That will be a fun game for all. But it means for the international community that an opportunity to face more robustly an outstanding issue has been lost. There will be others. On the other side of the balance sheet, China's foreign exchange reserves fell in May for the second month in a row and the RMB rate is sagging. Meanwhile, the Shanghai stock index ended the week down, which is not surprising given the main market news of the week which was that withdrawals from all money market funds had been capped at RMB 10,000 a day. If the authorities set such a limit on your ability to gain access to your money, what is your reaction going to be? Answer: to withdraw RMB 10,000 a day. This is precisely the problem that Morgan Stanley closed its eyes to when they agreed to include Shanghai stocks in their MSCI indices. And why is it necessary to establish such a limit? Only one possible reason: demand. But why would you want to withdraw money from an economic system that is growing at more than 6% a year? The paradoxes rule. That is what makes China so interesting.
The inclusion of China domestic shares in certain MSCI global indices is the big event of the week, and will have a stabilizing effect on what has always been a choppy and opaque market. But the point is that while the funds make it less choppy, it is unlikely any time soon to be less opaque. Meanwhile, the to-ing and fro-ing on US-China trade is not worth following in great detail here. What's needed on the US side is a steady and consistent policy position, which for obvious reasons is not going to happen any time soon. But what is clear is that the underlying problems are not going to go away, and the consistency of the view on the issue in the West, including the US (but not the White House), is still for us the key take-away. That is probably why the Shanghai stock market has reacted so mildly to the infusion of MSCI funds.
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