HONG KONG: Singapore-based Asia Genesis Asset Management is liquidating its hedge fund after a “significant and unprecedented drawdown” following missteps in Chinese and Japanese bets. The Asia Genesis Macro Fund lost 18.8 per cent in the first weeks of January, Chief Investment Officer Chua Soon Hock said in a letterContinue Reading
Moody’s Investors Service was something of a thorn in global policymakers’ sides in 2023. From Beijing to Washington, the ratings giant fired any number of shots across the bows of the biggest economies.
In mid-November, it lowered America’s credit outlook to “negative” from “stable”, pointing to political polarization in Congress as the US national debt topped US$34 trillion. Three weeks later, Moody’s cut its outlook for Chinese sovereign debt to “negative,” citing a slowing economy and a property sector crisis that Beijing has been slow to address.
Now, Moody’s is reminding Asia of the economic trauma 2024 may have in store as China’s slowdown imperils sovereign creditworthiness across the region.
Moody’s thinks the fallout from China’s property troubles on business and household confidence makes hopes for 5% economic growth in 2024 overly optimistic. It sees mainland gross domestic product (GDP) slowing to 4% this year and next.
For an economy at China’s level of development, such a downshift from the 6% growth averaged from 2014 to 2023 will set back living standards. And it will exacerbate the debt troubles Moody’s flagged last month, both among developers and local governments around the nation. It also may spark legitimacy problems for Xi Jinping’s Communist Party.
China’s slowdown “significantly influences” regional economic trajectories via supply chains, Moody’s says. “As these economies’ respective manufacturing bases are smaller in scale and less developed than China’s, the latter will remain at the center of many of the region’s supply chains and an important source of final demand in the near term.”
True, Moody’s argues that “against this backdrop, we expect companies to continue to diversify supply chains away from China to better manage risks around overarching geostrategic tensions, but also in response to longer-term structural trends.”
These “include population aging and policy risks in China – as illustrated in internet platforms and private education sector regulatory changes – as well as the rapid expansion of the middle class in India,” Moody’s says.
“The diversification trend,” Moody’s goes on, “has accelerated in recent years, boosting investment prospects in economies with large manufacturing bases and improving infrastructure such as India, Malaysia, Thailand and Vietnam.”
But such pivots take time to execute. Rerouting trade routes is complicated in the best of times and even more so in relatively tight global credit conditions.
In recent weeks, traders have dialed back expectations for US Federal Reserve interest rate cuts. The People’s Bank of China, meanwhile, has been far less generous about adding liquidity than most economists, analysts and investors expected.
In addition to the “lackluster situation in China,” says Moody’s analyst Christian De Guzman, tight credit conditions are an added headwind for the region.
“This,” De Guzman told CNBC, “is predicated on global liquidity conditions where we really don’t see the Fed easing until the middle of the year. And Asia-Pacific central banks – we don’t see much decoupling [from] global liquidity conditions there.”
It’s not just that China may be less of a global economic engine going forward. In 2023, Chinese imports contracted by 5.5% amid weak domestic demand. That means China’s 5.2% economic growth rate in 2023 didn’t generate much of a tailwind in Asia.
The bigger problem is how China’s financial risks may stress-test a region still dealing with the fallout from the Covid-19 era. In recent years, governments and companies borrowed aggressively to recover from the pandemic.
In its report, Moody’s warns that elevated global interest rates will worsen debt-servicing burdens. The upshot is that gaining access to international capital will become increasingly more difficult for lower-rated governments.
That will be a problem for China as much as anywhere, if not more. It’s sure to have a cooling effect on President Xi’s economy, notes Moody’s economist Harry Murphy Cruise.
“Real estate investment, dwelling prices and new dwelling sales are set to fall throughout 2024 before returning as a modest driver of growth in 2025,” he predicts.
Yet this could reflect wishful thinking if Xi’s team doesn’t act more forcefully this year to repair the property sector, including by creating a credible mechanism to get bad assets off balance sheets. A similar effort is needed to address the $9 trillion buildup of local government financing vehicle (LGFV) debt.
As these headwinds intensify, the Asia-Pacific region’s sovereign creditworthiness in general is deteriorating. These “tight international funding conditions will curb the region’s output,” Moody’s warns.
For its constellation of 25 sovereigns in the region, Moody’s sees GDP growth falling to an average 3.6% in 2024 from 4.2% last year. That, the rating agency’s analysts say, marks the “lowest rate of expansion in a non-pandemic year in at least two decades – reflecting a slowdown in China and broadly lackluster global economic conditions.”
Slower growth, Moody’s adds, will make it even harder for most governments to reduce Covid-era increases in public debt.
“Together with tight domestic labor markets, this will spur many APAC central banks to maintain tight monetary policy and mitigate currency depreciation risks,” Moody’s says. “International financing will remain difficult for lower-rated sovereigns, particularly frontier markets with large external payment needs.”
On Monday, China’s Premier Li Qiang called for more assertive steps to halt the plunge in mainland stocks, which are now at a five-year low. That’s easier said than done as global investors react to deepening deflationary pressures and a festering property crisis many economists compare to Japan’s banking debacle in the 1990s.
Even if the PBOC were to begin easing suddenly — something it’s avoided doing so far — the moves have already been priced in the market, says Eva Lee, head of Greater China equities at UBS Global Wealth Management. Only a much “punchier” monetary response might stabilize the situation, she adds.
Global “passive” funds are becoming far more assertive in hedging China risks. “Their recent selling did amplify the downside pressure,” says analyst Gilbert Wong at Morgan Stanley.
The reason is that “the Chinese government has not yet introduced effective measures to resolve the property turmoil and drive the economic recovery,” says strategist Ken Cheung at Mizuho Bank. This, he adds, has overseas investors continuing to “reduce their risk exposure” amid “bearish expectations” for China’s outlook.
Here, expectations versus reality are becoming a problem for investor sentiment. Generally, Premier Li has “doused” hopes for further support measures, notes Brian Martin, an analyst at ANZ Research.
As Li “trumpeted the nations’ ability to hit its 5% growth target without flooding the economy with massive stimulus,” investors were left fearing Beijing had lost the plot, he said.
Surely, Xi’s inner circle may have valid reasons to be confident about China’s 2024. It’s entirely possible that the economic dashboard Xi’s men are viewing suggests aggregate demand will bounce back sooner than most investors believe.
At the same time, Xi’s party is loath to squander progress made in financial system deleveraging. Beijing’s determination not to reward bad behavior and poor lending decisions is to be applauded. Still, if China’s trajectory is less dire than markets think, Xi’s team is doing a poor job spreading the news.
Even taking a glass-half-full approach to China’s 2023 performance requires an asterisk. “While the economy did beat the official target, it could have scored a higher grade through a more forceful response to the property meltdown and greater commitment to the private sector,” says Tianchen Xu, a senior economist at the Economist Intelligence Unit.
Downward pressure on the yuan also suggests the economy is less vibrant than Beijing’s spin would have investors believe. On Monday, Reuters reported that major state-owned banks are propping up the exchange rate. The rationale, Reuters notes, is to disincentivize traders from shorting China’s currency.
A deeper drop in the yuan might also add to default risks among distressed property developers and intensify selling of China’s A shares. So far this year, overseas funds have dumped upwards of $1.6 billion worth of Chinese equities.
“The PBOC has stepped up its efforts to restrain dollar-yuan through the daily fix lately, and this is keeping a lid on” the exchange rate “at the 7.20 level,” says Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “But I think it should give way to the upside soon.”
In recent days, Tan notes, the PBOC and Beijing’s foreign exchange regulator stepped up to “strengthen market expectation guidance and take actions to correct pro-cyclical and one-way market behaviors when necessary.”
Julian Evans-Pritchard, head of China economics at Capital Economics, says the PBOC’s decision Monday to hold benchmark lending rates steady proves that policymakers “appear to harbor lingering concerns” about the yuan.
“A cut at this stage could trigger additional depreciation pressure, something the PBOC wants to avoid,” Evans-Pritchard says. “Therefore, it may stick to quantitative easing tools for now,” including supplementary lending efforts.
This, too, is part of Xi’s desire not to derail success in building trust in the yuan. A stable exchange rate remains key to making China Asia’s top financial power. As such, Xi appears to care more about a strong currency than rising stocks.
There are also geopolitical threats to consider as US voters choose a new president in November. As US President Joe Biden looks to outflank Republicans loyal to Donald Trump by being tough on China, new sanctions could emerge.
Tensions in the Red Sea and Russia intensifying its Ukraine war could boost energy prices and thus inflationary pressures in the year ahead.
All this puts sovereign ratings across Asia in harm’s way. A bigger trade war is a particular wildcard. As Washington and Beijing face off in the year ahead and related risks become “more prominent,” Moody’s warns, Asian governments will find it increasingly difficult to maintain financial balance.
Moody’s adds that “competition between China and the US is resulting in regionalization of trade and shifts in economic and financial influence” in the longer run. In the shorter run, though, such disruption is another reason for investors to worry about threats to sovereign ratings in 2024.
Follow William Pesek on X at @WilliamPesek
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Many Americans feel broken and people are split on immigration and very divisive issues like gender or abortion and go for former president Donald Trump.
His victory in Iowa is proof of this. But the country is doing better than ever. A belief crisis blinds many. The US needs to restore its cultural unity, starting with accepting the reality of a new creeping war that could defeat the nation and smash the world.
Perhaps judging a country from afar is vain and impossible, especially one so openly full of contradictions and blinding lights. These lights make things harder to see than shadows in a dark room – they totally cancel one’s vision.
Yet, America is the hub and the keystone of the present world system and anything happening there has tectonic reflexes elsewhere.
The presidential election in November will sway the course of wars in Ukraine and the Middle East, the fate of continents, Asia around China, and Europe around the EU. The world order will be dramatically changed, and perhaps not for the best.
The US presidential election is a global issue, and although we can’t vote and can’t be elected in it, we feel a duty to voice our concerns and offer them to American fellows as a word of counsel. America’s plights are our own plight, as we can’t say we are not Americans.
These elections are actually about Biden and ought to be because he is the incumbent president. But the ex-president and now favored contender in the polls is Donald Trump. Perhaps it is right to start there.
Bret Stephens took an original, critical view of his strengths:
- “Trump got three big things right — or at least more right than wrong. Arguably, the single most important geopolitical fact of the century is the mass migration of people from south to north and east to west, causing tectonic demographic, cultural, economic, and ultimately political shifts…
- The broad direction of the country Trump rode a wave of pessimism to the White House… More than 12% of all adult males had a felony conviction on their record, leaving them in the shadowlands of American life. And there was a palpable sense of economic decline, with fewer and fewer younger Americans having any hope of matching their parents’ incomes at the same stages of life. Far too little has changed since then. Labor force participation remains essentially where it was in the last days of the Obama administration. Deaths of despair keep rising. The cost of living has risen sharply, and while the price of ordinary goods may finally be coming down, rents haven’t. Only 36% of voters think the American dream still holds true, according to a recent survey, down from 48% in 2016. If anything, Trump’s thesis may be truer today than it was the first time he ran on it…
- The question of institutions that are supposed to represent impartial expertise, from elite universities and media… those institutions did their own work in squandering, through partisanship or incompetence, the esteem in which they had once been widely held. How so? Much of the elite media, mostly liberal, became openly partisan in the 2016 election — and, in doing so, not only failed to understand why Trump won but probably unwittingly contributed to his victory. Academia, also mostly liberal, became increasingly illiberal, inhospitable not just to conservatives but to anyone pushing back even modestly against progressive orthodoxy.”
He warns that the appeal to democracy, strongly voiced by Biden last month, could fall flat with moderate voters. Perhaps there is a new and old impatience with the cumbersome and roundabout ways of the democratic process.
It is less effective day-to-day and does not communicate well as one man alone. There is skepticism about trying Trump in court now on charges difficult to understand for most people, like tax fraud or those about the January 6, 2021 “insurrection.”
On these pages, on January 7, 2021, we called the urgency to prevent the return of that “Epiphany” because tolerating the intolerant destroys the basis of a democratic process. In fact, Trump flaunts and breaks democratic rules and conventions, and he has a comprehensive plan to reform all democratic institutions.
His opponents, like Ian Bassin, in ex-president Obama’s team, reportedly argued: “Our democracy rests on a foundation of trust — trust in elections, trust in institutions. And you know what scares me the most about Trump? It’s not the sledgehammer he’s taken to the structure of our national house. It’s the termites he’s unleashed into the foundation.”
Still, Stephen’s arguments may cut little or no ice with people who feel broken without care from anybody.
Stephen astutely writes: “Brokenness has become the defining feature of much of American life: broken families, broken public schools, broken small towns and inner cities, broken universities, broken health care, broken media, broken churches, broken borders, broken government.
“At best, they have become shells of their former selves. And there’s a palpable sense that the autopilot that America’s institutions and their leaders are on — brain-dead and smug — can’t continue… If you’re saying it’s ‘Morning in America’ when 77% of Americans think the country is on the wrong track, you’re preaching to the wrong choir — and the wrong country.”
Americans feel crime is going up, and it is a serious political issue. However, recent FBI data show that violent crime actually dropped nationwide in 2022 while property crime jumped.
The broken people are not only with Trump; they are also with the Democrats, believing sometimes weird theories. They stopped trusting mainstream America. Maybe this is the real heart of the matter. Maybe in America, the social difference is no longer between blue or white collar, that dominated much of the past century.
Rather, it’s about being broken or not. Perhaps most feel broken or that being broken and dealing with broken people is part of their lives. They are branded and scorched in their soul for it and don’t see another chance.
But the United States was founded by people searching for a second chance, a new beginning and redemption. “Broken” is part of the American identity. But these people may feel mainstream society, controlled by the elites, doesn’t give them a second chance.
Then, they think they have to take things into their own hands. But it’s impossible in modern and complex societies. Somebody has to help them out. So, the question becomes: who is going to give them redemption?
Moreover, it is not just about being broken. It is about real divisive issues. The Biden administration’s support for the gender concept, abortion, indiscriminate backing of new immigration from the Middle East (now protesting against Israel, a traditional US darling), and what is felt as a hurried dismissal of conventional culture are all very irksome for many people in the US.
The press may blow out-of-proportion stories of kids being exposed or encouraged to sex changes in schools. Still, the fact that the Democrats do not invite prudence and wisdom is portrayed as a violent upending of old American values. They can’t be just waved away with easy gestures. The Iowa caucus proves they cut a lot of ice with many people. These new cultural sentiments also find little support abroad.
This and the sense of being broken can make a potent political alchemy.
The problem is the issues Trump raises are right. How the Democrats or other Republicans deal with them may not be right. But Trump’s answers so far are equally beyond wrong; they are flimsy. However, if there are no better answers to true issues, even the wrong answers will count.
Still, there is a difference between words and facts. Trump fell at the end because he failed to confront Covid. It was a difficult situation but unexpected disasters make or destroy leaders. The response to the exceptional 2004 tsunami transformed Thaksin Shinawatra from one of the occasional Thai prime ministers to an icon of the country.
The 2008 Sichuan earthquake made grey then-Chinese president Hu Jintao and premier Wen Jiabao popular. Even in the utter destruction of the 2023 Turkish earthquake, with a death toll multiplied by shoddy construction permitted by the government, Recep Tayyip Erdogan eventually took things into his own hands and turned the national mood.
During Covid, Trump had all the elements to fully grasp the moment’s gravity and act promptly. He should have cut flights and direct contact around China. Beijing itself went into lockdown, thus signaling to the rest of the world that it should protect against the spread of the disease abroad. He didn’t. Despite all the relevant information Trump had, he dithered, went into denial and changed his mind repeatedly.
The Covid experience alone may cast doubt on his ability to confront dire, unpredictable situations. In the past couple of years, there have been plenty of them, from Ukraine to Gaza, and President Joseph Biden has always risen to the occasion. In the future, times will be even more difficult. Would Trump be able to cope with them, or will he flop confusedly?
Then it is a twofold issue – Trump per se and the broken people following him or on the left all believing conspiracy theories.
There’s an intellectual belief crisis in America. There are cultural clashes, divides about gender, race, origin and class. This has shaped into tribalism that lost the middle ground where Americans used to meet and get together. This belief crisis makes people deaf to objections about their distorted view of reality. Without a shared view, people from different camps talk past each other.
Perhaps it is also because most people are not clear where we are in history now. There is no end of history or trust in a never-ending story of global liberal markets unfettered by burdensome politics. There is no clash of civilizations, as things turned out to be far more complicated than a few arbitrary lines drawn on a cultural map.
We are not in Cold War II, as the US is apparently reluctant to use this label that would precipitate memories of defense mechanisms unfit for the present situation. As the Pope said, we are in a creeping, crawling world war in pieces.
Perhaps, if we collectively recognize it and acknowledge the drama of the historic moment, we may hope to crawl back to peace. Perhaps Americans, both Democrats and Republicans, should openly recognize it, although the word “war” may start all kinds of troubles in the US inflammable state of affairs.
Trying to be unbiased, we see Biden possibly doing a much better job than he is credited. The economy is booming like in the 1950s. Biden launched a series of plans to push a technological and infrastructure revolution. He is successfully and cautiously handling three conflicts at once (Ukraine, Gaza, China). These plans and this attitude should be continued with or without him.
What is wrong? Inflation and immigration? More should be said and better, but both are very complicated issues that don’t have a simple answer. Incidentally, both fuel the booming economy; labor and investment are necessary now and for future growth.
What is true is that the US works; it is in the middle of massive, positive and tough changes. Some forces seem keen on stopping for some half-baked ideas of power concentration, hiding only a power grab.
This power grab can destroy the US as it is and the world as it is and throw America into unprecedented economic, social and political crisis, opening the gates to Russian President Vladimir Putin ruling the world and a post-USSR ghastly vindication.
David Axelrod stresses that Biden needs to provide a vision for the future of America. He has to say something reasonable about migration and mutual tolerance and set a repetition in communicating that. America is a nation about the future, not the past.
Biden is an old guy, but it’s an advantage; he has a sense of history. Because he’s old and has a sense of time, he can project the US 80 years ahead. It is what the world needs now, to see things together again. Biden or a possible Republican president should work to unite the country.
The US won the Cold War first by succeeding in re-establishing a world “cultural hegemony” with presidents Jimmy Carter (human rights) and Ronald Reagan (economics and liberalism) after the disasters of the war in Vietnam and the 1960s student movements worldwide.
Today, it is the same point. Trump does not establish an American global cultural hegemony; he shatters it.
Can China establish cultural hegemony? It was doing it with the Belt and Road Initiative but it underestimated its complexity and was misguided by minimal economic and low-end political calculations.
The BRI proposed de facto a world before America’s discovery but then with America’s existence and thus against America. Before the discovery of America, the world was torn apart by different worldviews in different areas. The order was kept because the different regions were not in direct contact with each other simultaneously.
With the discovery of America and the Magellan trip around the globe, the world grew with more direct geographic contacts and even shorter time lapses. It needed a unitary worldview and the West provided it over the next 500 years.
Still, China is apparently rethinking its whole approach to the BRI, linking it more consistently with its strategy and long-term plans, as Shi Yinhong, professor of International Studies at China’s People’s University, wrote.
China’s president, Xi Jinping, also offered the US to join the BRI on his November trip to San Francisco. China, of course, doesn’t have the problem of building a domestic consensus. However, exporting cultural consensus from an authoritarian country raises different sets of questions.
If America does not regain its unity, there is a risk of a shattered world without the past geographic and temporary separation. It would be a recipe for chaos starting right at the center of the global system – the US. The effects of the shattering may be incalculable.
This is happening already. Graham Alison warns of the “Trump put”:
Some foreign governments are increasingly factoring into their relationship with the United States what may come to be known as the “Trump put” – delaying choices in the expectation that they will be able to negotiate better deals with Washington a year from now because Trump will effectively establish a floor on how bad things can get for them.
Others, by contrast, are beginning to search for what might be called a ‘Trump hedge’ – analyzing how his return will likely leave them with worse options and preparing accordingly. Russian President Vladimir Putin’s calculations in his war against Ukraine provide a vivid example of the ‘Trump put.’ In recent months, as a stalemate has emerged on the ground, speculation has grown about Putin’s readiness to end the war.
But as a result of the ‘Trump put’, it is far more likely that the war will still be raging this time next year. Despite some Ukrainians’ interest in an extended cease-fire or even an armistice to end the killing before another grim winter takes its toll, Putin knows that Trump has promised to end the war ‘in one day.’
It is the dominant factor in all geopolitics now also because, as the Chinese would put it 不怕一万就怕万一 , which is something like: don’t think of the 99,99% possibility, just be afraid of the 0,01% chance.
In this sense, Trump’s only presence is disruptive, as he promises disruption, and nobody knows what kind of disruption he would bring. He is a total wild card in a world already on the brink of chaos. The problem is not our preferences but the possibility of drastic discontinuity of US policies and the relatively small (but not negligible) chance it could happen.
The combination of these two elements already today creates chaos in foreign politics because people put off choices as a measure of prudence. Still, the American people will vote according to American domestic concerns, dominated by the sentiment of being broken. Here, the split in American society is perhaps deepest.
This essay first appeared on Settimana News and is republished with permission. The original article can be read here.
The startling divergence between China’s 5.2% growth and cratering stock market is putting Asia’s biggest economy in global headlines for all the wrong reasons.
Given the chaos of 2023 — a massive property crisis, record youth unemployment, trade headwinds from Washington and deflationary pressures — China’s ability to top 5% growth year on year is impressive indeed. But the stock market continues to stumble, a rout that shows few signs of slowing.
So how bad could things get? In the first two weeks of 2024, global funds sold more than US$1.1 billion of mainland stocks. China’s CSI 300 index this week fell to its lowest levels since 2019, losing more than 25% over the last year. That’s the mirror image of the 24% rally in the S&P 500 over the same period.
China’s stock troubles have many causes. The most recent: disappointment that the People’s Bank of China didn’t loosen monetary rates this week. It left rates unchanged on its seven-day reverse repo and medium-term lending facility. Markets had been expecting cuts.
“The PBOC’s decision to hold rates is negative for market sentiment and economic growth, and suggests policymakers are not trying very hard to present a coordinated, strongly pro-growth message at the start of the year,” says Wei He, analyst at Gavekal Dragonomics.
Recent data show that China entered 2024 with a series of headaches undermining domestic demand and confidence. Property-related spending is sliding and home prices are the weakest since 2015.
Consumer prices have dropped for three consecutive months, suggesting the worst deflationary pressures since the 1997-98 Asian financial crisis.
Then there are the data trends that fuel “Japanification” chatter. That includes news that the historic decline in China’s population continues, with births falling to a record low in 2023, adding to Beijing’s longer-term demographic challenges.
It’s complicated, of course. As 2024 opens, Xi Jinping’s China finds itself at a transitional crossroads. President Xi’s team has been working to reduce China’s vulnerability to boom/bust cycles.
This means clamping down on runaway borrowing, reducing the role of state-owned enterprises, championing private-sector development and increasing innovation.
Deleveraging is a necessary ingredient to increasing the quality and productiveness of China’s gross domestic product (GDP). It means going easy on the kinds of stimulus Beijing would normally throw at a lethargic economy.
This can be seen in the PBOC’s reluctance to hit the monetary gas.
“We suspect the main reason the PBOC failed to deliver this time is a desire to avoid triggering renewed depreciation pressure on the renminbi,” economists at Capital Economics said in a note.
Along with hastened capital outflows, a weaker exchange rate would increase default risks among property developers already struggling to make offshore bond payments. It also might draw ire in Washington as the November presidential election heats up.
ANZ Bank analysts add that the “PBOC chose to hold despite strong deflation pressure. This likely reflects its concerns about bank profitability.” The rationale being that the lower rates go, the harder state-owned banking giants might find it to generate healthy returns.
Yet indications that China faces deflation buttress the case for additional monetary easing, says Commonwealth Bank of Australia strategist Joseph Capurso. “We judge the market has more or less priced in an imminent PBOC rate cut” in the near future, he notes.
Weak consumer demand is hardly helping to change the narrative among global investors. When it comes to spending, “sustainability is in doubt amid slowing economic recovery,” says Lillian Lou, analyst at Morgan Stanley.
Adding to the uncertainty at PBOC headquarters, Governor Pan Gongsheng has limited visibility into what the globe’s other top central banks are planning this year.
Bets that the US Federal Reserve would be cutting rates assertively are being reconsidered as the world’s biggest economy expands apace.
Top officials like Fed Board Governor Christopher Waller are signaling that rates will be lowered “methodically and carefully” at best.
Such comments suggest “there’s no reason to move as quickly as they have in the past, cuts should be methodical and careful,” says strategist Marc Chandler at Bannockburn Global Forex.
At Bank of Japan headquarters, officials are stepping away from plans to exit quantitative easing. Along with likely entering 2024 in recession, BOJ officials worry China’s slowdown will hit Japanese exports hard.
All this “means that the market no longer expects the Bank of Japan to raise interest rates at its late January board meeting,” says economist Richard Katz, who publishes the Japan Economy Watch newsletter.
“That, in turn, means the US-Japan interest rate gap will remain higher for longer than was previously expected, or grow even larger as it has over the past weeks,” Katz says. “If so, that means a weaker yen than previously expected.”
This dynamic could complicate the PBOC’s options for major steps to add liquidity. Gavekal’s He says that “policymakers are still likely to reduce policy rates later in the first quarter, meaning bond yields will probably remain at their current low levels.”
PBOC officials, He adds, “are unlikely to change the benchmark loan-prime rates later this month.”
“Commercial bank net interest margins remain at an all-time low, and it is hard to imagine that policymakers would exacerbate that squeeze by lowering bank lending rates but not their funding rates. Still, bond-market participants appear optimistic about an eventual rate cut,” He adds.
Thanks to looser liquidity conditions, lower deposit rates and rate-cut expectations, the 10-year China government bond yield has declined to about 2.5% from nearly 2.7% in early December.
Lower yields are narrowing the gap between the 10-year Chinese government bond yields and seven-day reverse repo rate, a measure of growth expectations.
“It is now nearly back to the average in 2022, when Covid lockdowns hammered the economy,” He notes. “The already low-level means room for further narrowing is probably limited, barring a substantial shock to growth.”
Speaking in Davos this week, Chinese Premier Li Qiang gave few hints that Xi’s inner circle expects major shocks. There, Li stuck to the line that Beijing isn’t about to announce “massive stimulus” moves to boost growth or combat deflation.
To be sure, China is mulling a special sovereign bond scheme to issue 1 trillion yuan ($139 billion) of new debt. The idea would be to sell ultra-long sovereign bonds to improve efficiency in sectors like energy, food, supply chains and urbanization planning.
But the real reasons so many global investors wonder if China is safe are an underdeveloped financial system and regulatory uncertainty.
As Bloomberg reports, SC Lowy Financial HK Ltd finds the “credit space uninvestable there” due to murky legal certainty and poor corporate disclosure. Thus, the investment firm has “very little exposure to China.”
At Davos this week, JPMorgan CEO Jamie Dimon told CNBC that the “risk-reward calculation” on China has “changed dramatically” despite Xi’s team being “very consistent” in opening up to financial services companies. That, he added, leaves global funds “a little worried.”
In the short run, Beijing is asking institutional investors not to dump large blocks of Shanghai or Shenzhen stocks. Regulators also are working to curtail big investors’ ability to be net sellers of shares on certain days.
As the Financial Times reports, this so-called “window guidance” is being pursued to calm nerves in both equity and debt markets. Yet this treats the symptoms of Chinese stock troubles, not the underlying causes.
The need for a clear and bold commitment to structural reforms was crystalized by a December 5 downgrade warning by Moody’s Investors Service.
It lowered Beijing’s credit outlook to negative from stable citing “structurally and persistently lower medium-term economic growth” and a cratering property sector. But also, because of China’s increasing financial volatility.
Xi and Li know what’s needed: greater government transparency; better corporate governance; more reliable surveillance mechanisms; a credible independent credit rating system; and a robust market infrastructure that keeps foreign investors engaged.
True, Moody’s noted that the “economy’s vast size and robust, albeit slowing, potential growth rate, supports its high shock-absorption capacity.”
Yet a bewildering array of headwinds slamming cash-strapped local governments and SOEs are “posing broad downside risks to China’s fiscal, economic and institutional strength.”
To its credit, China has made vital progress since 2016 to make its markets more hospitable to overseas investors. That was the year the PBOC secured a place for the yuan in the International Monetary Fund’s “special drawing rights” program.
The yuan’s inclusion in the IMF’s exclusive club of reserve currencies, joining the dollar, euro, yen and the pound, was a pivotal moment for Beijing’s financial ambitions.
In the years since, Xi’s team vastly increased the channels for foreign investors to tap mainland stock and bond markets. Shanghai stocks were added to the MSCI index, while government bonds were included in the FTSE Russell benchmark. among others.
As demand for the yuan and its global usage in trade and finance grows, China’s tolerance for a stronger currency has surprised markets.
Perhaps no policy lever would hasten Chinese growth faster or more convincingly than a weaker exchange rate. However, Xi’s Ministry of Finance has avoided engaging in a race to the bottom versus the Japanese yen, earning it points in market circles.
Yet the opacity that still pervades Beijing decision-making and Shanghai dealing remains a turnoff for all too many global punters.
Not all, of course. JP Morgan strategist Marko Kolanovic thinks the big drop in Chinese equities is “disconnected from fundamentals” and buying opportunities abound.
“We believe this is a good opportunity to add given an expected growth recovery, gradual Covid reopening, and monetary and fiscal stimulus,” Kolanovic says.
The odds are even greater, though, that China’s stock rout deepens further as Xi and Li navigate this transitional moment.
At some point, China will fix the property sector and build broader social safety nets to increase consumption. And its capital markets will one day be ready for global primetime. In the meantime, the CSI 300 could be in for quite a rocky ride.
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Since 2014, some of these municipalities have agreed to compensate dog meat retailers for closing dog meat stalls in traditional markets. However, now that a full ban is coming into effect, dog meat farmers are requesting compensation schemes as this new law will directly affect their livelihoods.
The Korean Dog Meat Association has been arguing that the Bill represents an abuse of power that overlooks the perspective of many South Koreans, and that it infringes on the right to choose what one wants to eat. Last December, the Association demanded compensation for farmers of 2 million won per individual dog and a grace period of 10 years after the ban.
While the ban may be good news for Korean dogs, dog lovers and for animal protectionists, it adversely affects those whose livelihoods depend on the domestic trade and who have practised the profession for generations.
The change does not necessarily mean an end to the consumption of dog meat in South Korea. Dog meat consumption will continue to be lawful (presumably supplied by imported meat).
Still, this is a milestone for the Korean relation to dogs that cements the dog’s privileged status, in contrast to other animals whose commodification as meat remains normalised and invisible.
Julien Dugnoille is Senior Lecturer in Anthropology, University of Exeter. John Knight is Reader in Anthropology and Ethnomusicology, Queen’s University Belfast. This commentary first appeared in The Conversation.