Chinese ‘hard landing’ would force Bank of England to slash interest rates

30 Aug 2015 | Author: | No comments yet »

Can Xi Jinping ride China’s market dragon?.

The collapse in Chinese markets has brought into focus a question that Western nations have been grappling with since the 2008 financial crisis: how much, if anything, stock markets have to do with the real economy.

After a dizzying two weeks that saw a rapid plunge and rebound in equity prices, investors are looking forward to a week of economic data that may provide clarity on the likelihood of a near-term US interest rate hike and help tamp down the market’s recent wild swings.Since taking China’s top job three years ago, Xi Jinping and his administration have cloaked themselves in the mantra of “the Chinese Dream,” a feel-good mix of national rejuvenation and ever-higher standards of living.New York – A volatile ride for global markets this week ended calmly on Friday even as lingering worries over Chinese economic growth and the Federal Reserve’s plans to raise interest rates weighed on stocks, but oil rebounded sharply for a second day.Global stock markets surged Thursday on renewed confidence in the US recovery after days of wild swings, but some observers warned of more turbulence to come over the slowing Chinese economy. Warning signs that Chinese stocks were overheating have been clear for months, and the scenes of distraught retail investors losing their life savings as prices began to snap back in June barely made a ripple in global markets, until last week.

Back in April, state-run media encouraged ordinary Chinese and companies to grab their share of that dream by buying stocks — even though China’s economic growth already was known to be slowing. Buyers streamed back to markets after Shanghai, the epicenter of the volatility, snapped a five-day losing streak, and a surprisingly strong new estimate of US economic growth in the second quarter — 3.7 percent — gave more support as the day passed. The Shanghai and Shenzhen brokerages were viewed as one step above casinos, with 80pc of the daily trading volumes coming from ordinary retail investors allowed to leverage up to the hilt on a state-sponsored bull run. The equities “surge” became so tied to the China Dream that people called it “Xi’s stock boom.” Then came a white-knuckle roller-coaster ride.

That — and a production stoppage by Shell in Nigeria — sent oil prices zooming up 10 percent, their biggest single-day jump since the 2009 global economic crisis. “The US economy continues to perform on a consistent basis… (showing) that its economic recovery is sustainable… The United States is leading the global economy as it has been since late last year,” said FXTM chief market analyst Jameel Ahmad. Peter Fitzgerald, Aviva Investors’ head of multi-assets investments, said: “There’s a big difference between the Chinese economy and the Chinese stock market. Global stock markets were stung by severe swings in recent weeks, stoked by concerns that a slowdown in China’s economy may be more harsh than anticipated.

After peaking in mid-June, the Shanghai Composite Index plunged nearly a third in less than a month — then rallied temporarily following government bail-out measures. Those Fed officials who are anxious to raise rates said at an annual global central bankers’ conference in Jackson Hole, Wyoming that continued market turmoil may lead the US central bank to delay tightening monetary policy beyond September. The economy, for example, has been doing well over the past 10 years, while the stock market really hasn’t until recently.” How China’s market panic spread to the rest of the world, creating a global meltdown last week, with the biggest one-day gains and losses since the eurozone crisis, is still unclear.

But after confirming a move into correction territory, the S&P 500 rebounded to score its best two-day percentage gain in over six years this week, as comments from Fed officials led some investors to believe the market turmoil and global growth concerns had diminished the possibility of a rate hike at the central bank’s September meeting. The moves by the Chinese government are “not as effective as they used to be,” said Yale University finance professor Chen Zhiwu on a conference call with the Council on Foreign Relations. In June, a stock market rally that saw China’s benchmark index double since the end of 2014 came to an abrupt end after Chinese authorities tried to curb investors from buying stocks with borrowed cash. But as Washington bickered, obfuscated and delayed, Beijing decisively injected $586 billion into China’s financial system, finally turning the nation into an engine of worldwide progress. Some City insiders have pointed to Beijing’s decision to devalue the yuan on August 11 as a warning that China’s economy was indeed slowing; others suggested disappointing data on manufacturing growth a week later was the trigger.

The move was the latest response by Chinese authorities, including the People’s Bank of China, to shore up the economy after they cut rates, lowered reserve requirements and injected liquidity into the banking system. The turnaround in Chinese shares, which ended with a 5.34 percent gain, came in the last hour of trade Wednesday, sparking speculation of state-engineered buying and talk of more possible support measures from the government. “There were external funds flowing in, but it’s uncertain if it was the national team,” Shenwan Hongyuan analyst Gui Haoming said, referring to entities which trade on behalf of the government.

Observers recommended its distinctive political mannequin — a hybrid of authoritarian politics and market economics — for giving its leaders the power and confidence to climate the worldwide monetary storm. Traders in futures markets that bet on rate increases boosted September’s odds after his words. “There is a narrative out there that Yellen’s Fed is looking for a reason to delay the rate hike; I don’t think that is necessarily the case,” said Brad McMillan, chief investment officer for Commonwealth Financial in Waltham, Massachusetts. After a stronger-than-expected revision to second quarter gross domestic product and solid durable goods figures, another run of strong data next week could bolster the case for a rate increase next month. State media recently has hinted at significant opposition to Xi’s economic ambitions — especially the reform of China’s ponderous state-owned enterprises — and alarm that his team’s crowded agenda may have distracted focus from China’s worrisome economic slowdown. Considerations over the rout have now eviscerated $5 trillion from international markets, as buyers start to doubt whether or not Chinese language officers will be capable of hold the world’s second-largest financial system from hitting a “onerous touchdown,” its progress decelerating to about four% or much less. “What’s occurring is an act of desperation by China and it begins dragging down different nations with it,” stated Invoice Stoops, chief funding officer with Dragon Capital, a Vietnam-based asset administration agency with 90% of its $1.15 billion in native equities. “China’s police state financial mannequin is falling aside.” Specialists, buyers and Chinese language officers agree that for China to take care of robust progress and enter the highest echelon of world monetary powers, the nation should shed a few of its dependence on its export-led financial system in favor of 1 that is pushed by consumption and providers.

The PBOC was throwing “everything but the kitchen sink” at the crisis, with interventions in both equities and currencies, according to Andrew Polk, senior economist at The Conference Board, as the central bank seemingly tried to get out in front of the expectations of increasingly frazzled markets. In a commentary that raised many eyebrows, various state media, including the website of the state-run broadcaster CCTV, recently criticized the “stubbornness, ferocity, complexity and weirdness of those who haven’t adapted to reform or are even opposed to reform.” It stated that the opposition “may go beyond what people imagine.” Yet even Xi, who since 2012 has consolidated his authority more swiftly than any other Chinese leader since the Great Helmsman Mao Zedong, could be in trouble if he’s no longer able to deliver the tradeoff that China’s mandarins have mastered for decades: fast growth in exchange for curtailed freedoms. Thomson Reuters data shows third-quarter earnings expectations have dropped 6.4 percent for the industrial sector and 8.8 percent for the materials sector since July 1. Though China’s “socialist market financial system” has warmed as much as personal entrepreneurship in current many years, permitting e-commerce giants resembling Alibaba to prosper, a number of sectors — telecommunications, aviation and delivery, energy era and distribution, petroleum — nonetheless fall beneath complete state management. The New York Stock Exchange used its circuit breakers, installed after the 1989 crash, to pause stocks on 1,278 occasions on what was immediately dubbed Black Monday.

Earlier this year, when Chinese stocks reached frenzied heights, communist party censors further tightened their monitoring of media and internet content by instructing editors to not “exaggerate panic or sadness. In January, Premier Li Keqiang stated the nation must “comprehensively deepen reforms” and “let the market play a decisive position in useful resource allocation to foster a brand new engine of progress.” China’s GDP is on monitor to increase maybe 7% in 2015, its slowest fee in many years. But when Chinese language shares, already propped up by a government-backed bull run, started plummeting in June, authorities intervened with dramatic pressure. German bond yields edged lower, defying the sudden surge in oil, as data showed consumer prices in Europe’s biggest economy had been weighed down by falling energy costs. They lent large sums of cash to stimulate shopping for, cracked down on “vicious promoting,” and suspended buying and selling in additional than 1,000 shares.

He’s grabbed the reins of a lot of economy policies — usually the responsibility of the prime minister — and heads a raft of smaller decision-making groups in charge of everything from foreign relations to the upcoming 70th anniversary parade celebrating victory over Japan in WWII. Chancellor George Osborne said Britain was “much better prepared than we would have been a few years ago for this kind of shock”, but the economy was “not immune” from the fallout of a Chinese crisis.

However critics stated the federal government brought about confusion by “zigzagging” between intervening and never intervening, opening up and cracking down. While there’s a history of authorities intervening in the markets, it’s tended to happen when values are very low and it was needed to support confidence. For many Chinese, playing the stockmarket is tantamount to gambling in a casino, because of a lack of transparency, rule of law and adequate regulation. A lot hangs within the stability — as China has developed and its center class has grown, the nation has grow to be the world’s largest shopper of copper, metal, aluminum, cellphones, rice, tobacco, meat, coal and a laundry listing of different merchandise and commodities. American central bankers have been signalling for two years that the crisis-era programme of vacuuming up bonds from the market, known as quantitative easing, would be wound up as the economy improved.

The country is Britain’s sixth biggest export market, representing 4.8pc of total UK exports in 2014, according to the Office for National Statistics (ONS). Even this approach wasn’t enough to prevent the “taper tantrum” of 2013, when the markets took umbrage at the suggestion that the Fed would begin to tighten monetary policy. The concept of a “state-mandated bull market” is dangerous, unsustainable and “naïve,” declared Caixin, a prominent financial publication, “it can easily become a ‘mad cow,’ spiking up and down.” New investors — many of whom nevergraduated from high school — were shocked to discover the hard way that officialdom won’t always ride to their rescue. “I don’t believe in government bailouts anymore,” said a 20-something Beijing woman who requested anonymity because she feared she might be punished for expressing such doubts, “Now there’s a big rumor that after the military parade on Sept. 3, all such bail-outs will stop.

Verified email addresses: All users on Independent Media news sites are now required to have a verified email address before being allowed to comment on articles. Despite its growing significance to UK growth, Martin Beck, an economist at Oxford Economics, describes China’s importance to UK GDP as a whole as “still fairly trivial”. China’s abrupt interventions have therefore come as a surprise to investors who have only recently gained direct access to the country’s A-share market.

Last week Prime Minister LiKeqiang repeated assurances that China’s 2015 growth target of around seven percent — the lowest in decades — was doable. According to Oxford Economics, if China manages to control its transition from investment-led growth to a consumption-driven expansion, a “soft landing” would see growth ease from 6.6pc this year to 5.3pc by 2020. Officers in Taiwan, a democratically ruled island of 23 million individuals off mainland China’s southeastern coast that sends virtually 40% of its exports to its giant neighbor, lately slashed their 2015 financial progress goal almost in half, to 1.65%. Cho Shih-chao, Taiwan’s deputy minister of financial affairs, stated in an interview that China is following the trail taken by the island, going from low-quality manufacturing to extra excessive worth information business and providers. “This took 5 or 6 many years for us to succeed in this degree,” he stated. “China began in 1978 with [former leader]Deng Xiaoping and we now have to confess they’re choosing up fairly quick.” “The get together’s decision-making is absolute energy, which suggests [its]insurance policies … need to be obeyed by all totally different sectors, together with [the]enterprise group,” he stated. “So it relies upon, from what angle you take a look at this stuff.

The more optimistic watchers point out that the US markets have just been through the third-longest period in the past 90 years without a major market fall of at least 10pc. Beijing has outlined its aims to wean the economy away from dependence on state-directed investments, to liberalize financial markets, and to allow market forces a more “decisive” role in the economy. However China’s recent stock market tumult has triggered aggressive governmentinterventions — including a freeze on IPOs and instructions for big players to buy stock — that run counter to those aims. Some also sound a note of caution about the timing of the rout, during what is normally the height of the summer slowdown on trading floors around the world.

State Division diplomat who labored at a Tokyo-based funding financial institution from 2000 to 2012, stated Japan’s financial system would in all probability survive the “China panic” intact. The lack of trades magnifies the effect of the deals that take place, particularly if the only players left making bids and offers are computer programmes designed to seek out and exploit any liquidity. When asked if instituting reforms during this economic slowdown would be painful, Prime Minister Li said the challenges were growing more acute, not just like “clipping one’s toenails, but more like taking a knife [to one’s own flesh].” Meanwhile, Xi’s anti-corruption campaign aimed at snagging both “tigers” and “flies” — both senior and working-level officials, respectively — has been so aggressive that many fearful apparatchiks have adopted a risk-averse strategy of bureaucratic paralysis.

He famous that China’s disaster had been brewing for years. “The Chinese language banking system is much more screwed up than was Japan’s after the collapse of the ‘bubble,’ and that’s no small feat,” he stated. “Once I labored on the U.S. Nigel Brahams, a partner in financial services and markets at the law firm Fox Williams, said: “High-frequency trading doesn’t ultimately change the direction of the market but it accelerates and exaggerates it. Among the prominent “tigers” nabbed so far, Xi’s graft-busters have toppled Ling Jihua, former chief of staff to Xi’s predecessor Hu Jintao; two senior generals; and the former security czar Zhou Yongkang. The disinflationary forces unleashed by a hard landing would push UK inflation to an average of just 0.2pc this year, rising to 0.9pc in 2016 and 1.3pc in 2017. Some have quietly urged Xi’s team to focus more intently on the economic slowdown, rather than get sidetracked with the anti-corruption manhunt, according to a recent New York Times article.

It’s.” Talking in November 2008, one week after China’s Cupboard introduced its stimulus, then-President Hu Jintao referred to as the nation’s financial improvement “an necessary contribution to safeguarding worldwide monetary stability.” Even three years later, as China’s GDP developed at a blistering tempo, the state-run New China Information Company accused the U.S. of accumulating an excessive amount of debt and urged Washington to “reestablish the widespread sense precept that one ought to stay inside its means.” Throughout this week’s market decline, Chinese language state media editorials carried a strikingly totally different tone. “Proper now each nation is experiencing financial points,” stated the International Occasions, a nationalistic state-owned tabloid. UBS has crunched the numbers on a possible Chinese slowdown and has estimated that a 1pc drop in economic growth would knock up to 0.4pc from Europe’s output. Even though China buys relatively little from European trading partners, equating to about 3.1pc of overall exports, a slowing consumption of fuel, commodities and consumer goods might spiral into deflation further afield. The scandalous purge of Ling Jihua reflected most negatively on Ling’s mentor Hu Jintao, Xi’s immediat epredecessor as president and party head. (One of the first public hints that Ling was living beyond his means was a spectacular car crash that killed his son, who was driving a black Ferrari in the company of two young semi-naked women at the time.) But a more senior rival to Xi’s authority is believed to be Hu’s predecessor, Jiang Zemin, who was party head from 1989 to 2002 and continues to win respect as the dean of a “Shanghai faction” of leaders, despite his advancing age and uncertain health.

On Tuesday the European Central Bank’s vice-president, Vitor Constancio, tried to dampen anxiety over an economic slowdown in China, saying that the economy did not show signs of major deceleration and that Europe’s central bank stood ready to intervene if deflation reared its head. Rumors whirled through Chinese social media after a stele adorned with Jiang’s calligraphy, which used to enjoy a prominent position at the party’s prestigious Central Party School in Beijing, was removed August 21. The incident triggered speculation on social media — “why don’t they explain the reason for ‘the removal’? … There are games behind this! — and humorous references to “the toad,” a nickname for Jiang because of his prominent stomach and over-sized spectacles.

Less than two weeks before the stele’s disappearance, an unusual editorial in the party mouthpiece People’s Daily warned that retired leaders should avoid the political arena and “cool off” like a cup of tea after a guest has departed. It accused “some leading cadres” of creating a “quandary” for new leaders, “fettering their hands from doingbold work.” The reference is widely interpreted to mean Jiang, though he was never named. Particular correspondents Jake Adelstein in Tokyo, Ralph Jennings in Ho Chi Minh Metropolis and Nicole Liu in The Occasions’ Beijing bureau contributed to this report. But without the central banking might of Beijing, or its $3.65 trillion capital reserves, they are consigned to wait for signs of progress from within China. Instead, the People’s Daily indicated that former security honcho Zhou Yongkang had bucked the “norm for officials to relinquish power after retirement.” Once a member of the all-powerful Politburo Standing Committee, Zhou is China’s most senior communist party official to be convicted of corruption — and was rumored to have plotted against Xi.

The annual Jackson Hole get-together this weekend has allowed the US authorities to drop more hints about what the China shudders might mean, with every morsel on inflation and interest rates carefully watched. While international risks are likely to be top of the agenda at September’s interest rate meeting, other indicators suggest the UK economy is growing nicely. The Communist government’s next five-year plan will be aired in October, with Premier Wen Jiabao’s desire to move more people into urban centres likely to continue unabated.

August’s Inflation Report also suggested the drag from falls in food and energy would “diminish” over the second half of the year, bringing domestic drivers of inflation into sharper focus. Signs of interruption in the long-term goal to rebalance the economy from manufacturing to services would hinder Beijing’s other goal of further opening up its economy to the world. Bank policymakers have noted that the 6pc rise in sterling in trade-weighted terms this year is likely to bear down on inflation for “some time to come”. While popular among liberal-minded Chinese, he’s seen as China’s weakest prime minister in decades because Xi has concentrated so much decision-making power into his own hands. “[If Xi] really needs a scapegoat, then Li fits the bill,” says Willy Wo-LapLam, a sinologist at the Chinese University of Hong Kong. Meanwhile, lower-level figures are already being questioned and detained in media, banking and regulatory organs for possible illegal stock-trading and rumormongering.

However, Ms Yeung added, “you can’t lose sight of the fact that China needs to deleverage and the reform agenda still needs to be implemented.” Stock-pickers within the City investment firms Aviva, Aberdeen, Fidelity, Numis and St James’s Place were among those who bought into the declines during last week’s dizzying trading sessions. This week China’s central bank lowered the benchmark lending and deposit rates by 0.25 percentage point and cut the reserve requirement ratio (the amount of cash banks are required to holdin reserve) by 0.5 of a percentage point. The PMI reading fell to 49.6, below the 50 mark that separates growth from decline, as market-watchers fret that property and industrial output have hit a wall.

He’s called up an unusual military parade for September 3 to mark the 70th anniversary of Japan’s defeat, and for the first time Beijing has invited foreign troops to take part. Carefully orchestrated images of Xi hailing the People’s Liberation Army honor guard, and hobnobbing with American president Barack Obama may stoke feelings of national pride among many Chinese.

For example Republican frontrunner Donald Trump has publicly suggested that Xi should be treated to “a Big Mac” instead of a state dinner at the White House, because Beijing has “sucked jobs … and all the money right out of our country.” If Xi’s image as a decisive world leader is sullied by perceived diplomatic slights, however minor, his critics back home will feel even more emboldened. Chinese may love aparade, but many are veteran cynics. “The big parade is useless,” groused one microblogger this week. “There are many more Chinese in poverty than there arein the parade. Moreover your real strength may not be that great anyway.” Another dismissed the spectacle as a “goose-stepping performance meant to entertain the leaders … Can they really fight a war?

An equally anonymous respondent tersely shot back: “1) nobody joins the party; 2) no military man joins the party; 3) foreign invasion [occurs]; 4) a Chinese Gorbachev appears.” In senior party circles, Chinese believe Mikhail Gorbachev made a fatal blunder by loosening politically just as he was trying to restructure the economy; that one-two punch triggered the Soviet Union’s collapse. But as the drama of recent weeks has shown, this double-barrelled challenge seems more complex than Xi’s team expected. “Reform has to address the politics and economy simultaneously,” insists Beijing-based political analyst Zhang Lifan, “If the political system doesn’t change, bureaucratic inertia will just send the reforms around in circles.” That may sound familiar to Xi — and he still clearly faces a long, hard journey ahead, before he can achieve his Chinese Dream.

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