Focus turns to US data as China slowdown looms

29 Aug 2015 | Author: | No comments yet »

Can Xi Jinping ride China’s market dragon?.

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.THE UPWARD revision to American GDP on August 27th provided a shot in the arm to global stockmarkets, which have endured their most volatile week of trading in years.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.

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. The American economy is now thought to have grown by 3.7% at an annual rate in the second quarter, a much higher estimate than the 2.3% that was given in an initial evaluation of the quarter. Anthony Bolton, Fidelity’s famed stockpicker, launched a China fund in a year when the Asian nation’s economy grew by almost 12 per cent in the first quarter. 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.

After so much bad news about the Chinese economy, which has been a factor behind the meltdown of Chinese share indices, the US figure came as a relief to markets. 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.

Mr Bolton’s legacy fund — now run by Australian small-cap specialist Dale Nicholls — today trades on the London Stock Exchange at a wide 20.5 per cent discount to net asset value, depressed by China’s surprise currency devaluation this week and volatility on the Shanghai stock market. 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. The 200 million workers who flocked to its new manufacturing cities since the 1980s expect higher living standards, as does China’s huge new middle class. 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.

The Fed is waiting to see how data and markets unfold over the coming weeks before deciding whether to raise rates at its meeting in mid-September, Vice Chair Stanley Fischer told CNBC. 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. The country’s banks, the largest of which remain mostly owned by the state, lent an estimated $1,650bn to local governments for infrastructure projects following the global recession. 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 problem for China’s communist leadership and its 56 million party members is to maintain the growth while shifting its focus and preserving its monopoly of power.

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. Stocks on Wall Street mostly edged higher at the close, as European equity markets did hours earlier, suggesting fears of Chinese contagion were overdone and that a US rate hike is not the end of the world, said Andrew Wilkinson, chief market strategist at Interactive Brokers in Greenwich, Connecticut. “It’s really a question of volatility having settled down somewhat even though it remains relatively high and people still view equities as being a decent place to be,” he said. 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. Hong Kong’s Hang Seng Index, which offers shares in many of the same companies that can be purchased in freely exchangeable Hong Kong dollars, has fallen 13 per cent. And however strong and cohesive are its party cadres and state apparatus, they are unable to stifle the social protests and critical media thrown up by a much more sophisticated society. 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. Some quick-and-dirty analysis of the data suggests that whenever the Fed changes rates, the Bank of England has a 23% chance of also changing rates (in the same direction) in the subsequent three weeks.

This greater diversity and pluralism is further reinforced by demands that the ecological and social costs of such rapid change be more sustainably and equitably borne. The leadership’s commitment to tackle global climate change issues, reflected in its agreement to act jointly with the US, is driven by its public’s concerns over pollution and environmental degradation.

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. We just have to play them right.” Fed Chair Janet Yellen is not attending, but her deputy, Stanley Fischer, will make keynote remarks on Saturday that could point to whether the central bank believes the global turmoil is severe enough to hold off on a long-expected hike in interest rates.

Should analysts continue to downgrade their expectations for third- and fourth-quarter earnings in those sectors or more broadly, that could make stocks more expensive, even after the recent selloff. “It is more important to the U.S. whether or not GM and Ford can sell cars there,” said Kim Forrest, senior equity research analyst, Fort Pitt Capital Group in Pittsburgh. 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. And the extensive campaign against high-level corruption reflects President Xi Jinping’s conviction that its legitimacy will be undermined if the issue is not tackled head-on. He speaks frankly of these problems, insisting that the leadership responds to public opinion and recognises the need for a legitimacy of outputs and outcomes. 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.

He makes the point that while China may look like a colossus to outsiders, its development is in fact highly uneven and on average its income remains a fraction of that in the more developed world. 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. And in a move redolent of Maoist times, Xi has granted a special pardon allowing for the early release of a number of convicted criminals as part of the anniversary commemoration.

The other listed option for UK investors is the JPMorgan Chinese Investment Trust, which focuses more on large blue-chip companies that dominate China’s economy. The US dollar gained for a fourth straight session, buoyed by calmer financial markets and generally positive US economic data that supported the notion that the world’s largest economy was on a stable growth path. This fund is also highly geared, at around 116 per cent, which its client director James Glover said is because there are multiple “opportunities” from the “pullback” in equity markets. Such injunctions sit uneasily with the wild speculative excesses of the last year’s stock market boom, as 20 million more middle class investors joined in this spring.

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. While it is true that only 15 per cent of Chinese household savings are so invested, the splurge looks like a classic bubble, created by property speculation and excess capacity. And while reserves arising from the long period of high growth are far larger than this, they may not be available to prevent the debt pile exploding.

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. China therefore faces major conjunctural problems as it tackles the transition from its existing model of export-led growth dominated by global markets to a more developed and sustainable one dominated by domestic consumption, services and innovatory productivity. Much international commentary assumes that can only be accomplished by freeing up international capital investment in its economy, by privatisations and legal freedoms to protect such property rights. Last week Prime Minister LiKeqiang repeated assurances that China’s 2015 growth target of around seven percent — the lowest in decades — was doable.

This worrying mix has underscored questions as to whether Xi’s team can manage a soft landing, especially since it hopes to restructure the economy to rely more on domestic consumption. That would combine an economic and political transition of such major proportions as to constitute revolutionary change – and possibly war with Asian or US antagonists. 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. Externally it is mobilising Asian and central Asian partners into an immense network of transport and infrastructure investment, creating a more integrated region reminiscent of former Chinese spheres of influence – and tributary relations. 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.

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. 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. 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.

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. 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.

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. 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 latter move would help boost bank lending by injecting about RMB 650 billion ($100 billion) into the system, said Liu Li-gang, chief China economist at the Australia and New Zealand BankingGroup in a note Tuesday. (But he said further monetary policy easing would likely be needed for Beijing to hit its seven percent growth target.) Additional measures could include more infrastructure investment (though of course this would hardly help encourage domestic consumption in the long run), new budget or tax policies and political moves geared towards restoring confidence.

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. 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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