Chris Wood on China

As regards the Chinese currency itself, there is general acknowledgement in Beijing that the pressure on the renminbi has been eased by the collapse in Fed tightening expectations relative to the start of this year.

There is also a general acknowledgment in Beijing that the enforcement of long existing capital account controls has been tightened considerably since last summer’s panic triggered by the August devaluation.

GREED & fear still does not believe that China is engaged in a 2009 steroid stimulus. Still there is also no doubt that the credit growth has been very strong in the first quarter, and certainly far stronger than anyone expected.

The social financing data does not capture the full extent of the so-called ‘swap’ of debt issued by local government financing vehicles to municipal bonds. Last year Rmb3.8tn was supposedly swapped with another Rmb5tn supposedly due to be swapped this year. If this municipal bond issuance is included in the social financing data, it raises the year on year growth in social financing to 16%YoY.

GREED & fear says the local government financing debt is supposedly “swapped” because it is much clearer that cheaper municipal bond finance has been provided to local governments than it is clear that the old debt has been extinguished. This is because the total lending continues to grow so much. Meetings in Beijing this week suggest that most people believe that much of the debt being “swapped” is not really being paid off.

But if it is really the case that the old more expensive LGFV debt has been paid off, it has been more than compensated for by a surge in new lending to local governments. For example, a trust company told China Reality Research (CRR) recently that its new loans to local government-related projects increased by more than 60%YoY in the first two months of this year.

Data on the total growth in assets in the banking system suggests an even stronger level of credit growth than indicated by the social financing data even allowing for the debt swap. This is seen by looking at the total growth in bank claims as reflected in the PBOC’s data on depository corporations’ domestic credit.

China’s financial system is becoming increasingly complicated and therefore increasingly difficult both to understand and to regulate.

GREED & fear continues to believe that last August’s misplaced currency devaluation will prove to have been a blessing in disguise since it was a wakeup call to the authorities of the dangers of pursuing renminbi internationalisation too aggressively. Talk of capital account convertibility has now been all but abandoned.

GREED & fear continues to believe that capital account liberalisation, in the real sense of the term, is incompatible with China’s current political system since it would amount to an unacceptable loss of control. It would also be extremely dangerous financially given the growing amount of debt in the system.

Source: ‘Greed & Fear’, The Donald, China and Duterte, April 28, 2016

(Postscript: After affirming his neutral weighting on China equities in this missive, a week later, he brought it to a slight underweight).

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