Category: China Economy/Study

Global Stocks and Oil Prices Hit By Fears of a Beijing Lockdown

Global stocks and oil prices fell on Monday as rising Covid-19 cases in Beijing sparked fears that the Chinese capital could join Shanghai and other major cities in lockdown.

China’s benchmark Shanghai Composite Index (SHCOMP) sank 5.1% to close at a 22-month low. It was the worst day for the index since February 3, 2020, when the initial coronavirus outbreak first rocked the nation’s stock market. Elsewhere in the region, Hong Kong’s Hang Seng Index (HSI) fell 3.7%. Japan’s Nikkei (N225) dropped 1.9%, and Korea’s Kospi (KOSPI) lost 1.7%.

European stocks also opened sharply lower on Monday. The FTSE 100 (UKX) fell 2.1% in London, while Germany’s DAX (DAX) slid 1.5%. France’s CAC 40 (CAC40) dropped 2.2%, despite market relief at  Emmanuel Macron’s election victory over far-right candidate Marine Le Pen.

The fall in Asian and European markets came after a grim session on Friday for US stocks. The Dow fell about 980 points, or 2.8%, following comments about likely aggressive interest rate hikes from Federal Reserve chairman Jerome Powell. The S&P 500 and Nasdaq each dropped more than 2.5%, too.

Fears about China’s worsening Covid-19 situation are adding to the downside momentum. On Monday, Dow futures were down 305 points, or 0.9%, while futures on the S&P 500 and Nasdaq were both down 1%.

Beijing, the capital of China with 21 million residents, began mass testing over the weekend and shut down residential compounds, raising concerns that more stringent restrictions could soon be implemented in line with other Chinese cities.

“Although some parts of China have been under restrictions longer than Shanghai, Omicron’s arrival in Beijing would be an ominous development,” wrote Jeffrey Halley, senior market strategist for Oanda, on Monday.

“China is the world’s second-largest economy and has shown no signs it intends to live with the virus,” he said. “With that in mind, the likely pressure valve is going to be disruption to China’s export machine, and a cratering of consumer confidence.” Oil prices tumbled on Monday as worries about faster US rate increases and China’s slowdown weighed on sentiment.

Futures for US oil and Brent crude, the international benchmark, both fell more than 4%. “It seems that China is the elephant in the room and markets feel that slowing China growth could materially change the supply/demand equation on international markets,” Halley said. The pressure to contain the outbreak in Beijing comes as cases continue to grow in Shanghai.

The lockdown in Shanghai has already forced many factories to suspend production and made shipping delays worse, threatening to deal a hefty shock to its vast economy and place more strain on global supply chains. Shanghai reported more than 19,000 new cases and 51 deaths on Sunday.

Source: Global stocks and oil prices hit by fears of a Beijing lockdown – CNN

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Critics:

Oil prices opened slightly higher on Tuesday, after falling sharply the prior session on worries that continued Covid-19 lockdowns in China would eat into demand and as the U.S. dollar rose to a two-year high.

Brent crude futures settled 2.6% higher at $104.99 per barrel and U.S. West Texas Intermediate contracts settled the day 3.2%, or $3.16, higher at $101.70 per barrel.

Both contracts had settled down around 4% on Monday, with Brent down as much as $7 a barrel in the session and WTI dipping roughly $6 a barrel.

In China lockdowns to counter Covid in Shanghai have dragged into their fourth week. Meanwhile orders for mass testing, including in Beijing’s largest shopping district, have prompted fears of other Shanghai-style lockdowns.

“The hit from Chinese lockdowns is over a million barrels a day and the testing of 12 districts over the next five days will determine the next major move for crude prices,” wrote Edward Moya, a senior market analyst for OANDA in a note.

The U.S. dollar also hit a two-year high on Monday, making oil more expensive for other currency holders. “Supply fears are not the primary focus for energy traders, and now you have a surging dollar that is adding extra pressure across all commodities,” OANDA’s Moya said.

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Is China Set To Dominate The World?

Having secured a presidency for life within the country’s borders, Xi Jinping is now going for world domination – not out of megalomania, but a concern for survival. Simon Wilson reports.

What’s happening?

It is to be Xi Jinping’s year of triumph. This autumn, the Chinese communist party holds its 20th Party Congress. In normal times, Xi would be expected to shuffle off into retirement, having put in a ten-year stint at the top.

Instead, he is expected to secure an almost unprecedented third term. In 2017 the party formalised the recognition that Xi had become the most powerful leader since Mao by enshrining his name and ideology into its constitution. Then, in 2018, the presidential two-term limit was lifted, conceivably allowing Xi to remain president for life.

How did he get so powerful?

Xi’s feat in consolidating and centralising power in his own hands, under a system that has typically valued consensual leadership, reflects his own qualities as a political operator and crucially the period during which he emerged as leader.

“Xi arrived at the party’s highest echelon at a moment of growing paranoia,” says James Palmer in Foreign Policy. In the early 2010s, China’s governing elite felt deeply threatened by public discontent about rampant corruption, and was spooked by the series of “Arab Spring” uprisings in 2010-2012.

At the same time, there was a widespread feeling that the low-key presidency of Hu Jintao had been a relative failure, opening the door to a more confident, charismatic figure. Xi “represented the possibility of deliverance for China’s autocratic, but consensus-based, political system”. Once in power, he used a populist anti-corruption drive to ruthlessly cement his power and remove his enemies.

What is his ideology?

First, the reassertion of total party dominance over all sectors of public life and, second, the rise of China to dominant global power. Xi was seen as the ultimate party insider due to his status as a party “princeling”. Xi’s father, Xi Zhongxun, was a young communist guerrilla leader in northwest China in the 1930s – a Mao loyalist who rose quickly to become a vicepremier of China in the 1950s while still in his 30s.

He was purged and jailed for a time under the Cultural Revolution, before being rehabilitated. Xi first joined the party (in 1974, aged 21) while his father was still in prison and later rose to national prominence via a succession of regional governorships where he established a reputation as an incorruptible safe pair of hands.

Yet according to leaked US diplomatic cables based on extensive interviews with an old comrade of Xi’s, now an academic based in the US, Xi’s commitment to the party is more “pragmatic” and “realist” than ideological. The source reckons that the Chinese president is most fundamentally an “elitist” – a nationalist who believes that “rule by a dedicated and committed Communist Party leadership is the key to enduring social stability and national strength”.

What’s his vision for China?

The same US diplomatic source quoted above reports that even as a young man Xi was “repulsed by the all-encompassing commercialisation of Chinese society, with its attendant nouveaux riches, official corruption, loss of values, dignity, and self-respect, and such ‘moral evils’ as drugs and prostitution”.

This stance finds current political expression in Xi’s core domestic agenda of “common prosperity” – levelling up on a grand scale – which he frames as “not only an economic issue, but also a major political issue related to the party’s governing foundations”. In recent years Xi has reined in technology firms, ordered corporations to improve labour conditions, capped rent increases, and announced that “excessively high incomes” will be “adjusted”.

Xi’s moral outlook also informs China’s nationalist-conservative interventions in social life – for example, cracking down on celebrity culture, banning children from playing videogames for more than three hours a week, and, as one admiring article on Xinhua, the official state press agency, puts it, ensuring that “the cultural market will no longer be a paradise for sissy stars” and for the “worshipping of Western culture”.

What about globally?

Xi’s vision is for China to become the dominant global power by mid-century, but he has made countless “unforced errors on the international stage, says economist Noah Smith. His “swaggering, bellicose approach” has led to other countries in the region hardening their attitudes against “a superpower they once considered a potential partner”.

Needlessly alienating India over relatively minor border issues is a particular blunder. The Belt and Road initiative – Xi’s big plan to build infrastructure in other nations to secure diplomatic fealty and access to natural resources – is also losing momentum.

Is Xi’s position secure?

Tensions over slowing economic growth, draconian Covid-19 lockdowns and Beijing’s dilemma over how far to back Russia’s war on Ukraine could boil over. And in the long run, all repressive one party states are vulnerable to collapse, says historian Edward Luttwak on Unherd. Henry Kissinger once predicted that, as China slowly rises to economic parity with the US, Chinese leaders would seek to arrange a “G2” world of dual superpowers with the US. “Always improbable, G2 became impossible when Xi arrived.

For him only G1 is good enough,” argues Luttwak. “Not because he is a megalomaniac, but the opposite: he thinks, accurately, that unless the Party establishes an unchallenged global hegemony, with its rule deemed superior to democratic governance, Communist China will collapse just as Soviet rule did.

He is right.” Given that need for hegemony, it is not hard to envisage a scenario in which Xi overreaches in the coming years, and triggers an armed confrontation serious enough to disrupt trade.

If that happens, “malnutrition will not be far behind, because of China’s critical dependence on imported animal feed”. If Xi Jinping falls, “pork prices could be the cause”.

By: Simon Wilson

Source: Is China set to dominate the world? | MoneyWeek

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China Blows $46 Billion A Month With ‘Zero-Covid’ Fiasco

Economists everywhere are obsessed with whether China can make this year’s 5.5% gross domestic product target. But two other figures will say far more about how Asia’s biggest economy might affect the global system.

The first—62 million—refers to the number of Shanghai-region residents being locked down this week to limit Covid-19 cases. The second—$46 billion—refers to how much GDP per month Hong Kong economist Zheng Michael Song thinks Covid policies are costing China.

Think about the epic scale of these numbers. The first is bigger than Italy’s 60 million population and almost in the neighborhood of France’s 65 million. Both are members of the Group of Seven nations. The second is bigger than Venezuela’s annual GDP of the Icelandic and Zambian economies combined.

All this because Chinese President Xi Jinping is sticking with a “zero Covid” strategy against which health experts, economists and geopolitical observers everywhere have been warning.

Take Ian Bremmer, CEO of Eurasia Group, who each year puts out a widely anticipated list of top risks for the year ahead. In 2021, for example, Bremmer’s biggest concern was Joe Biden’s ability to restore calm to Washington, post-Donald Trump presidency. For 2022, worries about China’s Covid policy topped the list, while Russia came in fifth.

Bremmer’s rationale: how China’s Covid absolutism would collide with increasingly transmissible variants. “The end of the pandemic will arrive soon as the virus collides with highly vaccinated populations and treatments that prevent death,” Bremmer argues. “But most countries, and particularly China, will have a harder time getting there. China’s zero Covid policy, which looked incredibly successful in 2020, is now fighting against a much more transmissible variant with vaccines that are only marginally effective.”

And here we are. News of fresh lockdowns in Shanghai belie hints that Xi’s government might pivot to a more “dynamic” strategy prioritizing testing and better vaccines over strict city-wide clampdowns.

“China’s Covid-19 lockdown of Shanghai saw oil prices slump overnight, as investors fretted about more sweeping containment measures, which would negatively impact China’s energy consumption,” says analyst Jeffrey Halley at Oanda.

This gets us back to the economist Song’s figures. Song, an economist at the Chinese University of Hong Kong, told Bloomberg and other news agencies that Xi’s lockdowns will probably cost the nation roughly 3.1% of GDP in lost output. The important caveat, though, is that the negative impact could double if Xi adds more cities to the lockdown list.

Given how risk-averse Xi is approaching 2022, this seems less an “if” than a “when.” And when that 62-million-person figure swells, so does Song’s $46 billion estimate. If things compound out from there, the global headwinds could be felt everywhere.

The good news is that Xi’s team can recalibrate if they so choose. The People’s Bank of China was ramping up stimulus before Russia’s Ukraine invasion exacerbated global uncertainty. And Xi’s government stockpiled nearly $190 billion of cash in January and February that could be deployed at any moment. Xi’s team has hinted that tax cuts may be on the way.

Yet Xi’s zero-Covid stubbornness collides with slowing growth everywhere as surging prices of oil and other commodities fuels inflation fears. Add in the Federal Reserve launching what could be a long tightening cycle and you have a near perfect storm of threats to world growth.

Another imponderable complicates 2022: how Xi’s headlong flight toward securing a third term as China leader later this year informs his priorities list. If not for this aspirational crowning achievement hovering about all Xi does, a Covid-19 pivot might’ve happened already. Xi may be loath to welcome headlines about surging infection rates ahead of coronation day.

In the meantime, economists are left to count the ways 2022 could go awry—one Chinese lockdown at a time. There also are open questions about whether surging U.S. bond yields could unnerve global markets. The Bank of Japan, too, is intervening in markets to stop interest rates from spiking.

Other potential risks include Ukraine. Xi has quite a tightrope walk between his pal Vladimir Putin and global outrage over the Russian leader’s unproved war. If Xi helps Putin evade global sanctions, U.S. President Biden and his allies might slap sanctions on the second-biggest economy.

Betting against China making its annual growth figures is often a fool’s errand. But making 5.5% in 2022 will require Xi doing the math on tradeoffs between maintaining his Covid absolutism and the GDP fallout to come.

William Pesek

William Pesek

I am a Tokyo-based journalist, former columnist for Barron’s and Bloomberg and author of “Japanization: What the World Can Learn from Japan’s Lost Decades.”

Source: China Blows $46 Billion A Month With ‘Zero-Covid’ Fiasco

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China Cuts Key Rates, Steps up Monetary Stimulus to Boost Economy

SHANGHAI (Reuters) -China lowered mortgage lending benchmark rates on Thursday as monetary authorities step up efforts to prop up the slowing economy, after data earlier in the week pointed to a darkening outlook for the country’s troubled property sector.

The cut to the one-year and five-year loan prime rates (LPR) followed surprise cuts by China’s central bank on Monday to its short- and medium-term lending rates, and came days after the central bank’s vice governor flagged more moves ahead.

With the property sector’s downturn seen persisting into 2022 and the fast-spreading Omicron variant dampening consumer activity, many analysts say those easing measures will be necessary, even as other major economies, including the United States, appear set to tighten monetary policy this year.

December economic data showed further weakening in consumption and the property sector, both major growth drivers.

At a monthly fixing on Thursday, China lowered its one-year loan prime rate (LPR) by 10 basis points to 3.70% from 3.80%. The five-year LPR was reduced by 5 basis points to 4.60% from 4.65%, its first cut since April 2020.

China’s central bank “should hurry up, make our operations forward-looking, move ahead of the market curve, and respond to the general concerns of the market in a timely manner,” People’s Bank of China Vice Governor Liu Guoqiang said on Tuesday, heightening market expectations for more stimulus.

All 43 participants in a snap Reuters poll had predicted a cut to the one-year LPR for a second straight month. Among them, 40 respondents also forecast a reduction in the five-year rate.

The cut to the 5-year rate suggested that “the Chinese authorities are keen to lower the cost of credit lending, so total credit growth is expected to rebound after the Spring Festival to ease the pressure on macro economy,” said Marco Sun, chief financial analyst at MUFG.

“China’s monetary policy still has some room for easing in the first half of this year, depending on the policy transmission effect and the growth target set by annual parliamentary meeting in March.”

Property firms’ shares and bonds jumped on Thursday following the LPR cut, as investors hoped it and other recent government measures would help to ease a funding squeeze in the sector that has seen a growing number of developers default on their debts.

Sheana Yue, China economist at Capital Economics, expects a further 20 bps cut to the one-year LPR in the first half of this year.

Interest rates on medium-term lending facilities (MLF) serve as a guide to the LPR. Market participants believe moves to the LPR should mimic adjustments to MLF rates.

Most new and outstanding loans in China are based on the one-year LPR. The five-year rate influences the pricing of mortgages.By:

By: Macro Matters

Source: https://www.reuters.com

Read more stories at: https://money.usnews.com/

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Hong Kong Is China’s Financial Gateway To The World

Hong Kong is not only an international financial centre, it is the most important gateway to Mainland China – and connectivity is the key to enhancing cross-boundary transactions. The Chinese central government is committed to ensuring that Hong Kong maintains its status as a free port and a separate customs territory, and at the same time focus on the development of the Guangdong-Hong Kong-Macau Greater Bay Area (GBA).

Hong Kong has long been a gateway to and from Mainland China, and different data points show that the city originates and intermediates about two-thirds of China’s inward foreign direct investment and outward direct investments. As one of the Mainland’s principal trading partners, Hong Kong not only provides a channel for goods and services to go global, but also catalyses the international usage of renminbi along to the process.

The renminbi (RMB) has retained its position as the fifth most active currency for international payments by value, with a share of 2.15% as of August 2021, according to Swift data. Since the launch of the pilot scheme for cross-border trade settlement in renminbi in 2009, RMB trade settlement handled by banks in Hong Kong has seen exponential growth.

Hong Kong remains the most important offshore RMB economy by weight, accounting for more than 75% of the global total. For the financial services sector, central and Hong Kong authorities are seeking to further promote cross-boundary RMB investment and financing activities, encourage competitive Mainland Chinese enterprises are also issuing green and sustainability related products in Hong Kong, aiming it to become a hub for green finance within the GBA.

“With complementary advantages of respective markets and systems in the GBA, the financial services industry in Hong Kong has much expectation on the coordinated development of the region,” said Laurence Li, chairman of the Financial Services Development Council (FSDC), a high-level cross-sectoral advisory body set up by HKSAR Government in 2013 to promote Hong Kong’s financial services industry.

“At the same time, different stakeholders have been engaging in conversations and preparatory work to enhance the connectivity and standards of financial services and product offerings. With some favourable measures being introduced and implemented in an orderly manner, the industry believes the ever-improving connectivity of financial markets will lead to uncharted market potentials.”

The FSDC has made efforts in facilitating Hong Kong’s financial services industry to capture market opportunities in the GBA. FSDC has recommended and advocated for connecting cross-boundary payment and transfer infrastructure, enhancing the convenience of remote account opening procedures, as well as fostering cross-boundary mortgage financing, mutual funds, insurance and wealth management.

In a recent research paper, the FSDC recommended connecting cross-boundary payment and transfer infrastructure, enhancing convenience of remote account opening procedures, as well as fostering cross-boundary mortgage financing, insurance and wealth management businesses. Through capitalizing on its unparalleled strengths, Hong Kong can play a unique role in driving the concerted development of the financial services industry, and in turn enjoy the growth momentum in the region.

The newly launched Wealth Management Connect scheme will help diversify investment portfolios through exposure to overseas markets via retail funds domiciled and regulated in Hong Kong, while attracting offshore investments to onshore wealth management products in Mainland. It will also allow Hong Kong investors to broaden their mainland exposure.

Wealth Management is a major breakthrough in which retail investment funds domiciled in Hong Kong and authorized by the Securities and Futures Commission (SFC) are eligible for the scheme instead of the traditional product by product approval approach.

The scheme further integrates the Mainland and Hong Kong markets and promotes cross-border trading, following on from the successful launch of the two Stock Connect schemes that linked the stock markets of Hong Kong with Shanghai and Shenzhen in 2014 and 2016, respectively.

According to a recent KPMG client note, Wealth Management Connect represents another “significant development” in the liberalization of Mainland China’s capital account following the launch of QFII/QDII, the Mainland-Hong Kong Mutual Recognition of Funds scheme and the Stock Connect and Bond Connect schemes. The firm expected these developments would accelerate RMB internationalization and strengthen Hong Kong’s position as a global offshore RMB hub.

Meanwhile, the new southbound leg of China’s Bond Connect programed will stimulate demand from Mainland Chinese investors for Hong Kong and US dollar-denominated bonds, boosting liquidity and, thus, facilitate a more efficient price discovery process. The launch of the southbound link could broaden the investor base for both Hong Kong dollar and offshore RMB bonds, whereas the support for the US dollar bond market could be strengthened even further.

Hong Kong should also be a main contributor to the collaboration in green finance, development of Fintech and digital assets in the GBA in the future. Last but not least, the various financial liberalization measures carried out in the region will foster closer exchange among different stakeholders, including regulators and market participants, provide an appropriate market dynamic, and are in line with the longer-term national objectives of financial liberalization and internationalization. Hong Kong, in this context, will continue to play its unique role as China’s only international financial centre.

The cross-boundary nature of Hong Kong’s financial services sector, especially asset management, is constantly being reshaped thanks to the joint efforts of the government and the sector, leading to an increasing number of available product types, a wider reach to more local, international and Mainland investors with different experiences, and more diversified investment strategies and preferences. Just as the Wealth Management Connect is on the horizon, Hong Kong is marching steadily towards its vision of becoming the world’s premier wealth and asset management centre.

Follow FSDC on Twitter or LinkedIn. Check out www.fsdc.org.hk to stay in touch with their thought leadership.

Financial Services Development Council of Hong Kong

Financial Services Development Council of Hong Kong

Financial Services Development Council (FSDC) was established in 2013 by the Hong Kong Special Administrative Region Government as a high-level, cross-sectoral advisory body to engage the industry in formulating proposals to promote the further development of the financial services industry of Hong Kong and to map out the strategic direction for the development. The FSDC has been incorporated as a company limited by guarantee with effect from September 2018 to allow it to better discharge its functions through research, market promotion and human capital development with more flexibility.

Source: Hong Kong BrandVoice: Hong Kong Is China’s Financial Gateway To The World

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