China’s third quarter growth rate has fallen to 6%, says Beijing. No it hasn’t. It’s more like 3%, says Morningstar’s China economics team led by Preston Caldwell in a report dated October 29.
While Donald Trump and his economic advisor Larry Kudlow try to convince Wall Street today that trade talks are going well and the two sides will still ink their so-called Phase 1 mini-deal this year, investors are noticing something awry in China. Companies are sourcing product elsewhere in modest, yet increasing numbers. China’s usual high fixed asset investment numbers are falling. Economic policy makers could be afraid of debt burdens and don’t want to overstimulate the economy. Growth is slowing. Industrial production is contracting.
To make matters worse, the full brunt of tariffs hasn’t quite been felt fully by China. The average incremental tariff rate increased to about 12% in the third quarter from about 9% in the second quarter. If Phase 1 talks result in no signed agreement anytime soon, Morningstar predicts it would send the average U.S. tariff rate on Chinese imports to over 20% by the first quarter of 2020.
The dollar/yuan exchange rate has helped offset some of the tariff costs. The yuan has weakened by about 5% since the end of the first quarter. For exporters, China is still cheap.
The bulk of the third quarter decline was due to the consumer durables index component of the Morningstar proxy for measuring GDP. It contracted 4.1% from 3.8% growth in the second quarter. Morningstar analysts believe there is a chance that the locals may be temporarily pulling back on spending in anticipation for new government subsidies. Still, slowing durables consumption matches the trend in place since early 2017. And stimulus has been trickling in since.
Two of the other Morningstar proxy components that brought them to the 3% figure also saw a marked decline in the third quarter. Their power proxy index is now in line with the other index components after being a positive growth outlier for about two years.
But it appears the real drag that brought Morningstar’s number down to 3% is industrial production. Industrial profits are down 5.3% year over year versus August’s contraction of 2%.
“Neither a surprise nor a market mover,” says Brendan Ahern, CIO of KraneShares in New York. “U.S. tariffs are still exacting their toll on export-focused manufacturers.”
The industrial sector slowdown might also be understated, especially if China is over-estimating inflation, Morningstar report authors warned.
Meanwhile, China’s dependence on credit to sustain economic growth has so far thwarted Xi Jinping’s attempts to convince the provincial governments to deleverage. Debt growth remains above nominal GDP growth rates.
“We’re not surprised that China’s economy has failed to recover, given that credit growth stalled after a slight rebound in the first quarter,” Morningstar analysts wrote.
China-bound investors will be watching for solid Singles Day sales on November 11. If they disappoint, emerging market funds who are mostly overweight China could finally start shifting positions.
China’s A-shares have been outperforming the MSCI Emerging Markets Index all year. Only Russia, as measured by the VanEck Russia (RSX) exchange traded fund, is beating the CSI-300, an index tracking mainland China equities listed on Shanghai and Shenzhen exchanges.
Official consumer spending showed a mixed picture in the third quarter. Nominal retail sales grew 7.8% year over year in September versus a high of 9.8% growth back in June. Real retail sales fell only 30 basis points from August.
China’s National Bureau of Statistics’ household survey data suggests that most of the spending went towards education, entertainment, and “miscellaneous services.”
Morningstar said that their own sampling of alternative consumer sales data such as box office revenue, telecom revenue, and air passenger volume suggests tepid consumer services growth. China’s number crunchers are more upbeat on that and Morningstar’s team is not, which brings their forecast so much lower than official figures.
E-commerce giant Alibaba – the company behind Singles Day – announced this week that Taylor Swift will be performing at the Mercedes Benz Arena in Shanghai where the shopping spree will have their telethon-like tally of sales. If Swift can hype Singles Day shoppers to spend, the China consumer bull narrative will remain in tact. If she fails, and Singles Day ends up being mediocre, all bets are on for more stimulus in the months ahead out of Beijing.
Spent 20 years as a reporter for the best in the business, including as a Brazil-based staffer for WSJ. Since 2011, I focus on business and investing in the big emerging markets exclusively for Forbes. My work has appeared in The Boston Globe, The Nation, Salon and USA Today. Occasional BBC guest. Former holder of the FINRA Series 7 and 66. Doesn’t follow the herd.
The best way to lose money in the markets is to sell when you are scared and buy/hold when you are happy with your profits.
So it was for me a couple of days ago when bitcoin (BTC) was $9,500. I so wanted to close out 25% of my BTC and leave myself to run the rest, having taken out the cost of my position in cash and thereby run the rest as free carry. You can spin all sorts of narrative why that’s a smart idea or why that’s a dumb one, but the fall was the impetus and the desire to flee a normal human emotion. It is an instinct that traders and especially investors need to control.
Luckily, I’ve been playing the high risk game long enough to wait. When I want to sell an investment solely because it has dumped I wait at least two or three days before making such a move. If and when bitcoin hits $13,500, I will want to load up on more but I will likewise stop myself from buying into bullishness.
So I did nothing with my bitcoin and this happens:
Bitcoin jumped again on Monday
Once again doing nothing is the best move you can make with a good position.
So in my model, this is China and this is down to the trade war.
When bitcoin jumps, something bad has just happened in the U.S./China trade talks. We don’t know what it is, but soon enough we will find out.
Well today we get a Trump tweet and up BTC goes again. Yesterday, what happened? I guess whatever it was that made bitcoin pop, also left the U.S. president even more incandescent than normal.
This is still a theory, but it keeps on playing out. So what to do? In the short term the question is, is the China situation going to continue for long?
Continuation of the trade war means BTC up. The longer the war runs, the higher bitcoin will go.
For me it’s likely that the trade war is going to run and run. Both sides can’t buckle and like most wars, sides are prepared to take big losses, not to lose. This means holding through a rollercoaster ride of developments.
If we are in for a trade war of attrition, bitcoin will be above £20,000 by Christmas or sooner.
What we also have here if this theory is right is a gift to the extra greedy. When bitcoin flies, short the Dow, because when BTC flies, for no apparent reason, it is a high probability that something Dow slapping will come out of the trade war in a day or two’s time. While information may flow more slowly in the U.S., whatever goes wrong will nonetheless hit the U.S. equities market soon enough, but meanwhile the bad news will hit the Asia bitcoin market much sooner, about as long as it takes for the participants to get out of their meetings and past the revolving doors.
BTC down on Monday, should also give Dow up on a Tuesday and vice versa. Bitcoin is the gift that keeps on giving to traders.
Gold and the whole platinum group metals (PGM) will follow but at a much more refined and subdued pace; bitcoin delivering another leading signal to the stacker community or any trader that wants to play the dangerous game of levered commodities.
Signals like this don’t come by very often and can’t last for long, but while the stakes are in trillion dollar scale, quite a few million dollar crumbs are going to be left lying around the table.
I am the CEO of stocks and investment website ADVFN . As well as running Europe and South America’s leading financial market website I am a prolific financial writer. I wrote a stock column for WIRED – which described me as a ‘Market Maven’ – and am a regular columnist for numerous financial publications around the world. I have written for titles including: Working Money, Active Trader, SFO and Technical Analysis of Stocks & Commodities in the US and have written for pretty much every UK national newspaper. In the last few years I have become a financial thriller writer and have just had my first non-fiction title published: 101 ways to pick stock market winners. Find me here on US Amazon. You’ll also see me regularly on CNBC, CNN, SKY, Business News Network and the BBC giving my take on the markets.
Intelligent Investing is a contributor page dedicated to the insights and ideas of Forbes Investor Team. Forbes Investor Team is comprised of thought leaders in the areas of money, investing and markets.
China’s central bank will launch a state-backed cryptocurrency and issue it to seven institutions in the coming months, according to a former employee of one of the institutions who is now an independent researcher. Paul Schulte, who worked as global head of financial strategy for China Construction Bank until 2012, says the largest bank in the world, the Industrial and Commercial Bank of China, the second largest bank in the world, his former employer, the Bank of China, the Agricultural Bank of China; two of China’s largest financial technology companies, Alibaba and Tencent; and Union Pay, an association of Chinese banks, will receive the cryptocurrency.
A separate source, who’s involved in the development of the cryptocurrency, dubbed DC/EP (Digital Currency/Electronic Payments), confirmed that the seven institutions would be receiving the new asset when it launches, adding that an eighth institution could also be among the first tier of recipients. The source declined to provide the name of the additional company. Speaking under terms of anonymity, the source, who previously worked for the Chinese government, confirmed that the technology behind the cryptocurrency has been ready since last year and that the cryptocurrency could launch as soon as November 11, China’s busiest shopping day, known as Singles Day.
At the time of launch, the recipient institutions will then be responsible for dispersing the cryptocurrency to 1.3 billion Chinese citizens and others doing business in the renminbi, China’s fiat currency, according to the source. The source added that the central bank hopes the currency will eventually be made available to spenders in the United States and elsewhere through relationships with correspondent banks in the West. “That’s the plan, but that won’t happen right away,” the source said.
The plan to use a diverse set of China’s trusted intuitions to disperse the cryptocurrency is reminiscent of a number of other ideas currently percolating around the world. For instance, Facebook’s planned libra cryptocurrency will be backed by a basket of currencies issued by central banks with support from companies like Mastercard and Uber in the United States, Vodaphone in England and Mercado Pago in Argentina. And last week, Bank of England governor Mark Carney floated the idea of a new currency backed by a number of central banks to replace the U.S. dollar as the global reserve currency.
What sets China’s DC/EP apart from libra and Carney’s “synthetic hegemonic currency” (SHC), according to Shulte, is that while libra is little more than early-stage computer code and the SHC doesn’t appear to have gone much further than Carney’s mind, the Chinese cryptocurrency is ready to launch. “China is barreling forward on reforms and rolling out the cryptocurrency,” says Schulte, who now runs an eponymous bank research firm. “It will be the first central bank to do so.”
At the time of publication, neither the People’s Bank of China nor any of the seven institutions mentioned by Schulte had responded to Forbes requests to confirm or deny his claim. However, the two-tiered strategy, where the central bank creates the currency and others distribute it, aligns with previously unreported statements made by Mu Changchun, deputy director of the Paying Division of the People’s Bank of China (PBOC) and the new head of China’s cryptocurrency research lab. In a speech on August 10 at the China Finance 40 Forum, since revised and posted on the PBOC’s WeChat channel, Mu described the central bank’s “two-tiered” system, wherein the bank would create the cryptocurrency and a small group of trusted commercial businesses would “pay the central bank 100% in full” to be allowed to distribute it.
In addition to preventing regional banks and other organizations from being disintermediated, Mu said the two-tiered system is designed to “curb” public demand for other cryptographic assets, consolidate China’s national currency sovereignty, ensure that the central bank maintains control over monetary policy affecting the currency, increase the likelihood of people using the currency, distribute the risk of having all the authority directly in the hands of the central bank and encourage competition between the organizations that receive the cryptocurrency.
“This dual delivery system is suitable for our national conditions,” said Mu. “It can not only use existing resources to mobilize the enthusiasm of commercial banks but also smoothly improve the acceptance of the digital currency.”
The composition of the organizations Schulte says will receive the DC/EP also aligns with Mu’s comments. Later in his speech, Mu added that only after the technical specifications for the DC/EP were completed in 2018 did the central bank realize the similarity between its design and that of libra, the cryptocurrency being developed by Facebook and about 30 other early-stage partners.
One key difference, according to Mu, is that while libra is being designed to handle 1,000 transactions per second, the DC/EP was designed to handle 300,000 transactions per second. For context, Mu added that during last year’s Singles Day the peak volume of all transactions in China was 92,771 transactions per second, dwarfing what the other platforms could support, but well within the DC/EP specifications. “At present, we belong to a state of horse racing,” Mu said according to the translation.
How Blockchain Went From Bitcoin To Big Business| 37:20
The DC/EP can achieve this kind of volume only because it is not a “pure blockchain architecture,” according to Mu, and therefore it doesn’t need to wait for groups of transactions to settle in a block. Like other permissioned blockchains that not anyone can use, the DC/EP is centrally managed, in this case by the central bank, meaning the digital currency remains a liability of the bank and the debtor/creditor relationship is unchanged, according to Mu. Also, instead of using an algorithm to limit supply, like bitcoin, Mu says the PBoC itself will control supply. Crucially, Mu says, the DC/EP is being designed to replace the physical notes and coins in circulation, not the renminbi sitting in bank accounts in a digital form.
“The central bank’s digital currency can be circulated as easily as cash,” said Mu. “Which is conducive to the circulation and internationalization of the renminbi.”
Whether anyone outside China would actually use a digital renminbi for transactions in their own country is unclear. As the Bank of England governor’s comments about replacing the U.S. dollar indicate, much of the world is tired of having their financial stability tied to the United States’ monetary system. But China may not be the best alternative. Earlier this month, as part of the escalating trade war between the United States and China, U.S. President Trump accused China of being a “currency manipulator.” After China’s renminbi fell to its lowest in 11 years, hitting 6.9225 renminbi per dollar on August 5, according to a Financial Times report, it has recovered significantly, trading at 7.15 renminbi per dollar today. While China has denied the charge and called the U.S. “protectionist” in a press statement, the perception of manipulation could be harmful to broader adoption of a digital currency linked to the renminbi.
In December 2017, another country accused of devaluing its currency, Venezuela, revealed plans for its own cryptocurrency, backed by oil and called the petro. After much hullabaloo, the currency somewhat officially launched in 2018, but it isn’t available on most international exchanges because of a U.S. embargo and has been almost impossible to accurately value. Another obstacle to adoption could be uncertainty about the benefits of a technology that’s intended to replace fiat currency but is still under centralized control. While it’s obvious that any central bank wishing to more closely observe how citizens are using a cryptocurrency would prefer a transparent ledger like the bitcoin blockchain, which makes transactions easily traceable, most of the benefits to users of current blockchains, such as instant settlement and digital transactions without the need of a middleman, could be undermined by central control.
One person who’s not concerned about the obstacles to adoption of China’s cryptocurrency is Charles Liu, chairman of HAO International, a private equity firm investing over $700 million in Chinese growth companies. After largely focusing on solar, organic fertilizer, and wastewater treatment technologies since 2012, Liu says he is an angel investor in “the first blockchain company to be able to sign an official contract with the People’s Bank” of China.
Liu declined to reveal the name of the firm or its technology but lent support to Mu’s comments about the potential benefits to businesses using China’s cryptocurrency. In addition to being a more efficient way to track money laundering, bribery and other transactions, Liu says, the cryptocurrency will give banks increased confidence in the creditworthiness of borrowers, let merchants receive payments instantly and lower transaction fees. While Liu says that banks in the United States have been resistant to such improvements that eat away at their bottom line, he adds that China doesn’t have that problem, because the government owns the banks.
“What will facilitate commercial transactions and enhance efficiency, the central government decides and they go ahead and do it,” says Liu, adding that “China’s strategic plan is to integrate more closely with the rest of the world. Cryptocurrency is just one of the means to have a more internationalized renminbi. It’s all strategic. It’s all long term.”
I report on how blockchain and cryptocurrencies are being adopted by enterprises and the broader business community. My coverage includes the use of cryptocurrencies such as Bitcoin, Ethereum and Ripple, and extends to non-cryptocurrency applications of blockchain in finance, supply chain management, digital identity and a number of other use cases. Previously, I was a staff reporter at blockchain news site, CoinDesk, where I covered the increasing willingness of enterprises to explore how blockchain could make their work more efficient and in some cases, unnecessary. I have been covering blockchain since 2011, been published in the New Yorker, and been nationally syndicated by American City Business Journals. My work has been published in Blockchain in Financial Markets and Beyond by Risk Books and I am regularly cited in industry research reports. Since 2009 I’ve run Literary Manhattan, a 501 (c) (3) non-profit organization dedicated to showing Manhattan’s rich literary heritage.