Monday, November 23, 2015

Bloomberg: "Devaluation Watch May Force China to Pay Premium on Dim Sum Debt"

Fion Li.  Bloomberg.  November 22nd, 2015.
China is set to pay more to sell sovereign bonds in Hong Kong than in the onshore market for the first time, as investors brace for the possibility of another yuan devaluation.

The Ministry of Finance will sell 14 billion yuan ($2.2 billion) of Dim Sum notes in the city this week, including 2 billion yuan to individuals. The yield on offshore yuan securities due 2020 was 3.39 percent on Nov. 20, 25 basis points higher than debt of the same maturity in Shanghai, suggesting the government will have to pay more to borrow outside of the country.

Sunday, November 22, 2015

2015-10 Relative Price Trends

In October, consumer prices increased by 1.3% from the same month last year, and purchaser prices decreased -6.9% over the same period.  The rate for consumer prices was the lowest increase in five months, and the rate for purchaser prices was the lowest since 2009.  Based on this metric, the Chinese business cycle is in its 47th month of contraction.

Sunday, November 8, 2015

2015-10 Stock Market Valuation

The Chinese stock market bounced back in October to 0.28 gold ounces, up 0.04 ounces since the end of September.  It was primarily valuation driven, because the price-to-earnings ratio increased faster than the gold price.  Despite being down from the peak, the index is still up 46% over the last 12 months, and has seen positive growth for 34 consecutive months.

Sunday, November 1, 2015

2015-10 Relative Equity Performance

In October, the exchange traded fund tracking the consumer goods sector, CHIQ, fell -0.58% over the trailing twelve months.  The materials sector equivalent, CHIM, fell -10.79% over the same period.  This is the second month in a row that CHIQ has outperformed CHIM, and is close to being positive over the trailing twelve months.  This trend should continue if the cost of raw materials continue to fall at an accelerating rate while consumer prices are essentially flat.

Sunday, October 25, 2015

2015-09 Interest Rate Trends

In September, the overnight interbank rate and private lending rate saw a continuation of the previous divergence in rates.

The Shanghai Interbank Offer Rate ended September at 1.99%, up 19 basis points from August.  Despite central bank policy, nominal rates have continued to rise over the last five months, although this September was still 57 basis points below the trailing average for September of 2.56%.

The Wenzhou Comprehensive Index ended September at 19.20%, down one basis point from August.  September's rate was 71 basis points tlower than the trailing average for Septembers.

According to Reuters, the situation for smaller enterprises is only getting worse:
The central bank has cut official lending rates five times since November by a total of 1.4 percentage points to 4.6 percent. But instead of falling, lending rates to SMEs have risen by 2 percentage points as willing lenders become scarce.

The Wenzhou index, which tracks private lending, shows the rate for 1 year or more has risen to 18 percent from around 16 percent in November. In April, rates were as high as 24 percent.

The state-dominated banking sector has become more selective in issuing loans in general, as non-performing loans increase in the economic slowdown. China's big-four banks all reported a rise in non-performing loans in the latest quarter.

China's economy is heading for its weakest growth in 25 years, and a recent run of poor data suggests it is struggling to meet its 7 percent target for 2015.

So only the brave are stepping in to lend to its most vulnerable firms - small, medium and micro businesses. That is reflected in central bank figures showing that while overall lending in China has risen, new loans to small businesses fell in the first half of the calendar year compared with the same period in 2014.

Sunday, October 18, 2015

2015-09 Relative Price Trends

In September, consumer and purchaser prices maintained their previous levels.  Consumer prices increased 1.6% over the last twelve months.  This rate of increase came down from 2.0% in August.  Purchaser prices fell 6.8% over the same period, which exceeded the rate of 6.6% seen in August.  This is the fastest decrease since November, 2010.

Based on this metric, China has been in a recession for 46 months.  The other metrics followed on this blog, such as relative equity trends and stock market valuations, are also showing declines in economic activity.

Sunday, October 11, 2015

2015-09 Stock Market Valuation

In September, the decline in the gold price of Chinese equities that began at the end of May continued for a fourth month, although the index is still up 35.5% from twelve months ago.  The valuation of the index dropped from 39.84 times earnings in August to 38.38 times earnings in September.  The renminbi price of the index fell from ¥1,790.31 in August to ¥1,716.78 in September, and the renminbi depreciated further against the U.S. dollar from ¥6.3383 in August to ¥6.3685 in September.  For international investors, this was partially off set by a decline in gold prices.

The big news for September was that the Federal Reserve did not raise interest rates.  The Federal Reserve's reason was given as:
"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad."
This will partially slow the flow of financial capital out of emerging markets.  Given that dividends on many stocks are now higher than fixed income products, funds should be malinvested back into Chinese equities.