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.

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.

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.

2015-09 Relative Equity Performance

In September, the Chinese consumer goods sector, represented by CHIQ, fell -11.95% over the trailing twelve months.  The materials sector, represented by CHIM, fell -18.95%.  This is the first time in 15 months that this indicator is pointing to a recession.  This would now put this indicator in line with the signals seen from the Consumer Price Index and Purchaser Price Index.  That indicator has been implying a recession has been occurring for close to four years now.

The South China Morning Post reported on the decline in mining and energy stocks at the end of the month:

In Hong Kong, resources stocks were among the biggest decliners. Kazakh copper miner Kazakhmys sank 37.1 per cent to HK$8.80, after copper prices declined further on Monday on Comex in New York. Jiangxi Copper, China's top copper producer, also skidded 4.7 per cent to HK$9.23.

Gold miners pulled back substantially after gold futures posted their largest daily loss in nearly three weeks on Monday on Comex in New York. Lingbao Gold dropped 7.8 per cent to HK$1.30, Zijin Mining Group gave up 4.5 per cent to HK$1.93, and Zhaojin Mining erased 2.6 per cent to HK$4.05.

Mining stocks were "at the heart of" the stock selling, with traders "absolutely concerned about follow-through selling in the commodity complex overnight", said Chris Weston, an analyst for IG Group, on Monday.

In the energy sector, offshore oil producer Cnooc slid 7.7 per cent to HK$7.44 after international crude futures settled sharply lower on Monday. Refining giant China Petroleum & Chemical Corp also sank 7.3 per cent to HK$4.48, and oil and gas producer PetroChina lost 6.5 per cent to HK$5.19.