China and Hong Kong: Why you should sell


Tuesday, December 13, 2016 // Written by Enzio von Pfeil

 The global Economic Time® is worsening in China and Hong Kong: sell in December and go away.

CHINA

China is seeking a World Trade Organisation ruling against the US and EU’s refusal to treat China as a “market economy.” Both the EU and US have imposed tariffs on steel exports which they say China is dumping on to the world market. On Friday, the U.S. imposed anti-dumping tariffs on Chinese-made washing machines. The granting of market-economy status would end the ability of the countries to impose anti-dumping duties on China.

1.  Market economy.  China’s wish to be treated as a market economy will have been going on for some time, i.e. this has nothing to do with Trump’s election.  Having said that, you can bet that the Trump Administration will disallow China to be classified as a “market economy”: were it to be granted such status, what  would Trump’s narcisstic negotiating hand end up being ?

2.  Dumping tariffs. As will moves to impose steel and washing machine  tariffs.  They have nothing to do with Trump’s election. 

China’s Commerce Ministry said yesterday that the duties had a severe impact on Chinese exports. U.S. President-elect Donald Trump said “China is responsible for almost half of America's trade deficit and they haven't played by the rules.”

1.  Negotiation positions.  Of course the Chinese would assert this claim! Meanwhile, Trump displays his arrogance of ignorance by claiming that :China is not playing by the rules”:

a.  Classic trade politics. All politics are local, as Tip O’Neill reminded us  as Speaker of the House years ago. So it with the US and China staking –out trade positions.

b.  Shoe on the other foot. But it surely is the Americans who are buying Chinese goods, or am I missing something. So how can Trump accuse his countrymen of buying Chinese goods?

  1. Arrogance of ignorance. And here is a classic Trump bit of arrogant ignorance: China accounts for half of America’s trade deficit.  How so?

                                           i.    It is the Americans who are buying Chinese goods of their own free will, and

                                         ii.    It is the Americans who have elected to invest directly into China in order to cater to Chinese demand, thus obviating exports from America.

China has reacted with fury to Donald Trump’s suggestion that the “One China” policy could be used as a bargaining trip in trade negotiations. The mainland’s state run Global Times said in an editorial that the U.S. President-elect was “as ignorant as a child in terms of foreign policy” adding the One China policy was non-negotiable.

China’s foreign ministry said there was no more basis for Sino-US ties if the one-China policy is breached.

1.  Negotiating position. Of course, the Chinese have to react angrily to Trump’s out-of-the box idea to link China trade policy to the her One China policy. 

2.  The arrogance of ignorance.  According to my friends who have had business dealings with Trump, this displays his classical narcissism: he defies the rule book, instead re-writing it as he pleases. He represents not the Republican “bull”, but the “bull in the China shop”!

3.  Outlook. Expect lots of trade turbulence, especially now that he has put another ignoramus, Wilbur Ross, in charge of trade policy. This used to be run by the far more erudite US Trade Representative, but such knowledge does not suit Trump’s bullying arrogance.

CHINA MARKETS

Chinese stocks, bonds and the yuan have all fallen.

The Shanghai Composite Index dropped 2.5% to end the day at 3,152. The Shenzhen Composite Index fell by almost 4.5%. The ChiNext index of small companies traded in Shenzhen sank 5.5%. Here in Hong Kong, the H-share index was down 1.7% by the close.

1.  Change in Economic Time®.  That’s very much because China has been tightening the monetary valves. At its simplest, this is because Beijing has been supporting the RMB, thereby reducing the amount of RMB in the system.

a.  Not good for markets.  Whenever monetary valves are tightened even though demand is not stellar, markets have to fare worse: the profits outlook is eroding off the back of slower economic growth, so why pay for today’s high valuations?

b.  Evidence-based investing reveals that highly-valued stocks just don’t do well – especially when the Economic Time® in China is worsening!

       

Bond prices fell and yields rose. The one-year Chinese bond yield rose 15 basis points. The 10-year sovereign bond yield rose 9 basis points to a one-year high of 3.19%.

The yuan fell 0.1% to a 8-year low of 6.91 per dollar.

1.  The bond price swoon has lots to do with this creation of an excess demand for money, with this tightening of the monetary valves in order to support the currency.

The government’s move to rein in leveraged buying by insurers has hit shares in insurance companies and their targets. Last week China's securities regulator described leveraged acquisitions of listed companies as immoral and described those that use undisclosed sources of funding to undertake them as "robbers."

On Friday, the mainland insurance regulator suspended Evergrande Life from investing in stocks.  The China Evergrande Group holds a 14% stake in the mainland’s largest property developer Vanke, which has been fighting off a hostile takeover attempt by the Baoneng Group. Baoneng through its subsidiary Foresea Life has acquired a 25.4% stake.

Yesterday shares in Vanke fell 6.3%. Shenzhen listed Gree Electric Appliances, another Baoneng target, plunged 6.1% after Foresea Life said it would gradually sell its stake.

Shares in construction companies also fell sharply after the president of Vanke said he expected a significant drop in home sales next year.

1.  I never comment on individual stocks and know nothing of the insurance sector that would add value to our listeners Sorry.

2.  This one works worldwide: rates rise and home sales fall. China is no different.


HONG KONG

Hong Kong’s Financial Secretary has resigned and is widely expected to launch a bid to become the territory’s next Chief Executive. The Secretary for Financial Services and Treasury, KC Chan, will act as the Financial Secretary.

1.  Old news. We have had press murmurings to this effect for some days now. The players are jockeying for position.

Funding costs surged for a 10th day yesterday to a 2009 high. Hong Kong’s three-month interbank rate, or Hibor, jumped 10 basis points to 0.82%

1.  Worsening Economic Time®.  This monetary tightening is part of a global phenomenon: higher US rates are attracting money to the US out of lower-interest rate environments, so of course, our local money markets get squeezed.

2.  Market implication.  Evidence-based investing suggests that when there is an excess demand for money and an excess supply of goods, stocks that are over-valued have to fall. è We are gloomy on the Chinese markets going forward.

 

 

 

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