China – US: the battle is just beginning

Donald Trump’s threats to world trade are a desperate attempt from the US to maintain the country’s world economic leadership. The most dramatic shift over the past 20 years has taken place in China, as the country has displayed stellar growth and now accounts for an increasingly large percentage of the world economy.

China has been one of the big winners from globalization, as citizens have enjoyed an impressive surge in income to the detriment of the middle and lower classes in developed markets, as shown by Branko Milanovic’s famous elephant chart. This chart also goes a long way to explaining recent political events in western countries: the middle classes across the board have ended up in a more unstable situation than 10 or 20 years ago, and this has major consequences for the way they vote.

The industrial momentum that very swiftly pushes up income is now the preserve of Asia, and China in particular. Industrial output across the US, Japan and Europe – the three major areas that drove world growth after the Second World War – has stagnated over the past ten years, while figures in Asia (excluding Japan) have doubled. The “Made in China 2015” plan seeks to further accelerate this shift.

This contrasting industrial momentum now comes firmly down on the side of Asia and acts as the focus for Trump’s trade measures against China. Output is no longer increasing in western countries, but rather in Asia, driving the region’s catch-up trend and reducing developed countries’ headway. The US is seeing its leadership diminish, while at the same time the situation also raises major challenges for Europe, although it has not taken the same aggressive course of action as the White House. Furthermore, the industrial revival in developed countries often referred to as “Industry 4.0” only seems to involve the substitution of existing production, rather than a true jump in production volumes. For the moment, this so-called revival is not sufficient to point to a reversal in the aforementioned trend towards the location of production in Asian countries. Continue reading

Higher bonds rates in China – Should we care?

Written with Zouhoure Bousbih

This week, the Chinese bond market has again been under selling pressure. The yield on 10-year Chinese government bonds once again flirted with the 4%, the highest in 3 years.
The Pboc (the Chinese Central Bank) intervened twice this week by injecting liquidity into the market, for a total amount of 810 billion yuan or USD 122bn , the largest injection since mid-January.
Should we worry?
No. The movement began just after the end of the C.C.P congress (end of October) when the Chinese authorities signaled clearly that they would continue their fight against high leveraged finance, ie shadow banking.
This has resulted in massive sales from Chinese government bondholders notably from  mutual funds that are the second largest holders of Chinese state bonds. They feared a tightening of financial conditions.
China’s interest rates have been low so far because of the loose Pboc’s monetary policy. The orientation has not changed but the action of the Chinese monetary policy is now more focused.
The Pboc intervened in the market by injecting liquidity in order to reduce volatility and it will continue to intervene if necessary to correct the excesses of the financial markets.
The Chinese central bank must find an equilibrium between its deleveraging campaign and the stabilization of Chinese financial markets so as not to penalize economic activity.

Does this question the attractiveness of the Chinese bond market for international investors? and the willingness of the Chinese authorities to open their bond market?
At 4%, Chinese government bonds remain attractive compared to their counterparts in developed countries,  helped by a stabilized yuan. China’s deleveraging campaign is rather a positive signal sent to international investors. China will not come back on the opening of its bond market to international investors because of the internationalization of the yuan. China’s economic activity remains sound. This is only a moment of turbulence to pass …

The Chinese bond market opens

Co-authored with Zouhoure Bousbih

The Chinese bond market is becoming more international and opening up to foreign investors. Coinciding with the 20th anniversary of the handover of Hong Kong to China, the Chinese authorities are displaying their aim of shaping world affairs, acting directly on the largest and most important financial market worldwide.
The Chinese bond market is the third largest worldwide after the US and Japan, with assets of $9,000 billion (source FT) if we combine sovereign bonds, agencies and corporates.
Foreign investors only account for 1.5% of this market, which is ridiculously small for an economy the size of China’s. The magnitude of the Chinese economy in the world and the proportionate weighting of its bond market are not yet comparable. But this is set to change, and this shift in balance will mark a lasting transformation compared to the current situation.   Continue reading

3 Graphs on Chinese Trade Surplus

The Chinese external trade surplus is almost at its highest in August 2015. It is close to USD 60bn. Cumulated on twelve months, the surplus is at its highest ever. That’s what we see on the graph.
china-2015-august-comexComparing exports and imports’ profiles allows a better understanding of the trade surplus and of the impact China has on the world trade momentum. Continue reading

Chinese Fluctuations

China has played a major role in all of the stock market fluctuations seen in recent days. However, analysis of this should be discriminating. The Chinese economy has not suddenly collapsed, it is more the Shanghai stock market that has adjusted sharply downwards.
A clear distinction should be made between the two phenomena and we should keep in mind that stock market fluctuations are always excessive relative to economic movements. Paul Samuelson, probably the most influential economist in the post-war period, indicated that the stock markets had forecast nine out of the last five recessions.
The Chinese economy is no longer that which enjoyed growth of 10% a year over two decades. The development of a sizeable middle class has radically changed its growth model. This middle class has other needs than those noted in an economy that is taking off. China is currently in this transition phase. It needs to adapt its economy to more diversified growth with a larger share for services.
This transition is causing and will continue to cause a lower growth rate. If the Chinese economy’s profile follows that of Japan and South Korea, in around 10 years, GDP should therefore grow in range of 3-5% a year. Continue reading