China’s Temporary Stimulus

China’s stock market is leading the world this year, rising by 22% compared to 16% for U.S. stocks. China’s A-shares market, which represents a broader sample of mainland-listed stocks, is up a whopping 39% since the beginning of the year.  This bullish market has been propped up by confidence in a forthcoming trade deal with the U.S. and optimism that the economy is recovering from a recent lull.  This week’s announcement of  first quarter GDP growth at a sturdy 6.4% and a recent firming of manufacturing output data has provided support for the bulls. Moreover, news of record steel production and a ramp-up in iron ore prices have raised hopes of an old-style stimulus effort based on infrastructure spending which could translate into  a sustained move upwards for  commodities and emerging market stocks. This wishful thinking is most likely misplaced. Chinese policy makers are aware of the declining marginal returns on fixed capital formation investments and the lack of debt-capacity to fund them. Moreover, a return to the debt-fueled investment model of the past would go directly against the clear government policy of transitioning the economy from dependence on gross capital formation to greater reliance  on consumption. Furthermore, the government’s priority is to promote investment in the value-added frontier industries highlighted in its “China 2025” policy, which are considered of much greater strategic importance. So, what is going on and what can we expect for the future?  Most likely, we are seeing now a  coherent and moderate response by policy makers to the economy’s sharper than expected deterioration last year. Beijing was certainly surprised by the effectiveness of Trump’s trade war strategy and the broad support it has received from Europe and business interests. The tension and loss of confidence caused by the trade war came at a time when China’s economy was already feeling the pressure from the  difficult economic transition away from debt-fueled growth. In addition, a significant slowdown in the global economy did not help. In typical bureaucrat-central-planning mode, Beijing immediately responded with stimulus to maintain growth on its preordained path. Both fiscal and monetary measures were introduced throughout 2018 and they appear to have worked their magic. Though policy makers would have probably preferred to apply stimulus to the consumption side of the economy, several factors conspired against this. First, at the beginning of 2018 housing prices were  significantly above trend.  Beijing is very determined to maintain price stability in this crucial sector which represents  the core of private savings and was reluctant to fuel further housing inflation.  Second, the effectiveness of consumer stimulus is difficult to predict, as the consumer may save more instead of spending the boost in income. In any case, the stimulus has largely found its way to fixed asset investment in both infrastructure and real estate development, reverting the recent downward trend. These are areas where the government has great control over decisions and typically an abundance of shovel-ready projects, and they also immediately generate employment. This is shown clearly in the following chart from Gavekal. The chart shows clearly the downward trend in infrastructure and real estate development spending between 2012 and 2018. This has been an intrinsic element in Beijing’s effort to control debt levels and redirect spending towards consumption. In mid-2018 this trend was reverted, and further data points to a strong upsurge under way (shown in the chart below). However, this upsurge in fixed assets investing is most likely of an emergency nature. Once Xi and Trump sign their trade deal and a modicum of normality returns to China-U.S. relations confidence will return. At that time authorities will be able to recalibrate and adjust policies, and it is likely they will seek to return to the previous path of managing the transition to a more consumer and service-driven economy.

Trade Wars

  • After the deal “Cold War II” will continue (SCMP Stephen Roach)
  • The reemergence of a two-bloc world (FT)
  • The deepening U.S. China crisis (Carnegie)

India Watch

China Watch:

  • China’s economic Challenge (Barrons)
  • China’s bad debt problem (marcopolo)
  • Beijing’s new airport (Economist)
  • China’s laid-off optimists in Chongqing (NYT)
  • China’s economy increasingly pulls all of Asia (Nikkei)
  • China’s wig firm takes over Africa (WIC)
  • Does China have feet of clay (Project Syndicate)
  • Martin Wolf on China’s prospects (FT)
  • Chna stimulus is not what it used to be (FT)
  • Japanese firms are leaving China (WIC
  • China’s Gree going fully private (WIC)
  • The privatization of Gree (SCMP)
  • Shanghai consolidates position as global leader (SCMP)
  • Chinese students U.S. visa problems (WIC)
  • The debate on China’s BRI (Carnegie)
  • China’s voracious appetite for Russia’stimber (NYT) 

China Technology

  • The debate on China’s BRI (Carnegie)
  • China’s voracious appetite for Russia’stimber (NYT
  • China internet weekly (Seeking Alpha)
  • China’s food delivery war (Bloomberg)
  • How China took the lead in 5G technology (WP)
  • China’s MIC 2025 plans are roaring ahead (SCMP)
  • China’s EV future (The Econoist)
  • Chinna’s EV bubble (Bloomberg)

Brazil Watch

  • The bear case for Brazil (seeking alpha)
  • Business optimism returns to Brazil (FT)
  • Brazil digital report (McKinsey)
  • Brazil’s finance guru (FT)

EM Investor Watch

  • Erdogan’s new Turkey (Bloomberg)
  • Turkey will recapitalize state banks (FT)
  • Turkey’s bubble has popped (Forbes)
  • Istanbul’s new airport (The Economist)
  • Turkey’s key role in the Mediteranean gas market (GMFUS)
  • Malaysia restarts China rail project (SCMP)
  • Mexico’s back-to-the-past energy policy (NYT)
  • Nigeria’s urban time-bomb (Bloomberg)
  • Indonesia’s Economic slack (FT)
  • The strongmen strike back (Washington Post)

Tech Watch

  • Investing in Asian Innovation (Oppenheimer)
  • Trends in battery prices (BNEF)
  • Germany is losing the battery war (Spiegel)
  • Does automation in Michigan kill jobs in Mexico? (World Bank)

Investing