Bull market or bluster?

Access Archive

Dear Access member,

  • If you’re in New York on November 13, please join us for SupChina’s second monthly women’s networking event with guest speaker Ingrid Yin, Ph.D., cofounder of MayTech Global Investments and a winner of the 2018 SupChina Female Rising Stars Award. Our theme is innovation in medicine and biosciences in China.

  • —Jeremy Goldkorn, Editor-in-Chief


    1. Bull market or bluster?

    “China’s beaten-down stock market had its best day in more than two and and a half years on Monday,” reports CNN: “The benchmark Shanghai Composite index surged more than 4% after a rare concerted intervention by senior officials to talk up the country’s struggling economy and markets.” The “rare concerted intervention” began last week with expressions of confidence in the stock markets and the real economy from four key economic officials — Liú Hè 刘鹤, Guō Shùqīng 郭树清, Yì Gāng 易纲, and  Liú Shìyú 刘士余.

    Andrew Polk, co-founder of political and economic research house Trivium, tweeted that the foursome’s rare cheerleading “speaks volumes about how high the level of anxiety is right now.” I tend to agree. Polk’s tweet reminds me of an old truism in China: You can only be sure something is actually happening when the government denies it.  

    Which is why this headline from CNBC on the stock market rally is perhaps a better summary of the real situation than CNN’s focus only on the good news: Chinese stocks surge, but looming uncertainties could drag markets down again. Even if the stock markets remain healthy after this propaganda-fueled bounce — I need hardly say — their performance is not a reliable indicator of the real economy. Trivium’s latest newsletter offers more detail on why today’s buoyant market might not mean anything:

    Anxiety abounds in Beijing

    There is palpable anxiety in Beijing these days. Q3 economic data showed a weakening economy. The worst part was that, so far, there has been little impact from the trade war. But those effects should start to be felt in the coming months.

    Liu He and other top officials went on a high-profile media blitz on Friday to try and calm market jitters. Then Liu and other top officials met on Saturday to discuss financial risks.

    The markets took all this to mean that stimulus is coming, and had a big day today.

    We are far less certain. What’s clear to us is that presently there is no clear plan for how to address economic weakness. Instead, there is an active — and unsettled — debate about what to do.

    Counterpoint: Economist and Sinica Podcast guest Andy Rothman, admittedly a permabull on China but one who is rarely wrong, in his latest research note:

    On the one hand, China market sentiment and performance are weak. On the other hand, macroeconomic conditions and corporate earnings are strong. This great China disconnect is likely to narrow, although it isn’t possible to say exactly when that will happen.

    Macro data published last night for the third quarter reflects a healthy Chinese economy, driven by domestic demand, limiting any leverage the Trump administration believes it will gain via tariffs. Beijing has not undertaken significant stimulus, but will do so if the tariff dispute escalates into a trade war.

    2. Xi’s second Southern Tour

    General Secretary Xí Jìnpíng 习近平 has set off on what the South China Morning Post calls a “highly anticipated trip to Guangdong at a most critical time with the Chinese economy at a new crossroads after four decades of almost uninterrupted boom.”

    3. Censoring the blockchain

    In the first attempt to regulate the content of blockchain technology rather than its use for cryptocurrencies, the Cyberspace Administration of China (CAC) published a set of draft regulations (in Chinese) governing all blockchain-based information services. The public is invited to comment in the draft until November 2, but there’s no timetable when the law will take effect.

    • In April this year, #MeToo activists called for an investigation into a coverup of a two-decade old sexual harassment case at the prestigious Peking University. When their social media postings were censored, they turned to the cryptocurrency Ethereum to record the case for posterity.

    • When China’s latest toxic vaccine scandal exploded in July, some savvy users of cryptocurrency Ethereum inserted the text of a censored WeChat article into the metadata of a transaction to preserve it. TechNode reported the details: Chinese bet on blockchain to counter vaccine scandal cover-up.

    • Preventing samizdat blockchains seems to be a major aim of the new regulations from the government. The South China Morning Post reports that rules stipulate that “entities operating in China that provide blockchain-based information services will have to ask users to register their real names and national identification card numbers, censor content deemed to pose a threat to national security and store user data to allow inspection by authorities.”

    • But there’s a problem: the whole point of blockchain is that you can’t change or delete the information it records. So how will post hoc censorship even be possible?

    —Jeremy Goldkorn

    4. Trade war, day 109: Trump ‘wants them to suffer more’

    Axios reported yesterday:

    President Trump has no intention of easing his tariffs on China, according to three sources with knowledge of his private conversations.

    • Trump “wants them to suffer more” from tariffs, believing it will give him more leverage, the sources say. One of those anonymous sources dialed up the bravado and claimed the trade war is only at the “beginning of the beginning.”

    • The U.S. Treasury Department has been in contact with Beijing to “exchange information,” according to Axios, but it’s been “nothing close to real negotiation.”

    • Beijing has “offered no sign that it was willing to meet US demands in a way that could lead to a breakthrough between the countries” ahead of an expected Trump-Xi meeting at the end of November, the Financial Times separately reports (paywall), citing comments from Trump economic advisor Larry Kudlow, who says that Xi and Beijing “have to make a decision and so far they have not, or they have made a decision not to do anything, nothing.”

    Axios briefly alludes to Trump’s confusing conflation of the Chinese stock market drop with real economic health — if you took Trump by his word, you would think he already believes he has severely damaged the Chinese economy and that China is begging him to negotiate — but does not go into detail about the exact calculation that team Trump is making, other than that the President thinks “We are strong and they are weak.” Nonetheless, there may be a small bit of economic sense behind the insistence on waiting longer for tariffs to take a toll:

    • “Chinese exporters are not yet suffering. Exports to the U.S. rose 14% YoY in September, the fastest pace of the last seven months, and roughly the same as a year ago.” So writes economist Andy Rothman in his regular Sinology report. Rothman also notes, though, that the impending direct impact from U.S. tariffs on Chinese companies won’t be large, when considering these three facts:

      • “Net exports (the value of a country’s exports minus the value of its imports) account for only 2% of China’s GDP, down from a peak of 9% in 2007”;

      • “China’s exports to the U.S. accounted for only 19% of total Chinese exports in 2017”; and

      • “About two-thirds of the largest exporting companies based in China are foreign-owned.”

    More trade war news:

    • What China’s leaders may not be hearing
      Chinese experts ‘filtered’ trade war advice to Beijing policymakers / SCMP
      “Chinese policymakers have been left searching for answers to the trade war with the US because the domestic think tanks Beijing has called on for guidance have provided ‘filtered information’ to avoid offending supervisors, sources close to the Chinese government and diplomatic observers said.”
      “Researchers have told the Post that Beijing has only allowed China’s policy specialists to make brief visits to the US, some as short as one week. The limitation makes thorough investigation and quality communication with American contacts impossible, the researchers said.”

    • Capital movement
      Opinion: Beijing finds anti-Trump weapon in global indices / by James Kynge in FT (paywall)
      “A trade war is raging between the US and China, but somebody forgot to tell foreign portfolio investors. Surging inflows of foreign capital have headed to the Chinese bond and stock markets and helped to stem the depreciation of the renminbi against the US dollar.”

    • Commentary
      US and China heading for lose-lose situation in trade war if they do not talk, says US garment trade chief Rick Helfenbein / SCMP
      “Rick Helfenbein, president and CEO of the American Apparel and Footwear Association (AAFA) – an advocacy group representing more than 1,000 major industry brands – described the present situation as ‘dangerous’ and likened the trade war to an approaching tsunami.”

    • Products: Rubber
      Ivory Coast’s ‘devil’s milk’ at centre of US-China trade war / Al Jazeera
      “Rubber tree growers in Ivory Coast are emerging as the latest casualty of the trade war between the United States and China. It is Africa’s leading exporter of the valuable commodity, which was historically called ‘devil’s milk’ because of the brutal conflicts it fuelled.”

    • Products: Liquefied natural gas
      Trade war: China’s natural gas tariff will kill off US projects, says Canadian firm / Reuters via SCMP

    • Products: Pork
      America struggles to take its pigs to world’s biggest market / WSJ (paywall)
      “As a result of the Trump administration’s clash with Beijing over trade, China’s tariffs on U.S. pork have climbed as high as 70%, making U.S. imports more expensive. At the same time, an outbreak of African swine fever in China has increased demand for imported pork.”
      “To fill the void, Chinese customers are increasingly looking to companies in Europe and South America to fill their orders—and those companies aim to turn that opportunity into long-term business. The shift raises the prospect of not just a short-term hiccup for American hog farmers, but a fundamental realignment in the global supply chain in one of the world’s hungriest markets.”

    —Lucas Niewenhuis

    —–

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    —Jeremy Goldkorn, Editor-in-Chief


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    PHOTO FROM MICHAEL YAMASHITA

    Raising hairy crabs

    Fishermen set up nets to raise hairy crabs in October in Gaoyou, Yangzhou, Jiangsu Province, for the Shanghai market. Shanghai is the nation’s biggest consumer of hairy crabs, chomping through 80,000 to 100,000 metric tons of hirsute crustaceans every year, according to the Shanghai Restaurant and Cuisine Association. The hairy crab season usually starts between late September and early October and concludes in mid-December.

    Jia Guo