China’s multi-front economic war dulls direction

Chinese stocks were at the bottom of the Emerging Asia pack into August, down 20% in local-index terms, as the so-called “trade war” with Washington added another 25% mutual tariff blow on tens of billions of dollars’ worth of goods.

The International Monetary Fund urged a negotiated settlement as it predicted only “limited direct impact” on the Chinese economy, shaving growth by half a percentage point under a medium-case scenario, while holding to this year’s 6.6% forecast. However, the IMF also warned that credit expansion was unsustainable and that tighter global financing conditions posed “downside risk,” as the renminbi continued its 10% slide since April.

The IMF’s Beijing representative described the yuan as “fairly valued,” even though analysts estimated that depreciation would translate into higher exports with a time lag to offset the tariffs.

US Treasury Secretary Steven Mnuchin raised the stakes with notice that his department was “carefully monitoring weakening” in preparation for another currency-manipulation assessment due in October. Chinese officials insist that market forces rule, with no competitive devaluation strategy, as the central bank reinstated bank forward position reserve requirements to curb speculation.

However, the US-China exchange-rate and trade regimes now closely overlap as an overhang on “A” share consideration, despite China’s 30% slice on the benchmark MSCI Index, with a clean resolution of cross-cutting issues unlikely to offer recovery prospects in the coming months.

As if these battles were not enough to daze foreign investors, whose first-half US$45 billion in inflows have turned to outflows, another theater opened after the Pakistani election in July brought the prospect of another IMF balance-of-payments rescue that could also repay Beijing’s Belt and Road commercial-infrastructure lending, as the two systems try to reconcile debt-workout procedures. US Secretary of State Mike Pompeo, responding to congressional concerns, insisted that an IMF program would not benefit Chinese coffers.

Although Chinese exports increased by more than 10% on an annual basis in July, a $30 billion current-account deficit in the first half was the sole instance in the past two decades as outbound tourism jumped.

The official purchasing-manager index hit a five-month low of 51, and the services-optimism reading was the poorest since 2015. Monetary policy was loosened as money-market rates fell 200 basis points year to date, and the Chinese State Council pledged “more active” fiscal steps short of stimulus.

The midyear budget deficit came in less than 2017’s, as a hundred fixed investment projects were approved worth $40 billion.

Local-government spending will ramp up in the second half as 1.8 trillion yuan ($261 billion) in bond issuance is allowed, in part to compensate for sliding land sales. The Housing Ministry ordered provincial authorities to manage risks better, as the news agency Xinhua tallied 200 property-tightening rules across the country to deflate bubbles.

With the domestic downturn, Chinese institutional investors only allocated $4.5 billion to overseas property in the second quarter, a 45% drop on an annual basis according to global tracker Cushman & Wakefield.

Financial-sector troubles continue despite “preliminary deleveraging results” in the Chinese government’s view, as the central bank injected a record 500 billion yuan in one-year liquidity. It called for greater small-business credit, as regional lenders with 40% of system assets retrench under capital constraints and seek to launch share offerings in Shanghai and Shenzhen.

According to the banking regulator, only 35% of 250 trillion yuan in assets are onshore, and overseas disclosure is opaque. Financial-services overseers were otherwise swamped with depositor protests after 150 peer-to-peer lending platforms suddenly closed. Thousands have proliferated to serve an estimated 50 million borrowers, and range from well-known e-commerce units to personally run pyramid schemes.

The asset-management association also revealed “lost contact” with hundreds of private-equity and hedge funds that failed to renew registration. The State Council announced further measures against illegal financial firms and activities, after 20 mainstream corporate bond defaults through July, with state enterprises facing a heavy rollover schedule in 2019. Standard & Poor’s Ratings found that more than half of investors with put options, mostly in the property sector, exercised immediate repayment rights over that period.

The National Development and Reform Commission calculated that foreign-exchange liabilities were back to 2014’s steep levels, as currency mismatch also prominently surfaced as an element in the warlike footing.