Asian markets had a boost on Monday morning from President Trump’s Sunday announcement that the deadline for an increase in US tariffs on Chinese goods will be extended on the basis of substantial progress in trade negotiations.
Chinese infrastructure stocks remain the star performers, leading year-on-year returns to the Hang Seng China Enterprises Index. China Tower, the mobile infrastructure consortium, leads the index with a 53% gain, followed by China Railway Group (+37%), Guangdong Investment (+33%), China Telecom (+28%), CNOOC (+23%) and CRRC (+14%).
Telecom equipment maker ZTE shows poorly year on year, after last year’s ban on purchases of American chips, but it has surged from HK$11 at the end of October 2018 to HK$23.35 at the Friday close. I called attention to the “stealth boom in 5G stocks” on February 13, and the boom continues.
This augurs well for China’s economy in the Year of the Pig. Capital appears to be flowing to the kind of investments that contribute to productivity growth in the long-term. The main concentration of Chinese corporate debt, I have shown in past studies for Asia Times, supports infrastructure investment. China appears to engage in a measured credit expansion supporting productivity-enhancing investments.
January’s 3.23 trillion yuan rise in new lending elicited warnings by brokerage-house strategists that “deleveraging is dead,” as a February 24 Bloomberg headline wrote. This is fake news. January’s big gain in new lending mainly reflected seasonal needs.
The People’s Bank of China has undertaken an expansionary monetary policy, as a counterweight to the contractionary effects of the shrinkage in world trade and investment due to the ongoing tariff war. But the scale of monetary expansion is modest compared to China’s response to the 2009 global financial crisis or the spate of economic weakness in 2005-2016.
It’s clear from the chart that the monthly surge in new loans follows a long-established seasonal pattern anticipating the Lunar New Year holiday. Using the Eviews econometrics package, I calculated a seasonally-adjusted series that smooths out the Lunar New Year effect, as shown in the chart below.
In the following chart, I compare the seasonally-adjusted increase in lending to the 15-year trend line. The January number was above trend, to be sure, but not nearly as far above trend as in 2015 and 2016, when the overvalued RMB led to a domestic credit squeeze.
Margin lending in the equity market, meanwhile, is down 24% year on year in January, although it ticked up slightly during the month due to seasonal factors. Shadow lending is down 7% year on year, reflecting the PBOC’s preference for on-balance-sheet loans in place of poorly-regulated lending.
All of this remains within normal parameters and is consistent with real GDP growth of slightly more than 6% and a stable RMB parity against the dollar.