Aside from Tacgnol, reforms are going according to plan and doing surprisingly well. Sometimes, you have to look beyond the internet headlines:
BEIJING - 3 Mtgs / 3 Distinct Conclusions
I spent all of last week in Beijing and organized three meetings involving old contacts across Tsinghua University, IMF and Peoples Bank of China (PBOC). The rest of the visit was spent wandering around the city, collecting anecdotal vignettes.
Specific conclusions resonated.
All three meetings essentially echoed a similar refrain, notably (1) the current austerity measures implemented two years ago under the new Beijing regime were working well and irreversible, (2) overall sluggish pace of economic growth consistent with steady/gradual rebalancing of economy towards consumption and services and (3) renminbi 'fairly/adequately valued' versus US$, thereby providing ample room for further accomodative monetary policy.
Although many corners outside China argue that Beijing is considering relaxing the harsh austerity measures, nothing could be further from the truth, based on my interactions, as long as the current fifth generation of leaders is in power. These measures are clearly working and have the support of the people. To reverse course now would damage the credibility of the Beijing leadership, especially as the crusade against corruption involving government officials is bearing fruit.
President Xi Jinping and his top Politburo enforcer, Wang Qishan, have made great strides in reversing the two-decades long embrace of rampant corruption, in many forms, from bribery to embezzlement, which was essentially condoned in the previous two regimes. Macao provides a stark example of the extreme nature of black money from the Mainland. Now, Macao casinos are empty, front-line witness to Beijing's crackdown on corruption. Casino revenues in Macao have taken a battering, collapsing a record near 50% YoY in 1Q2015. VIP business has all but collapsed with even mass market punters now starting to disappear. Casino stocks should become familar with this lower revenue territory; the same for share prices.
Energy consumption has been another significant target of the austerity measures. This is equally a reflection of the growing urgency to address the dreadful pollution problem, especially in major cities, as lignite remains the primary raw input to fire power plants. Remarkably, Beijing is now essentially pitch dark at night. Chang'an Jie (Ave), the main artery traversing Beijing, with the heavyweight SOE HQs adorning both sides of the boulevard, are dark. For the first time in my near three decades of visits to Beijing, no lights were visible outlining these gleaming monuments to China's rising economic clout. Darkness descended from Nanlishilu in the west all the way past/including Tiananmen Square to Wangfujing in the east. Mao's Masoleum disappeared in the darkness enveloping all of Tiananmen Square. Even the PBOC HQ was lost in the darkness. Beijing in the dark certainly sends a message that times have changed.
Expectations for asset declarations by public officials remain under discussion, as has been the case the past two decades, but have received more attention lately from President Xi. A disclosure decision would be a significant achievement for the regime, despite the resistance from vested interests.
While the economy has been visibly slowing the past several years, to levels not seen in a quarter-century, this new normal is welcome and consistent with the gradual rebalancing of overall growth drivers and recognition of the rapid changes in China's demographic profile. The 'Low Wage Ice Age' is largely complete. This overall adjustment phase is truly welcome, reinforcing our 2008 argument that 'Investors should WELCOME, not fear, a slowing China.' No need to panic! The embrace of more efficient growth, while challenging, represents a shift in priorities emphasizing the quality, not sheer quantity of economic growth. This will ultimately serve China's next phase of growth. Recent PBOC policies reflect such a new growth profile.
Visible progress is also noted across both China's new Asian Infrastructure & Investment Bank (AIIB) and Silk Road ("One Belt, One Road") initiatives, dual programs designed to extend Beijing's sphere of influence. While both projects have a common economic objective of infrastructure and trade, the political and diplomatic realities are undeniable. In many ways, they represent Beijing's ongoing version of the Marshall Plan. 57 nations have pledged to join the AIIB, despite certain objections from Washington, while US$46 billion worth of investments in Pakistan highlight a new bilateral relationship, connecting China to the subcontinent, Middle East and Europe. Energy deals with Russia also figure in the mix, as President Xi was in Moscow this week signing deals with Putin.
China continues to pursue a greater role for the renminbi within the IMF and progress is again noted. The forthcoming IMF annual economic assessment of China will represent a paradigm shift in perspective, containing significant positive comments regarding the currency, overall economic activity and housing market adjustments. The IMF's new language describing the renminbi, always a sensitive political topic, will herald a breakthrough for which Beijing has long sought. China will most likely allow this annual IMF paper to be published!
The big prize of gaining new clout for the renminbi from the IMF will be a milestone in Beijing's efforts to further open its economy and internationalize the currency. This follows years of IMF censure of China's currency management. Come June, the IMF will decide to include the renminbi in its SDR. Becoming a constituent in the basket of special drawing rights would be a huge advance for the currency, which is no longer as tightly controlled by Beijing as many observers argue.
The rewards for Beijing would be more than simply financial (always part of the plan); acquiring SDR rights would be a powerful boost to its geopolitical ambitions. Indeed, this inclusion is largely symbolic to global recognition of China's rise in status. Essentially, it's declaring what we already affirm, another official, yet vital, acknowledgement of China's growing stature in the global economy and financial markets. But recent visits confirm the IMF's shift in view is also a marker underscoring how swiftly China is moving to dismantle capital controls, in line with the reform policies of the PBOC.
As part of Beijing's currency liberalization plan, China threw open its onshore bond market last week, approving 32 foreign financial institutions access. The current size of the bond market is nearly US$6.0 trillion, with barely 2.0% of that held by foreign investors. Little wonder on the timing of the decision, nor the intention of luring more foreign inflows to shore up a wobbly borrowing class.
The final hurdle to clear for Beijing to gain currency clout from the IMF involves whether renminbi interest rates are market-based. The IMF has conducted much work in this area the past few years in preparation of a decision.
This decision will have broad implications for global investors as we experienced with Japan in the late 1980s and both South Korea and Taiwan more than a decade ago. It will ultimately mean China could soon assume a much larger weight in crucial global financial markets to which funds are benchmarked. Furthermore, China is too hard to simply ignore, as was the case with Korea and Taiwan. Today, Hong Kong-listed China companies barely register in the MSCI All Country World Index (similar in FTSE) but could rise to near 15% of the index once adequate currency convertibility is achieved (IMF's call), allowing onshore Shanghai China 'A' shares to be included in the index. Global investors will then be forced to consider increasing allocations to China, not solely based on the merits of fundamentals.
Which brings me to the final conclusions of my visit....
BEIJING - 3 Mtgs / 3 Distinct Conclusions
I spent all of last week in Beijing and organized three meetings involving old contacts across Tsinghua University, IMF and Peoples Bank of China (PBOC). The rest of the visit was spent wandering around the city, collecting anecdotal vignettes.
Specific conclusions resonated.
All three meetings essentially echoed a similar refrain, notably (1) the current austerity measures implemented two years ago under the new Beijing regime were working well and irreversible, (2) overall sluggish pace of economic growth consistent with steady/gradual rebalancing of economy towards consumption and services and (3) renminbi 'fairly/adequately valued' versus US$, thereby providing ample room for further accomodative monetary policy.
Although many corners outside China argue that Beijing is considering relaxing the harsh austerity measures, nothing could be further from the truth, based on my interactions, as long as the current fifth generation of leaders is in power. These measures are clearly working and have the support of the people. To reverse course now would damage the credibility of the Beijing leadership, especially as the crusade against corruption involving government officials is bearing fruit.
President Xi Jinping and his top Politburo enforcer, Wang Qishan, have made great strides in reversing the two-decades long embrace of rampant corruption, in many forms, from bribery to embezzlement, which was essentially condoned in the previous two regimes. Macao provides a stark example of the extreme nature of black money from the Mainland. Now, Macao casinos are empty, front-line witness to Beijing's crackdown on corruption. Casino revenues in Macao have taken a battering, collapsing a record near 50% YoY in 1Q2015. VIP business has all but collapsed with even mass market punters now starting to disappear. Casino stocks should become familar with this lower revenue territory; the same for share prices.
Energy consumption has been another significant target of the austerity measures. This is equally a reflection of the growing urgency to address the dreadful pollution problem, especially in major cities, as lignite remains the primary raw input to fire power plants. Remarkably, Beijing is now essentially pitch dark at night. Chang'an Jie (Ave), the main artery traversing Beijing, with the heavyweight SOE HQs adorning both sides of the boulevard, are dark. For the first time in my near three decades of visits to Beijing, no lights were visible outlining these gleaming monuments to China's rising economic clout. Darkness descended from Nanlishilu in the west all the way past/including Tiananmen Square to Wangfujing in the east. Mao's Masoleum disappeared in the darkness enveloping all of Tiananmen Square. Even the PBOC HQ was lost in the darkness. Beijing in the dark certainly sends a message that times have changed.
Expectations for asset declarations by public officials remain under discussion, as has been the case the past two decades, but have received more attention lately from President Xi. A disclosure decision would be a significant achievement for the regime, despite the resistance from vested interests.
While the economy has been visibly slowing the past several years, to levels not seen in a quarter-century, this new normal is welcome and consistent with the gradual rebalancing of overall growth drivers and recognition of the rapid changes in China's demographic profile. The 'Low Wage Ice Age' is largely complete. This overall adjustment phase is truly welcome, reinforcing our 2008 argument that 'Investors should WELCOME, not fear, a slowing China.' No need to panic! The embrace of more efficient growth, while challenging, represents a shift in priorities emphasizing the quality, not sheer quantity of economic growth. This will ultimately serve China's next phase of growth. Recent PBOC policies reflect such a new growth profile.
Visible progress is also noted across both China's new Asian Infrastructure & Investment Bank (AIIB) and Silk Road ("One Belt, One Road") initiatives, dual programs designed to extend Beijing's sphere of influence. While both projects have a common economic objective of infrastructure and trade, the political and diplomatic realities are undeniable. In many ways, they represent Beijing's ongoing version of the Marshall Plan. 57 nations have pledged to join the AIIB, despite certain objections from Washington, while US$46 billion worth of investments in Pakistan highlight a new bilateral relationship, connecting China to the subcontinent, Middle East and Europe. Energy deals with Russia also figure in the mix, as President Xi was in Moscow this week signing deals with Putin.
China continues to pursue a greater role for the renminbi within the IMF and progress is again noted. The forthcoming IMF annual economic assessment of China will represent a paradigm shift in perspective, containing significant positive comments regarding the currency, overall economic activity and housing market adjustments. The IMF's new language describing the renminbi, always a sensitive political topic, will herald a breakthrough for which Beijing has long sought. China will most likely allow this annual IMF paper to be published!
The big prize of gaining new clout for the renminbi from the IMF will be a milestone in Beijing's efforts to further open its economy and internationalize the currency. This follows years of IMF censure of China's currency management. Come June, the IMF will decide to include the renminbi in its SDR. Becoming a constituent in the basket of special drawing rights would be a huge advance for the currency, which is no longer as tightly controlled by Beijing as many observers argue.
The rewards for Beijing would be more than simply financial (always part of the plan); acquiring SDR rights would be a powerful boost to its geopolitical ambitions. Indeed, this inclusion is largely symbolic to global recognition of China's rise in status. Essentially, it's declaring what we already affirm, another official, yet vital, acknowledgement of China's growing stature in the global economy and financial markets. But recent visits confirm the IMF's shift in view is also a marker underscoring how swiftly China is moving to dismantle capital controls, in line with the reform policies of the PBOC.
As part of Beijing's currency liberalization plan, China threw open its onshore bond market last week, approving 32 foreign financial institutions access. The current size of the bond market is nearly US$6.0 trillion, with barely 2.0% of that held by foreign investors. Little wonder on the timing of the decision, nor the intention of luring more foreign inflows to shore up a wobbly borrowing class.
The final hurdle to clear for Beijing to gain currency clout from the IMF involves whether renminbi interest rates are market-based. The IMF has conducted much work in this area the past few years in preparation of a decision.
This decision will have broad implications for global investors as we experienced with Japan in the late 1980s and both South Korea and Taiwan more than a decade ago. It will ultimately mean China could soon assume a much larger weight in crucial global financial markets to which funds are benchmarked. Furthermore, China is too hard to simply ignore, as was the case with Korea and Taiwan. Today, Hong Kong-listed China companies barely register in the MSCI All Country World Index (similar in FTSE) but could rise to near 15% of the index once adequate currency convertibility is achieved (IMF's call), allowing onshore Shanghai China 'A' shares to be included in the index. Global investors will then be forced to consider increasing allocations to China, not solely based on the merits of fundamentals.
Which brings me to the final conclusions of my visit....
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