This is
the period in the monthly cycle that China releases most of its high frequency
data. The process is well under way. Over the weekend, China reported its reserve figures that suggested
capital outflows have slowed. Earlier today China reported its largest
trade surplus (in dollars and yuan) since January.
With the help of a lending spree, Chinese
officials have managed apparently to stabilize
the economy. Data due out over the coming days is likely to confirm this signal.
There are several notable developments outside
of the immediate economic data. First, it appears that the
anticipation of the yuan formally joining the SDR has begun increasing the
demand for onshore yuan bonds. Preliminary data suggest
that foreign investors increased their onshore yuan bond holdings in June by
the most in two years. Foreign investors boosted their holdings by
CNY47.7 bln (~$7.2 bln) to CNY764 bln. The breakdown of officials and private sector holdings is not
clear.
In addition to SDR considerations, there has
been some liberalization in terms of access. When China was
experiencing strong inflows, officials liberalized outflows. More
recently, capital outflows challenged officials and they moved to liberalize
inflows. Specifically, in February, officials have allowed medium- and
long-term investors easier access the onshore interbank bond market.
Registration is required, but applying for permission or a quota is no longer
necessary. June was the fourth consecutive month that
foreigners were net buyers of onshore yuan bonds.
There are two other considerations.
First, there was the quest for yield. The premium China offered over the
US on 10-year money gradually rose in H1 from about 65 bp to start the year to
nearly 150 bp by early July. It was the most in nearly a year.
Second, although MSCI decided not to include
China’s A-shares in its global indices, China is still pushing for its bonds to
be included in global indices that Citi, JP Morgan and Barclay’s have
created. These indices are important because they serve as the
benchmark for many fixed income managers.
Political events have become more important
for investors, and just because China does not a representative form of government, does not mean that it does not
have politics. Over the weekend, senior Chinese officials met.
A key issue was the political changes in a year’s time. Of the
seven-member Standing Committee ( a key decision-making executive committee)
five will hit the mandatory retirement age (68). The new configuration
will not only shape President Xi’s second term
but also indicate the succession process.
As we have noted previously, President Xi has
consolidated power to such an extent that the balance of power in China between
the “Princelings” and the Communist Youth League may be at risk.
President Xi has been particularly critical of the Communist Youth League, and
many economic problems, including the stock market’s performance, has been blamed
on them. Premier Li, coming from the Communist Youth League, served as a lightning rod. Some reports suggest
that President Xi anti-corruption campaign was aimed primarily at members or
sympathizers of the Communist Youth League.
Last week, before the weekend confab,
President Xi took what appears to be the most aggressive move to date.
Under his direction, the Communist Party control over the Youth League will be
increased. Xi is demanding the Youth League are fully committed to his political
views. The League’s ability to reward loyal supporters through promotions
in its large bureaucracy, and then the government
will be undermined.
Meanwhile, China’s tensions with Japan and
South Korea have flared up. Reports indicate that hundreds of Chinese
fishing boats and more than a dozen coastguard vessels have been spotted near disputed islands.
Japan is formally objected, and is protesting what it claims is the
installation of military-grade radar on a gas platform near its territorial
waters.
Last month’s decision South Korea to install a US missile defense system
irks Chinese officials. The US and South Korean officials argue that
the “Terminal High Altitude Area Defense System (THAAD) is aimed solely at
North Korea’s missile threat. Several South Korean legislators are
visiting Beijing this week, and it is
causing some consternation in local Korean politics.