China Update

There have been several developments in China that may have been overshadowed by the US election.  The
US election itself is a mixed blessing for China.  Trade and currency
issues will likely prove more contentious.  However, to the extent that a
Trump Administration may pull back from
its global engagement and leadership, there may be less confrontation over
human rights and freedom of the press.  

In terms of China’s politics, an
important development has been the suggestion by some high ranking officials
that the age limit on Politburo members
as set as it had seemed since former President Zemin first articulated it in
This is important because
next year, the key seven-member Standing Committee begins a new term.  The
“seven up, eight down” principle, which means someone 67 years old
can be promoted but at the end of their
term if they are 68 they must step down, could see five of the seven members
replaced (all but President Xi and Premier Li).  

This is important in its own
right, but also as a precedent for Xi himself, who was recently recognized as “core” leader, something
achieved since Deng Xiaoping. 
President Xi is widely understood to be
consolidating power to a great extent.  The softer age limit would
potentially see Xi stay longer. Currently, it is not unusual in China for
leaders to still wield influence even after they leave office. 

Ahead of next year’s National People’s Congress, China’s legislature,
there are various ministerial changes. 
Among these, Finance Minister
Lou Jiwei has been replaced.  He was
widely respected, and no new position for
him was announced.  His replacement
is Xiao Jie, who previously worked with Premier Li.  Xiao Jie reportedly will focus on three large
issues:  relations with the US, broadening local government revenue base,
and address the real estate market.  Xiao recommended increasing property
taxes before 2013.  This may come
back to the fore.  

China has also gotten involved in
Hong Kong politics. 
The proximate issue is that two HK newly elected
HK legislators refused to take a loyalty oath.  China argues this
prohibits them from serving.  The two elected legislators advocated HK
independence, which conflicts with the loyalty oath.   

Earlier today, China reported inflation figures.  October CPI
was in line with expectations at 2.1%.  It is the highest since
April.  The main culprit is food prices.  They are up 3.7%
year-over-year.  Non-food prices are up 1.7%.   Another way to
slice the data is to separate goods from services.  Goods prices are up
1.9%, while service prices were up 2.5%.  

Perhaps more importantly, producer prices are rising.  In
September they stopped falling for the first time since Q1 12 by posting a
slight 0.1% increase.  In October, producer prices were 1.2% above a year ago levels.  The market had expected
a smaller rise.    An interesting takeaway from the higher PPI is that it will likely boost nominal GDP in
coming quarters.    More broadly, China joins the US, UK, and
many countries in the continental Europe that have seen deflationary forces

Yesterday China reported its October trade balance.  The surplus
rose to $49.1 bln from $42 bln in September.  However, exports fell for the
seventh consecutive month.  The 7.3% decline was larger than expected but
less than the 10% fall in September.  Imports fell 1.4%.  This was also more than expected, but a slower
pace from September (-1.9%).  

The US-China bilateral deficit may become more politicized in the period
  Exports to the US fell 5.6% year-over-year in October.  This means that the year-to-date US trade
deficit with China, by their reckoning is $208 bln compared with $218 bln in
the same 2015 period.  Note that last week’s US trade figures showed the
US had a $258 bln deficit with China this year, down from $275 bln in the year
ago period.  

A sector that has been the sources of much trade friction is steel. 
China’s steel exports for the third month on a year-over-year basis.  They
were off 15% in October to 7.7 mln tons. Steel exports were off 22% in
September and 7.4% in August.  However, the surge at the start of the year
means that China has still increased its steel exports in the Jan-Oct period
for the same year ago period (0.7% to 92.74 mln tons).  

Some part of the slowing of steel export growth is the replenishing of
domestic inventories.
  The property boom and infrastructure spending,
which has supplanted monetary policy as the key form of stimulus, places a demand on
steel as well.   Crude oil imports slipped from September’s record. 
Copper imports fell to their lowest level since February 2015.  The drop
in copper imports seems to reflect “import substitution” as domestic
output is rising with new smelters coming online.  

The yuan has fallen 4.4% this year
and is now at its lowest level in six years.
  Given the appreciation
of the greenback since Asia closed, it seems reasonable to expect dollar rises
further on Wednesday.  The currency is likely to be a flashpoint Trump Administration.  As a candidate, Trump has claimed China is a
currency market manipulator.  Many expect him to make this an official
assessment early in his term.  The Treasury Department, following
Congressional legislation, has devised a framework
with quantitative measures to better define manipulation.  We have shied
away from claims of a currency war, but this too can change.



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