Big Trouble In Little China


Given that today is Donald Trump’s coronation, it’s somewhat ironic that we begin in China, where the Politburo was kind enough to tell us what they want us to think GDP is. I’ll just skip the niceties and get right to the data since there’s a lot to cover this morning. Full breakdown from Blooomberg:

  • National Bureau of Statistics reports 4Q GDP growth of 6.8%; median est. 6.7% y/y (range 6.5%-7.1%, 44 economists).
  • China’s economy grew 6.7% Y/y in 2016; est. 6.7% (range 6.6%-6.8%, 28 economists)
  • Industrial production in Dec. rose 6.0% y/y; est. 6.1% gain (range 6.0%-6.5%, 42 economists)
  • Dec. retail sales rose 10.9% y/y; est. 10.7% y/y (range 10.2%-13.8%, 41 economists)
  • Fixed-asset investment excluding rural households up 8.1% y/y in 2016; est. 8.3% (range 8.1%-8.5%, 39 economists)

Here’s the visual on the quarterly number:



And here’s FAI and IP:


(Charts: Goldman)

So obviously the numbers are a joke (the 6.7% annual growth rate just happens to be right square in the middle of the Politburo’s target), but I suppose the important thing to note is that they’re really struggling to keep up the charade at this point. “Ren”member (get it?), these numbers are brought to you by the letters “C”, “N”, and “Y”. That is, the only way to keep the economy afloat at this juncture is by steadily devaluing the currency. Well, that, and more leverage.

You can see the one-way move since the historic deval in August, 2015:


And here’s a chart which demonstrates just how keen Beijing is to keep the offshore yuan stronger than its onshore counterpart in the new year – a frantic effort to instill confidence in the currency (mainland Chinese take their cues from the offshore spot):


As for debt, have a look at total social financing as a percentage of GDP since 2003:



Despite the effort, annual GDP growth is still the slowest it’s been since 1990. Here’s Goldman’s take on the numbers (note the bolded passage).

As GDP is by far the most important among today’s data, its upside surprise is likely to make policy makers feel fairly comfortable with the growth picture. As a result, we believe the policy stance is likely to maintain a modest tightening bias, which is reflected in the tighter liquidity conditions in the financial market and likely more administrative controls in areas such as credit supply. At the same time the focus on risk management will be maintained, especially in light of the all-important party congress in the autumn. On the other hand, the pace of reform is unlikely to accelerate drastically before the party congress. We see modestly more upside risks to our 1Q 2017 forecast of 5.5% qoq annualized sequential GDP (6.5% yoy) in light of the stronger-than-expected actual data. The risks to 6.5% growth for the whole year are still largely balanced, in our view. This is especially so in light of the potential trade frictions, which could have some dampening effects on growth–if mild, some might even consider these helpful from a narrow demand management point of view, as long as they do not escalate to a full-scale trade war.

In other words, they’ve managed to massage the headline number enough to make further tightening possible, so watch money market rates. At the same time, I’m not sure that now is the time to get lax about systemic financial risks. Consider the following headline from Bloomberg:

  • Chinese listed companies’ purchases of wealth management products climbed 40% to 761.1 billion yuan in 2016, according to a Hua Chuang Securities report Friday.

In a testament to how tight liquidity already is (and there’s some seasonality going on), around 1:45 EST, Reuters reported that the PBoC had “temporarily” cut RRR for five large banks. Here’s Citi with a decidedly downbeat assessment:

PBoC has provided temporary liquidity to banks with high cash withdrawal demand during the holiday season, a move similar to a targeted RRR cut by our observation — The temporary liquidity will last for 28 day with identical funding rate as the open market operations with similar duration, and aims to deal with the huge cash withdrawals during the Chinese New Year Holidays and the tax payment demand in Jan. The PBoC has not provided much detail about the scale, but if the 100bps RRR cut for five big banks (ICBC, CCB, BOC, ABC, and BoComm) reported by Reuters were to be correct, it would inject around RMB657bn liquidity on our estimate (the total deposits of five large banks amounted to RMB65.732trn as of 2016 Q3). This is indeed a policy innovation not seen in the past.

Although the targeted RRR cut is temporary, this policy action suggests both onshore cash needs before holidays are huge and net capital outflow could be large — As the Chinese New Year is approaching, the money market has been tightened sharply. The 3 month SHIBOR registered 3.82% today (20th Jan), the highest reading since May 7th 2015. Meanwhile, the intensified RMB depreciation expectation has increased the capital outflow, which in turn tightens the onshore liquidity further. The PBoC has enlarged the net injection via open market operations (OMO). The net injection via OMO reached RMB1.13trn, the highest weekly net injection in history. However, the bond market jitters has made its open market operations increasingly difficult to operate, as banks are unwilling to accept PBoC bills for fear of rising yields in the future.


So all of this may sound like things are getting pretty hectic in China, but don’t worry, Premier Li Keqiang says everything is fine.

China has condition to keep good momentum in 2017″, he told CCTV on Friday.

It’s a good thing Beijing can depend on a friendly and open trade environment. Oh, wait…




One thought on “Big Trouble In Little China

  1. “Don’t worry all is well”, as the young Kevin Bacon is run over by the hoard in the epic Animal House ending. The status quo is right in the path of ????? The big boys are waiting to Dump Trump if needed and plant the rubber stamp of Pence at their disposal. DON’T WORRY ALL IS WELL>

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