Tuesday Brings Good News For China As Stocks Soar, July FX Reserves Post Surprise Gain

Washington is playing double-faced tactics in the ongoing trade war. Pointing China with gun and artillery and then asking for a talk, the US showed zero sincerity. The eye-catching economic figure released recently boosted Washington’s confidence, making the arrogant Uncle Sam unaware of where it really is before having rounds of clash with China.

That’s from a super-entertaining “Op-Ed” published in the People’s Daily late Monday, and it gives you a pretty good idea about how China is looking to spin the ongoing trade dispute with the Trump administration.

The reference to an “eye-catching economic figure” is to the second quarter GDP data that Trump celebrated two Fridays ago by holding an actual press conference in front of the White House on the way to insisting that the numbers were “amazing”. That, despite the fact that the second quarter would have been just the fifth best under the Obama presidency. In short, the data was good, but was in no way, shape or form the kind of historical anomaly Trump suggested it was. Here’s some context for you.

(WaPo, BEA)

In any event, China is pretty keen on exposing the ugly truth of the tariffs, and in the same piece excerpted here at the outset, the People’s Daily says the following about the effect of Trump’s protectionist policies on American businesses and agriculture:

As a matter of fact, some American firms have already been on the brim of collapse, and the farmers are severely hurt by the trade war.

The additional tariffs increased production cost of American companies by more than 30 percent, pushing them to the brink of bankruptcy. The Trump administration intends to bring American firms back to the US through the trade war, but because of the high tariffs, some companies have moved overseas, such as motorcycle manufacturer Harley-Davidson and auto maker Tesla.

It’s propaganda, but there’s a lot of truth in there and it’s also highly amusing to imagine Trump reading it, because this President reading the People’s Daily would be like Xi Jinping watching Fox News if Xi didn’t understand the meaning of government propaganda.

Overnight, Chinese equities soared the most in more than two years as the Shanghai Composite snapped a week-long losing streak to rally more than 2.7%.

Traders cited a China Daily article that tipped policymakers’ intention to implement additional policies to juice investment appetite. That, according to an unnamed official with the National Development and Reform Commission. Also, China Business Journal cited an anonymous source from China Railway Corp. as suggesting that China’s full-year railway investment may exceed CNY800 billion versus CNY732 billion in a March plan. That gave a boost to railway stocks.

Later, after the close, we got a look at FX reserves data, which showed China’s war chest actually rising by $5.8 billion to $3.118 trillion in July. The median estimate here was $3.107 trillion, so this is an upside surprise that seems to send a benign message about capital flight and also suggests China did not resort to rampant intervention to arrest the yuan’s slide. Market participants already knew the PBoC hadn’t done much in the way of outright intervention in the spot market last month, so if there had been a large drop in reserves it would have been an early warning sign on capital flight – or at least that’s the quick read.

(Bloomberg)

“July’s FX reserve data will be very telling for the market’, BofAML wrote last week, adding that “a better than expected outcome (small fall or rise) would justify the market suspicion of less effective sterilized intervention that suggests the current status quo of smooth CNY depreciation will continue.”

Although Goldman generally likes to wait for PBOC and SAFE flow data to assess whether capital flight has in fact picked up, the bank notes on Tuesday that consistent with the modest outflows tipped by the June SAFE data, “July reserve data also suggest broadly balanced FX flows.” The bank does mention Friday’s move to reinstate the rules on forwards as a sign that authorities want to head off capital flight before it’s a problem. “We think this showed the PBOC was worried about the risk of an adverse feedback loop between currency depreciation and outflows, as CNY depreciated relatively rapidly before the announcement”, Goldman writes.

As a reminder, here’s the annotated chart that shows you notable moments in the evolution of the effort to manage CNY. The dramatic depreciation you see in the red oval marked “trade war” was countenanced by the central bank in an effort to allow the yuan to effectively absorb the economic impact of the tariffs, but 6.90 (give or take) looks to have been the red line beyond which policymakers are concerned about capital flight materializing. Notably, that’s also the level where the PBoC began to lean heavily on the counter-cyclical adjustment factor last summer in the course of engineering a rally.

In any event, Tuesday was a decent day for China in terms of capital markets and it’s a welcome reprieve after Monday and after Donald Trump’s weekend tirade that found the president bragging about how the Chinese equity market is in a bear market before disingenuously explaining that he “doesn’t like that”, because Xi is his “friend.”