SINOWEEKLYPLUS

The potentially dire implications of US tariffs on China; signs of China’s economic trouble surface

SinoInsight 1
At 23:00 UTC (19:00 ET) on June 15, the Hong Kong dollar traded outside the weak end of its trading band of between 7.75 to 7.85 against the U.S. dollar. As of 12:00 UTC (08:00 ET), the Hong Kong dollar continued to trade outside the 7.85 level, at one point reaching a low of 7.85295.

OUR TAKE
1. The Hong Kong dollar breaching its lower limit is a major event for the global financial sector and would impact the Chinese economy. The Hong Kong, Chinese, and Western media, however, have not reported on this at the time of writing this newsletter. In fact, mainland Chinese media has been displaying the Hong Kong dollar as trading above its lower limit since the breach—an extraordinarily unusual phenomenon.

Since April 12, the Hong Kong Monetary Authority (HKMA) has been purchasing the city’s currency to prevent the Hong Kong dollar from falling outside its lower limit as it is mandated to by a linked exchange rate system. It is unclear why the HKMA had recently allowed the city’s currency to fall below the 7.85 level.

2. We believe that the U.S. Federal Reserve’s recent interest rate hike would greatly impact Hong Kong. Hong Kong’s property bubble could pop and trigger a chain reaction in mainland China.

SinoInsight 2
According to the People’s Bank of China’s financial data for May, the aggregate financing to the real economy was 760.8 billion yuan, a decrease of 300 billion yuan (28.4 percent) year-on-year and 51 percent from the previous month.

OUR TAKE
The data suggests that liquidity is very tight in China’s real economy. In this financially challenging period, many companies, including subsidiaries of large state-backed corporations, are defaulting on their bonds.

Local governments in China are also financially challenged. Already, civil servants and employees in state propaganda outlets have held protests after not receiving wages.

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