SinoInsight 1
With China’s stock markets rising (5.1 percent) after the Lunar New Year, Chinese securities analysts and commentators have been talking about “the beginnings of a bull market” and recommend the people put their money in stocks.
Chinese shareholders, however, have been selling since the start of the year. According to data from Chinese financial service provider Wind, A-share listed companies have made as many as 970 announcements this year related to reduction of shareholdings as of Feb. 20 (first 31 trading days of 2019). The reductions involved 637 public companies.
Of the 970 shareholding reduction announcements, 66 involve the complete liquidation of shares by major shareholders. Meanwhile, 69 announcements were for the reduction of shares of over 5 percent of a listed company’s total share capital, while 11 announcements were for reductions of over 10 percent.
In 2018, major holders of A-shares saw reduced their net holdings by 4.33 billion shares, or an accumulated net reduction of 88.444 billion yuan, according to Wind statistics.
OUR TAKE
1. We believe that the recent trend of rising Chinese markets is a temporary phenomenon. The market’s upward trend could be partly due to “man-made” efforts by the Chinese authorities to create an illusion of recovering markets in the new year, or partly a technical correction in the markets after a period of sharp declines.
The rise in Chinese stocks, however, will unlikely be sustainable. First, the Chinese economy has been weakening due to structural issues even before the trade war, and we are not optimistic that Beijing can arrest the slide in the short term. Second, China is facing a severe debt crisis, and majority shareholders are under pressure to reduce their holdings. Third, the markets do not appear to be optimistic about China’s economic prospects, and shareholders are taking the opportunity to cash out.
2. We believe that the present economic situation in China gives Xi Jinping strong incentives to reach a trade agreement with the United States. The alternative would see the U.S. raise tariff rates and impose additional tariffs, a move that could cause market confidence to evaporate and trigger a crash. And if China’s stock markets crash, it would trigger a systemic financial crisis.
SinoInsight 2
On Feb. 19, the PRC State Council released its first document of the year (“No. 1 central document”). The document focused on poverty alleviation, ensuring food supply, maintaining social stability in the rural areas, and strengthening Party building at the grassroots.
The “No. 1 central document” noted that under the “complicated situation” of “increased downward economic pressure and profound changes changes in the external environment,” the rural areas, farmers, and agricultural workers (“three agricultures”) have to serve as a “ballast stone” and take the initiative to cope effectively with various risks and challenges.
The document also stressed the following points:
- First, efforts must be made to lift farmers out of poverty;
- Second, the farmers must ensure an effective supply of important agricultural produce;
- Efforts will be made to keep arable land steady at above the “red line” of 1.8 billion mu;
- There must be full implementation of the permanent basic arable land special protection system;
- Permanent basics arable land must be kept at above 1.546 billion mu.
- The State Council’s “No. 1 central document” of 2017 focused on supply-side reform for agricultural production and adjustments to industrial structure.
The 2018 “No. 1 central document” focused on strengthening Party building in the rural areas, as well as anti-corruption work and combating religious activities.
OUR TAKE
1. The 2019 State Council’s “No. 1 central document” focuses on the issue of ensuring food supply and brings up statistics to support its case. While food supply is mentioned in the “No. 1 central document” in previous years, it was dealt with briefly and without additional data. This represents a shift in priorities for the CCP, and suggests that the CCP is very concerned about the food supply issue.
2. Data released by China’s National Grain Trade Center on Feb. 19 reflect a drop in agricultural harvest from a year ago. China’s main grain area produced 140.08 million tons of rice, corn, and soybeans from the autumn harvest, a drop of 21.02 million tons (13.05 percent) from a year ago. Total harvest of indica rice was 41.92 million tons, down 4.16 million tons (9.03 percent); corn harvest was 62.49 million tons, down 16.68 million tons (21.07 percent); and soybean harvest was 2.46 million tons, down 750,000 tons (23.36 percent).
The recent official data reflects a continuing trend of decreased agricultural production on the mainland, a phenomenon which we spotted last year (Sept. 27 issue of SinoWeekly Plus). Last year, the summer harvest saw wheat purchases fall 32.39 percent from a year ago and indica rice fall 12.61 percent year-on-year.
Declining harvest of corn and soybeans is particularly worrisome for China because it used to make up the shortfall by importing from America. Chinese tariffs on U.S. agricultural products and the chronic problem of local officials fabricating grain data for profit (link), however, mean that shortfall in harvests cannot be easily made up. Given China’s low food self-sufficiency rate (66 percent, below the 95 percent safety standard), a food crisis is on the horizon if Beijing cannot resolve the trade war.
3. In January, we obtained intelligence from mainland sources which affirm our assessment about a food crisis. According to our sources, a Chinese general recently made remittance to his home village and sent instructions to “stockpile half a year’s worth of food.”
4. The Sino-U.S. trade war has exposed China’s food crisis. If Beijing cannot secure a trade deal, then food problems may erupt on the mainland in the second half of 2019. If the food crisis is severe, a humanitarian crisis could develop. The crisis will see the CCP’s political legitimacy take a massive hit.
