SinoInsight 1
Poor financial data in April has thrown cold water on China’s technical “bull market:
- China stocks continued to fall this week. On April 26, the Shanghai Composite Index fell by 1.2 percent to go below the 3,100 point mark, while the Shenzhen Component Index fell by 1.28 percent.
- In the week of April 15, the Shanghai index dropped 5.64 percent while the Shenzhen index fell 6.12 percent. The evaporation of 3.47 trillion yuan ($515.607 billion) in total market value was the largest weekly decline in nearly 27 weeks.
- Total northward net outflows on the Shanghai-Shenzhen-Hong Kong stock connects was 12.772 billion yuan in the week of April 22, according to data from Chinese financial service provider Wind. Cumulative net northward net outflows in the first four months of 2019 were close to 22 billion yuan, the highest since July 2015.
- According to Chinese financial data provider Choice, accumulated net reductions of industrial capital stocks in China totaled 7.378 billion yuan from April 1 to April 28, or more than three times that over the same period in 2018. In March, net reductions in industrial capital stocks totaled 32.369 billion yuan.
- From mainland media reporting, 3,459 Chinese public companies (95.84 percent of listed companies) have released their annual reports thus far. Of the companies that have published their annual reports, 403 reported losses last year (up 78.32 percent from 2017). And of the 403 companies, 316 saw stock losses of over 100 million yuan, while 20 other companies saw losses exceeding 3 billion yuan. On the whole, the losses were a record-high for the A-shares market.
- Presently, 2,391 public companies (66.25 percent) have released their first quarter results. Of the 2,391, 305 reported losses, or 12.76 percent of the companies who released a quarterly report. In comparison, a total of 491 companies, or 13.67 percent of all listed companies, reported losses in Q1 2018.
OUR TAKE
1. We have been bearish on the Chinese economy and noted previously that the latest “bull market” would be hard to sustain. The poor stock market performance and annual/quarterly data released by public companies affirm our analysis.
In the March 7 edition of this newsletter, we wrote: “It would be good news for the “bull market” if China and the United States can seal a trade agreement in March. However, the first quarter results for public companies that will be released before April 30 will be a major test for the “bull market.”
And in our April 17 article, we noted that the “rebound” in China’s economy was due to government stimulus measures (central bank injecting liquidity, tax and fee cuts, etc.), and that China would unlikely maintain its “strong” first quarter economic performance in April and beyond.
2. We previously analyzed that Beijing is prepared to make concessions to America to get a trade deal and avoid further regime-threatening economic shocks. Concurrently, the CCP appears to be using every trick in the book to delay the signing of a trade agreement and buy itself some “breathing space” to recover economically and find ways to circumvent U.S. efforts to “contain” and counter CCP expansionism.
SinoInsight 2
On April 26, Xi Jinping delivered a keynote speech at the opening ceremony of the second Belt and Road Forum for International Cooperation.
Key points of Xi’s speech include:
- An emphasis on multilateralism;
- A proposal for a common anti-corruption effort;
- A proposal to introduce widely accepted international rules;
- China and other countries will together build “high quality” infrastructure and increase interconnectivity;
- China will sign “high-standard” free trade agreements with other countries;
- In the next five years, China will support 5,000 people from the innovation sector in Belt and Road countries in conducting exchanges, training programs and joint researches;
- China and other countries will together build an “eco-friendly big data service platform”;
- China will invite 10,000 representatives of political parties, think tanks and non-governmental organizations from Belt and Road countries to the mainland for exchanges over the next five years;
- China will be committed to adopting a series of major reform and opening up measures, including: Broadening market access; strengthening intellectual property rights protection; increasing imports of products and services, setting up new free trade pilot zones; and implementing the policy of opening up to the world.
- On April 27, Xinhua News Agency published a 283-page Belt and Road achievements list which includes items like China’s initiatives for the project, multilateral or bilateral cooperation documents, as well as investment and financing projects.
OUR TAKE
1. From Xi Jinping’s speech and the Belt and Road achievements list, it seems that the CCP has dialed back the rhetoric and is approaching its global infrastructure development project in a more measured manner. Indeed, Xi made a series of commitments that read like concessions, and the CCP seems willing to “observe” international rules and carry out reforms to open up China more.
We believe, however, that the CCP’s “survival-dominance” dynamic is in play at the second Belt and Road Forum. On the one hand, the CCP is trying to survive America’s efforts to counter its overseas expansionism. On the other hand, the CCP is searching for new “living space” in countries outside the U.S. to lay the foundation to grow its global hegemony.
2. While the U.S. saw exceptional growth in the first quarter (3.2 percent), many of the world’s economies are weakening or seeing slow growth. As countries seek new channels for growth, the CCP’s Belt and Road project becomes much more appealing. After all, the geopolitical risks of PRC hegemony seem far off as compared to the need to boost GDP. The CCP will undoubtedly play to demand and make the Belt and Road more “amenable,” starting with the recently ended forum.
3. Under the present global economic climate, the CCP regime may find it easier to export its excess capacity and promote the internationalization of the renminbi along the Belt and Road. Also, the CCP may be successful in getting Belt and Road countries to adopt its 5G equipment and standard; Huawei’s lower pricing for 5G is a strong selling point when economies are performing poorly. With new outlets for Chinese goods and services, the regime would be able to better weather the pressure of the Sino-U.S. trade war.
4. Xi Jinping’s commitment to major reform and opening up measures at the Belt and Road forum seems like a concession made with an eye on ongoing trade negotiations between China and the United States. From this perspective, there is a very good possibility that a trade agreement will be signed.
5. When pledging to make major reforms, Xi also brought up the issue of “strengthening institutional and structural arrangements to promote a higher level of openness to the world.”
We believe that Xi deliberately used the phrase “structural arrangements” (“结构性安排”) instead of the trade talks phrase “structural reforms” (“结构性改革”) to avoid alarming Party hardliners and giving his political rivals an opportunity to attack him.
