SinoInsight 1
The Shanghai and Shenzhen indexes rebounded by around 2 percent on May 15. The Shanghai index rose 1.91 percent to close above 2,900 points, while the Shenzhen index gained 2.32 percent.
On Monday and Tuesday, the raised U.S. tariffs caused China’s stock markets to fall sharply. Since then, the Chinese authorities have sought to rescue the markets while mocking America for reigniting the tariff war, moves which could have contributed to turbulence in the U.S. markets.
According to Chinese language news reports on May 14, Beijing Jiuding Huaxin Capital Management Co. released an internal document on May 13 which prescribed how trading personnel (fund managers, traders, etc.) should carry out trading activity. All trading personnel were forbidden from short selling on May 14 after watching CCTV programming on May 13. Trading personnel should instead encourage traders to invest in equity funds or other instruments to ensure ample liquidity in the markets. Beijing Jiuding Huaxin also evoked a “state of war” metaphor in requesting that all fund practitioners “resolutely obey” the Communist Party’s commands on big issues.
OUR TAKE
1. We believe that the CCP is resorting to propaganda and indoctrination to save the markets and save face while signaling to America that China is unafraid of a trade war. However, the CCP’s attempts at market rescue go against regular financial operations and cannot be sustained over the long run.
2. The CCP’s bailout has made it easier for foreign capital to exit the markets. On May 14, northward net outflows from the Shanghai/Shenzhen-Hong Kong stock connects reached 10.9 billion yuan, or the second highest ever net outflow in a single day. According to official data, northward net outflows have exceeded 25 billion yuan in May.
3. The Sino-U.S. trade war will likely trigger an acceleration in capital outflows. Liquidity on the mainland could decrease and China’s economic deterioration could become increasingly severe. A stock market plunge seems inevitable.
SinoInsight 2
On May 15, China’s National Bureau of Statistics released macroeconomic data for April. The data showed declines in industrial production, overall investment, and retail sales. Also, trade surplus was down 43.8 percent year-on-year.
On May 13, Chinese premier Li Keqiang delivered a speech at a national conference on entrepreneurship and job creation via teleconference. Li told local governments to “handle well” rural unemployment issues and prevent large-scale migration to the countryside.
According to a recent report by Chinese media Yicai, at least 13 Chinese regions have been hit with fall armyworm infestations. The report noted that armyworm infestations can lead to severe crop destruction. The report added that the agricultural authorities are very alarmed by the armyworm infestations and are working hard to “snatch food” from the pest.
On May 13, the Beijing Municipal Development and Reform Commission issued an emergency regulatory plan to curb fluctuations in Beijing’s cooking oil prices.
OUR TAKE
1. The CCP responded to the rise in U.S. tariffs by signaling that it is unafraid to go toe-to-toe in a trade war. However, China’s April economic performance indicates that it would be hard for the regime to withstand a full-blown trade war.
We earlier anticipated that China’s economy would continue to decline in April and in the second half of 2019. The latest official economic figures have confirmed our forecast. If present trends hold, China’s economy will greatly worsen in the second quarter and second half of the year.
2. We wrote in our 2019 China outlook:
Foreign enterprises who primarily export to the U.S. may shift supply lines out of China or leave the mainland in large numbers;
Corporate closures will become more frequent and severe, resulting in a sharply shrinking manufacturing sector and sluggish retail sales;
The wave of unemployment in China will become more serious;
Food shortages may worsen, and the price of staple food may rise sharply;
Aside from the African swine flu, other forms of contagious diseases could break out on the mainland. The authorities, however, will only divulge more information about a disease outbreak when the situation becomes too problematic to cover up.
Barring a change in the trajectory of the Sino-U.S. trade war, we expect our economic predictions above to be verified in the remaining half of the year. And should our predictions come to pass, the Chinese regime will face an unprecedented political crisis. Businesses, investors, and governments must begin preparing for tremendous change in China.
