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The truth is that over the last three years, Beijing authorities have been intervening to keep the CNY from devaluing, because they want to avoid capital flight.

Monday 6th May


President Trump said via Twitter that the US will increase tariff rates on $200 billion in imports from China to 25%, from the 10% rate currently. His tweet said the increase in tariff rates would take effect on Friday (10 May). This looks like an attempt to get the negotiations closed quickly, or an acceptance that he will not be able to paint the deal as a victory. Either way, uncertainty is heightened again and the Chinese stock markets fell 8% overnight. Beijing will probably not respond to this intimidation, as ‘face’ would be catastrophically lost, so these new tariffs may well come through – and China’s retaliation is likely to be gradualist, but focused once more on the financially strained Republican farm belt. The calculation will be that the agriculture lobby finally breaks cover and applies pressure to the White House. Meanwhile, the US electoral calendar grinds closer and Trump’s window of opportunity to show results starts to close, thus reversing the pressure onto him. A key indicator will be how the US financial markets and domestic US politics reacts. Expect Treasury and the NEC (National Economic Council) will be pushing to build an exit strategy from a prolonged tariff escalation through 2020. For all the other financial markets in the world, this is an unwelcome injection of more uncertainty, when global economic growth expectations are already weak. As suggested in my 5G note, my base case is that the capital markets had overestimated the chances of a smooth negotiation, so there was always room for disappointment.


Independently from all of this, last week saw policy momentum along many fronts in China. Banking regulator Guo Shuqing announced new measures to expand foreign participation in the banking and insurance sectors. While the move is timed in part to coincide with US-China trade talks, the more important driver is Beijing’s financial reform agenda. In the energy sector, officials rolled out a new regime for solar subsidies that should help reduce wasteful investment in the industry and improve its sustainability. Beijing is also tweaking the ways that local governments issue bonds amid a surge in activity, though it is not yet prepared to tackle the fundamental issue of introducing credit risk by allowing defaults.

Wednesday 8th May


The Turkish Supreme Electoral Board (YSK) decided to annul the result of the Istanbul mayoral election and hold another vote on 23 June. The decision will lead to further political instability and economic populism in the short run and reinforce concerns about the commitment of President Recep Tayyip Erdogan’s government to the democratic process. Given that Erdogan now must win Istanbul to avoid losing face, it also implies that there will probably be significant irregularities in the new vote and subsequently of messy, large-scale public protests.


President Andres Manuel Lopez Obrador announced new austerity measures, with the savings being directed toward state-owned oil company Pemex. It is unclear how much these cutbacks will yield, but they are unlikely to make a significant difference for Pemex; that said, fewer resources and more personnel cuts will hamper the efficiency and general functioning of the government.


China and India are in advanced negotiations to consolidate their crude oil buying volumes, to benefit on price. These countries are among the top importers in the world and are seeking to undermine OPEC’s premiums on exports to Asia. The US is likely to be upset, as China is Iran’s top oil export market while India is third, behind Japan.

Wed 15th May 2019

US-China trade

The markets are in my opinion still too optimistic on the possibilities of a meeting between Trump and Xi at the Osaka G20 meeting at the end of June. The base case seems to be that they get together, agree a new deal, or agree another temporary truce, thus kicking the can down the road. It seems more likely that we see no meeting, or a failure to agree terms. The reason for pessimism is based on each leader’s belief that the other’s position is weaker than it appears on the surface. Washington thinks that China is more economically stretched than it is and Beijing thinks the Trump administration is vulnerable and needs to have its bluff called. Markets will probably weaken indiscriminately in the first instance – what happens later will be dependent on the propaganda war and the real evidence provided by the flow of economic statistics coming through on both sides. What seems increasingly clear is that there is no discernible point available for an elegant reconciliation, without loss of ‘face’ on either side.

Energy markets

The benchmark West Texas Intermediate (WTI) is up 34% year to date, because of several negative news items, such as the continuing deterioration of oil production in Venezuela, the outages in Libya, the US decision to remove the few existing waivers for limited Iranian oil exporters. The drone attacks on Saudi pipelines and ships in the Persian Gulf have demonstrated the physical vulnerability of these installations, increasing investor concern. In Tehran and in Washington, the hardliners appear to have the initiative, which clearly ratchets up the risk of an unintentional incident. Expect volatility from here.

Fri 17th May 2019

US-China ‘Cold War’ escalates

The US Commerce Department has added Huawei to its Entity List . Essentially this means that any export of any component to Huawei must be specifically applied for, in the knowledge that it is highly likely to be denied. Typically, US suppliers tend to cut links with clients who end up on this list, because of the perceived reputation risk implied in servicing a foreign company that is characterised as operating against US national security or foreign policy interest. This marks a significant ratcheting up of pressure and burns some bridges to potential face saving climbdowns.

China will view this as more conclusive evidence that the real agenda is to restrict the country’s development and that nudges Beijing towards further escalation. At this point, non-tariff measures are likely to be deployed, alongside an increase on the existing tariff rate on US goods. Beijing has an extremely effective history of applying non-tariff trade barriers to countries that it falls out with. The menu is very long and stretches from restriction of Chinese tourism, through restrictions of imports on consumer safety grounds, to varying degrees of harassment of companies in China and finally foreign exchange and physical asset seizures.

Foreign companies have very few options when they are caught up in this maelstrom, other than to be visible in lobbying domestically for good relations with China. There is an historical precedent in 1905, when US President Theodore Roosevelt reformed a discriminatory law restricting Chinese immigration after an “especially injurious” boycott of US cotton. Roosevelt’s point was that refusal to reform facilitated foreign competitors’ expansion in the Chinese market. A similarly economically destructive boycott of South Korea in 2017 after Seoul installed the US made THAAD missile system, ostensibly aimed at North Korea, but with powerful enough radar to reach deep inside China. The economic fallout on corporate Korea and on the country’s revenues was substantial.

One other option in the toolbox is stirring up nationalist fervour. This unleashing of popular anger has proved extremely effective in the past. For example, anti-Japanese sentiment in 2012 triggered by a territorial dispute in the East China Sea culminated in violent demonstrations, Japanese cars being vandalised and a boycott of Japanese products that lasted a couple of months but caused significant damage to Japanese businesses.

Capital markets appear to be holding onto the idea that this is all temporary and that commercial logic will prevail in the end. My observation is that we are watching those bridges burn with a depressing regularity.

Monday 20th May 2019

Indian elections

Exit polls in India point to a victory by PM Narendra Modi’s BJP-led National Democratic Alliance (NDA), as most observers expected. Investors will doubtless take this as a vote of confidence in Modi’s reform programme and factor in capital markets friendly policies over the next 4 years. There are however reasons for caution; namely, the historic inaccuracy of Indian exit polls and more importantly, the reality of coalition politics imply that any assumptions around reforms going forward, even in the event of an NDA victory, are likely to be over optimistic. In many countries, there are term limits for Presidents and PMs. In India there are none, so we are not likely to see this as Modi’s last term in office and therefore focused on his legacy over potential re-election. Best case scenario is the preservation of the status quo, with relatively minor adjustments around the edges.


For those looking for some good news, or simply pining for 2015, when trade was free, there was a glimmer of hope: The US announced it would be lifting the tariffs on steel imports from Canada and Mexico and the move was reciprocated by Canada and Mexico. The move appears to be driven by a desire to boost ratification of USMCA but it is currently not clear that it will be possible in the time left in this session, given the crowded agenda for the US Congress. In Canada and Mexico, the move is viewed as welcome, but not a demonstration of a fresh approach, so it looks like USMCA may not be approved in 2019.

31st May 2019

Baoshang Bank – What does it mean?

Inner Mongolia-based Baoshang Bank has been taken over by the Chinese regulator and the Central bank for 12 months because of concerns over ‘serious credit risk’. During that time, day to day management has been passed on to China Construction Bank, one of the ‘Big Four’ Chinese banks. Depositors and customers are covered by guarantee, but only to RMB50m ($7.2m). There is negligible risk of contagion, as this was a bank principally lending to the conglomerate of its controller, Xiao Jianhua, with limited connectivity to the system. It had grown assets fast and depended on wholesale funding, so it was widely viewed as being troubled.

There are over 4,530 banks in China, according to China’s Banking & Insurance Regulatory Commission (CBIRC). For the second largest economy in the world, this is not an excessive number. And as in any large banking system, periodic closures, mergers or sales are to be expected. But this is China. Despite widely held views to the contrary, the regulator in China does appear to do a pretty good job, with a consistent approach and several significant restructurings of banks in the last five years.

What makes this one interesting is the manner of the intervention. Investors have become accustomed to seeing ‘arranged marriages’ of weak and strong banks, mergers and asset sales as the process to deal with troubled banks, with little or no publicity. In this case, there was a joint announcement by the People’s Bank of China (PBOC) and CBIRC, followed by a press conference to answer questions. Observers point to transparency being driven by the (relatively) new Chairman of the CBIRC, Guo Shuqing.

In the short term, the spreads on fixed interest instruments for banks should diverge, resulting in a higher cost of funding for smaller banks and introducing differentiation by perception of quality. We don’t have absolute transparency on the estimated 3,000 small rural private banks , but intuitively investors should expect a shakeout as their presumably narrow margins struggle to cope with higher funding costs. This is good news for investors over the long term, as it rewards the better run institutions, demonstrates the regulators’ watchfulness and their willingness to act. But the best news perhaps is the new climate of improved transparency ushered in at the CBIRC.


2Terminal High Altitude Area Defence
3Source: Statista, CBRE (2017)
4PBOC Press Release 24th May 2019
5Rural banks: Number of banks by grouping: Statista>
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