|Bid||0.00 x 0|
|Ask||0.00 x 0|
|Day's Range||9.49 - 9.49|
|52 Week Range||9.34 - 12.17|
|Beta (3Y Monthly)||0.79|
|PE Ratio (TTM)||4.22|
|Forward Dividend & Yield||0.67 (7.04%)|
|1y Target Est||N/A|
Moody's Investors Service ("Moody's") has assigned a P-1 short-term foreign-currency rating to the euro-commercial paper (CP) component and (P)A1/(P)P-1 foreign-currency ratings to the certificate of deposit (CD) component of the US$2.5 billion euro-commercial paper and certificate of deposit programme proposed by Bank of China (Dubai) Branch. The assigned ratings are in line with long-term and short-term deposit ratings of Bank of China Limited (BOC), and reflect the structure of the proposed programme. The CP notes and CDs to be issued under the programme will constitute direct, unconditional, unsubordinated, and unsecured obligations of BOC, which holds significant amount of liquid resources in convertible currencies in both Asian and European time zones to support the proposed programme.
(Bloomberg Opinion) -- As the financial world’s movers and shakers hunker down at Jackson Hole this weekend, one pressing question will be who’s next to cut interest rates. The People’s Bank of China has already decided: It isn't joining the global race to the bottom.Over the weekend, the PBOC took a long-awaited step in interest-rate reform, which aims to give markets more sway in determining borrowing costs. The central bank will make the loan prime rate, which banks offer to their best clients, the new benchmark for pricing loans. That rate also will be linked to lenders’ cost of borrowing from the central bank, or the so-called medium-term lending facility. Previously it followed the one-year lending rate, which has been considered too blunt a tool to manage an economy so saddled with debt.To many, this is a clear easing signal. At 4.35%, the PBOC’s policy rate is 105 basis points higher than that of the MLF. The new loan prime rate, to be announced on August 20, will likely be substantially lower than its current level of 4.31%. This is a misconception. Rather, the measure is an acknowledgment from China’s central bank that a policy rate cut would no longer be effective. The PBOC’s priority is squarely to improve the way liquidity flows through China’s financial system. Throughout this year, researchers at the PBOC have been saying that China’s baseline interest rates are already low enough, and reducing them further will do little to drain China’s “capital swamps,” or segments of the economy that can’t get any – or affordable – financing. Banks are becoming pawn shops, unwilling to lend to smaller enterprises that can’t put up big plots of land as collateral.Indeed, a sharp divergence is forming between the corporate-loan and bond markets. While AAA-rated companies can now borrow at much lower rates by issuing debt – thanks to the PBOC’s various easing measures – rates on bank loans, which still account for two-thirds of China’s total social financing, have hardly budged. That makes the loan prime rate an obvious candidate to bring down the cost of borrowing for small businesses. If you need any more evidence that this is a tweak, rather than a broad-brushed easing move, read the PBOC’s wording carefully. The central bank’s language indicates it isn’t ready to have long-term bank loans, such as consumer mortgages, follow market-moving rates just yet. In other words, don’t expect mortgage rates to fall. Between late 2014 and 2015, the last time the PBOC cut its policy rate, disaster ensued. With so much easy money flooding the system, China’s stock market saw a meteoric rise and fall and the real-estate market went haywire. The average home price of the four first-tier cities of Beijing, Shanghai, Shenzhen and Guangzhou doubled from less than 25,000 yuan ($3,550) per square meter in 2014 to more than 50,000 yuan by 2018. Now that President Xi Jinping has tied his political legacy to the mantra that “apartments are to be lived in, not speculated on,” the PBOC will not – and dare not – restart full-blown easing now.For bank loan rates to fall, the PBOC has two options: cut the policy rate and risk forming another asset bubble, or find a way to revamp interest rates. It has understandably opted for the latter.Will China’s new bank loan rate become an effective policy tool? Only time will tell. But at least China is learning its lesson – rate cuts don’t necessarily work and may just create new problems. While the world’s major banks are racing to cut their rates to zero, China is now sitting on the sidelines. (Corrects the legend in the first chart, which was reversed.)To contact the author of this story: Shuli Ren at email@example.comTo contact the editor responsible for this story: Rachel Rosenthal at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg Opinion) -- Eighteen banks coordinating to calibrate a market-driven rate – cynics could be forgiven for thinking that another Libor-rigging scandal is around the corner in China. Perversely, such an outcome would be a good sign for its financial system. Over the weekend, the People’s Bank of China made the loan prime rate, which banks offer to their best clients, the new benchmark for pricing corporate loans. It works a bit like Libor, the key global rate that determines borrowing costs for everything from student loans to derivatives: Every month, 18 banks will submit their one-year loan prime rates to the PBOC, which will publish an average after removing the highest and lowest quotes.It isn’t inconceivable that Chinese lenders, like their peers in the U.S. and Europe, would be tempted to collude and fix these rates to their advantage. But you need to have a market before you can manipulate it. In China, banks still don’t know how to price loans without hand-holding from the central bank. A case in point: Lenders in the developed world use market-driven benchmarks to determine their loan rates. Banks in Hong Kong, for instance, base mortgage rates on one-month Hibor, the city’s main interbank rate. In the U.S., loans with longer duration are priced against Treasuries of the same tenor. No such standards exist in China’s loan market. Some banks link their loan rates to Shanghai’s Libor equivalent; some to Chinese government-bond yields; and some to the savings deposit rates they offer. Still others equate their loan prime rates to the coupons of their own bonds, which means they don’t earn a penny from originating these loans. This dysfunction helps explain why the PBOC is asking these 18 banks to base their loan prime rates on their cost of borrowing from the central bank – China’s bank-loan market needs a pricing benchmark. It’s also understandable that the central bank is frustrated with the status quo. Lenders have enjoyed cheaper funding in recent months, as the PBOC has pumped liquidity into the system through open-market operations. Yet they haven’t passed lower borrowing costs on to clients: Many banks simply apply the central bank’s policy one-year lending rate of 4.35%, tag on a small discount of, say, 10%, and blindly offer this minimum loan rate.As a result, and much to the PBOC’s ire, interest rates for bank loans have held steady, despite a lower cost of borrowing in the bond and money markets. In its statement, the central bank warned against lenders setting “hidden floors” that would maintain lenders’ profit margins.Expanding the list of banks to 18 from 10 – and including regional and rural commercial banks – will also create extra work for the PBOC. Whereas the Big Four commercial banks can rely on China’s thrifty households for deposits, regional banks have to seek funding from the interbank market. Bank of Xi’an Co., for instance, gets more than a quarter of its funding from short-term loans in the interbank market, compared with roughly 10% for China Construction Bank Corp.This makes smaller banks’ access to funding much more volatile. If a lender such as Bank of Xi’an has a big repo loan due over the next week, wouldn’t its loan prime rate have to shoot higher? Bureaucrats at the PBOC will need to spend a good deal of time babysitting these small-town bankers – and teach them a thing or two about cash-flow management. While it’s laudable that the PBOC finally took the long-awaited step – six years, to be exact – in interest-rate reform, one can’t help wondering if China’s bank-loan market is ready. What we will end up seeing is a lot of window guidance. The PBOC can only wish that Chinese bankers are as clever as those in London.(Corrects the legend in the chart, which was reversed.)To contact the author of this story: Shuli Ren at email@example.comTo contact the editor responsible for this story: Rachel Rosenthal at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. The People’s Bank of China unveiled a major reform to its system of benchmark interest rates on Tuesday, a move that’s immediately focused attention on if and when the real monetary easing will begin.The central bank will now release a so-called Loan Prime Rate each month, a yardstick meant to peg the cost of borrowing by firms and households more closely to the rates that banks pay for cash in money markets. While that step itself should already nudge borrowing costs a few basis points lower, analysts say that outright cuts to monetary policy tools are still needed.Even though China’s economy is slowing to its weakest pace in almost thirty years, the government remains focused on stability rather than speed amid the broadening confrontation with the U.S. That means PBOC officials are sounding reluctant to roll out the big stimulus guns: monetary-policy department head Sun Guofeng said Tuesday that there’s “not too much” room to further cut banks’ reserve ratios.“The reform tells markets that the PBOC isn’t keen to cut reserve ratios or interest rates immediately,” said Peiqian Liu, China economist at Natwest Markets in Singapore. “The central bank is paying more attention to rates transmission, which will be the focus in the second half of the year.”Industrial output slid in July, after second quarter gross domestic product growth came in at the weakest pace since quarterly data began in 1992. For some, the current approach isn’t enough to arrest the economy’s slide and adjustments to some of the PBOC’s tools are in view.The interest rate reform itself means the PBOC is less likely to use its old benchmark lending rate to cut costs broadly across the economy, as policy makers have said that instrument will ultimately be scrapped. The new lending rate was announced at 4.25% on Tuesday, 10 basis points lower than the old benchmark.Instead, analysts are focusing on the medium-term lending rate and bank reserve ratios as possible tools to be adjusted.Sun steered against outsize expectations in that department.“There is some room for adjustment to the reserve-requirement ratios, but generally speaking the room isn’t as big as people imagine,” Sun said Tuesday.Liu said the central bank will likely keep monetary policy stable in the third quarter, and it’s likely to lower the rate for mid-term lending toward the end of the year by 5-10 basis points.The central bank under Governor Yi Gang has become increasingly wary of flooding the economy with cash even as it slows because of concerns about property market bubbles and financial stability risks. That stance has held even as the impact of the trade war with the U.S. has worsened.The LPR reform is to “improve the formation and transmission of interest rates,” it can’t replace monetary policy or other policies, Sun Guoefeng said Tuesday. The PBOC will work with relevant departments to take various measures to lower overall borrowing costs, he said.Fiscal policy makers are stepping up with support for the economy while monetary policy appears constrained. The government is considering allowing provincial governments to issue more bonds for infrastructure investment, raising the quota from the current level of 2.15 trillion yuan ($305 billion), according to people familiar with the matter.However, expectations for further action from the PBOC still remain.“Considering the State Council’s aim to reduce funding costs for smaller companies by another 100 bps this year, we expect the PBOC to reduce rates for its medium-term lending facilities by 25-50 basis points by year-end,” Bloomberg Economist David Qu wrote in a note. “We see further room for the LPR to decline in the coming months, aided by other policy easing measures.”“As the transmission channel will to some extent be improved, the PBOC may be more willing to cut quasi policy rates to drive down the LPR,” Lu Ting, chief China economist at Nomura International in Hong Kong wrote in a note. “We expect riskless rates and government bond yields to drop further as the PBOC catches up with other central banks in rate cutting.”To contact the reporters on this story: Jeffrey Black in Hong Kong at email@example.com;Yinan Zhao in Beijing at firstname.lastname@example.orgTo contact the editors responsible for this story: Jeffrey Black at email@example.com, James MaygerFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. China is considering allowing provincial governments to issue more bonds for infrastructure investment, people familiar with the matter said, a move that would boost government stimulus as the economy continues to decelerate.Policy makers may raise the annual quota for so-called special bonds from the current level of 2.15 trillion yuan ($305 billion), according to the people, who asked not to be named as the matter isn’t yet public. The amount of the increase hasn’t been decided yet, one of the people said.One person said the plan was mentioned at a recent meeting of the State Council, or cabinet, while another said the final decision probably still needs to be approved by the National People’s Congress, China’s legislature.The move shows that policy makers deem the current level of stimulus insufficient to counter rising headwinds such as slowing investment and the worsening trade war with the U.S. The quota for 2019 is already higher than the previous year, and the government loosened the restrictions over how the money could be used in June. Economists have raised questions over whether the money is actually being used effectively.China May Raise Local Government Bond Quota, MOF Researcher SaysThe finance ministry didn’t immediately respond to a fax seeking comment on the matter.China’s economic growth continued to soften in July after posting the weakest pace since the early 1990s in the second quarter. Morgan Stanley estimates that extra special-bond quota worth 0.75 to 1 percentage point of gross domestic product could be added. That adds to the reform to the People’s Bank of China rate system beginning this week, which is expected to entail lower borrowing costs in the short term.“These measures are defensive in nature and may not fully offset the growth drags amid trade uncertainties,” Morgan Stanley chief China economist Robin Xing wrote in a note.Local governments have been told to finish sales of the existing quota by the end of September. Officials had sold nearly 1.4 trillion yuan worth of special bonds in the first six months of 2019, or 65% of the full-year quota, according to data from the Ministry of Finance.As well as providing money for infrastructure spending, allowing local governments to sell more debt after they exhaust the existing quota also helps shore up credit growth data, as the bonds sales are included in the total financing data and were a key support of the growth in lending in July.The next meeting of the NPC is on Aug. 22 to 26, according to a statement published on the legislature’s website. The public agenda for the meeting includes a regular discussion on the government’s budget implementation this year, but it doesn’t specify if a new bond quota will be reviewed.One of the people said that as part of the change under consideration, the Ministry of Finance may improve oversight of local government debt sales and how the money is used.(Adds economist comment from sixth paragraph.)To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at firstname.lastname@example.org;Jing Zhao in Beijing at email@example.comTo contact the editors responsible for this story: Jeffrey Black at firstname.lastname@example.org, James MaygerFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- It’s hard not to see HSBC Holdings Plc’s exclusion from China’s interest-rate reform as a snub.Hong Kong’s biggest bank wasn’t included in a list of 18 lenders that will participate in pricing for a new loan prime rate that the People’s Bank of China will start releasing Tuesday. The roster includes foreign lenders Standard Chartered Plc and Citigroup Inc., which have smaller China businesses than HSBC.It’s the latest sign that all may not be well in HSBC’s relations with Beijing, after a turbulent period that has seen the departures this month of Chief Executive Officer John Flint and the bank’s Greater China head, Helen Wong. HSBC shares fell 13% in Hong Kong this year through last Friday, compared with a decline of less than 1% in the benchmark Hang Seng Index.London-based HSBC, which is also Europe’s biggest bank, has made China a key plank of its growth strategy. The lender is the third-largest corporate bank in the country by market penetration, according to data provider Greenwich Associates LLC. That places it ahead even of China Construction Bank Corp. and Agricultural Bank of China Ltd., two of the nation’s big four state-owned lenders. Standard Chartered and Citigroup don’t rank among the top five, according Gaurav Arora, head of Asia Pacific at Greenwich.It could be argued that HSBC’s focus on big corporate clients means it’s less attuned to the loan market for small and medium-size enterprises that are the focus of China’s changes to its interest-rate regime. That would be a stretch, though. Corporate banking is a scale game. And even though StanChart may have a greater preponderance of smaller clients, HSBC surely has many similar customers. Citigroup’s inclusion makes more sense: It’s the only U.S. bank in China with a consumer-lending business that spans credit cards to SME loans. The list also includes less influential domestic lenders such as Bank of Xian Co. Those searching for reasons why HSBC may have fallen into China’s bad books may point to Huawei Technologies Co. Liu Xiaoming, China’s ambassador to the U.K., summoned Flint to the embassy earlier this year to interrogate him over the bank’s role in the arrest and prosecution of Meng Wanzhou, the chief financial officer of Huawei, the Financial Times reported Monday. The then-CEO told him HSBC had no option but to turn over information that helped U.S. prosecutors build a case against Meng, the FT said. On Aug. 9, an HSBC spokeswoman denied that Wong’s departure as Greater China head was linked to any issue involving Huawei, pointing out that she announced her resignation before Flint’s departure. Still, the bank has faced criticism in China’s state-owned media over its role in the case. The way HSBC helped the U.S. Department of Justice acquire documents concerning Huawei was unethical, the Global Times reported previously, citing a source close to the matter. The bank was likely to be included in China’s first “unreliable entity” list of companies that have jeopardized the interests of Chinese firms, it said.The timing of China’s interest-rate snub won’t do anything to quell jitters, coming a day after Cathay Pacific Airways Ltd. CEO Rupert Hogg resigned amid criticism from Chinese regulators over its stance on employee participation in Hong Kong’s protests. Beijing is becoming more muscular in its attitude to the city’s unrest and foreign-owned businesses aren’t being spared. In an increasingly politicized environment, even a business that’s been around for 154 years will have to tread carefully. To contact the author of this story: Nisha Gopalan at email@example.comTo contact the editor responsible for this story: Matthew Brooker at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Emerging-market currencies and stocks fell for a fourth straight week last week, the longest losing streak for equities since October, amid mounting concern about a global slowdown. The inversion of the U.S. yield curve for the first time since 2007 fueled fears of a recession, outweighing relief over a pause in the U.S.-China trade war. Argentina led declines after market-friendly President Mauricio Macri was trounced in a primary election.The following is a roundup of emerging-markets news and highlights for the week ending Aug. 18.Read here our emerging-market weekly preview, and listen to our weekly podcast here.Highlights:On Wednesday, 10-year Treasury yields fell below the rate on 2-year notes for the first time since 2007. The yield-curve inversion sent ripples through financial markets amid concerns over a possible recession in the U.S.President Donald Trump delayed the imposition of new tariffs on a wide variety of Chinese consumer products including toys and laptops until December. The pause in his fight with China came as senior officials on both sides had their first phone conversation since Trump threatened the tariffs at the beginning of this monthTrump said Thursday he had a call coming soon with China’s President Xi JinpingChina called planned U.S. tariffs on an additional $300 billion of Chinese goods a violation of accords reached by the presidents, vowing retaliation as Beijing also pushed back on Trump’s efforts to link the trade war with the turmoil in Hong KongChinese officials are sticking to their plan to visit Washington in September for face-to-face trade meetings, people familiar with the matter saidChina posted the weakest industrial output growth since 2002 in July, as a cyclical slowdown and trade tensions add to the case to roll out more stimulusThe People’s Bank of China has responded to downward pressure on the renminbi exchange rate by communicating with the media and market participants to keep the rate “basically stable,” Deputy Governor Liu Guoqiang writes in a Financial Times opinion pieceYuan won’t see disorderly weakening despite external shocks, including trade frictions, according to an article written by PBOC Deputy Governor Pan GongshengChina’s central bank said it’ll start releasing a new reference rate for bank loansArgentine Economy Minister Nicolas Dujovne resigned Aug. 17, a day after Fitch Ratings cut Argentina’s long-term issuer rating by three notches to CCC and S&P lowered the country’s sovereign rating to B- from B and slapped a negative outlook on itMacri will meet new designated economy minister Hernan Lacunza and central bank President Guido Sandleris, according to a spokesman from the presidential palaceStocks, bonds and the currency all sold off ahead of the downgrade amid the prospect of market friendly Mauricio Macri losing power in October’s presidential electionAssets rebounded Thursday after a brutal three-day sell-offThe rout, that took sovereign bonds and the currency to a record low, hit big funds, including Pimco and star bond manager Michael HasenstabHong Kong’s airport halted check-ins for remaining departures for a second straight day on Tuesday as embattled local leader Carrie Lam warned that the city risked sliding into an “abyss”Investors are getting anxious about the impact of 10 weeks of anti-government demonstrations on Hong Kong’s banksChina ramped up the rhetoric against the protesters, with mainland officials in the city saying they “acted like terrorists” in swarming the main terminal buildingsBrazil’s central bank announced it will sell dollars from its foreign reserves for the first time in more than a decade to meet spot-market demandCentral bank will also offer reverse currency swaps -- the equivalent of buying dollars in the futures market -- to cancel out the impact selling dollars would have had on the realPlan was welcomed by traders who say the move will help meet market demand without disrupting the outlook for the currencyThe Moscow City Court released French investor Philippe Delpal from jail to house arrest after prosecutors unexpectedly dropped their opposition in a closely watched case that’s become a thorn in relations between Russia and FranceAsia:The People’s Bank of China is “close” to issuing its own cryptocurrency, according to a senior officialSouth Korea moved to downgrade Japan from its list of most trusted trading partners while also seeking talks to end a months-long spat that has hurt economic ties between the two American alliesSouth Korea is not considering curbs on DRAM supply to Japan as part of corresponding measures against Japan’s export restrictions, President Moon Jae-in’s spokeswoman Ko Min-jung saidBank Indonesia said there is still space for a policy rate cut, while the economy continues to perform well despite strong external headwindsIndonesia’s economy is set to expand at the fastest pace in seven years in 2020 with growth of 5.3%, President Joko Widodo said Friday in his annual budget speechWidodo sought parliament’s approval to relocate the nation’s capital to the island of Borneo, home to some of the world’s biggest coal reserves and orangutan habitats, as he seeks to ease pressure on congested and polluted JakartaWidodo said laws hindering the nation’s progress must be scrapped to boost economic growth, signaling his intention to push on with an ambitious nation-building agenda in his second termPresident proposed record government spending next year to drive the economy to its quickest projected growth in seven yearsThai Industry Minister Suriya Juangroongruangkit said he is satisfied with the Bank of Thailand’s currency management and that the baht strength reflects a high current-account surplus. He also said the central bank can’t intervene much as Thailand could then be criticized for being a currency manipulatorPrime Minister Prayuth Chan-Ocha wants the baht to be at the level that the country’s exports can compete, Narumon Pinyosinwat, the government’s spokeswoman, saidBank of Thailand Governor Veerathai Santiprabhob said a planned policy-coordination committee with the Ministry of Finance won’t affect the central bank’s rate decisionsThailand plans a 316-billion-baht ($10 billion) package of government spending and loans to counter an economic slowdown caused by the U.S.-China trade war and currency strengthIndia Prime Minister Narendra Modi has hit back at critics of his government’s decision to revoke Kashmir’s autonomy, saying its special status had only led to terrorism and corruptionHe also announced a new position of Chief of Defence Staff, saying the move will “sharpen coordination” between the army, navy and air force servicesIndia’s consumer prices rose 3.15% in July compared with 3.18% in June, while wholesale-price gains slowed more-than-expected to 1.1% from 2% the prior monthFurther reduction in Philippines lenders’ reserve requirement ratio is a live discussion in Monetary Board, central bank Deputy Governor Francis Dakila told ABS-CBN News ChannelForeign direct investments net inflow was at $242 million in May, down 85.1% from last yearMalaysia’s economic growth quickened in the second quarter, spurred by stronger domestic demand and a rebound in commodity prices; gross domestic product expanded better-than-expected 4.9% in the second quarter from a year ago, the strongest expansion since early last yearThe central bank announced further steps to increase market liquidity, ahead of an expected decision by FTSE Russell in September on whether to retain ringgit bonds in its indexInflation slowed to 1.4% in July on year from 1.5% in JuneThe European Union opened a probe into whether Chinese, Taiwanese and Indonesian exporters of flat-rolled stainless steel sell it in Europe below costTaiwan Premier Su Tseng-chang asked central bank governor Yang Chin-long to closely monitor global financial markets amid China-U.S. trade conflict and uncertainties surrounding Hong KongTaiwan plans to spend a record amount on national defense next year as President Tsai Ing-wen looks to bolster the island’s defenses in the face of threats from an increasingly assertive ChinaEMEA:Russia’s economy expanded 0.9% in the second quarter as consumer demand remained weak, but mining and manufacturing showed a modest pickup. The Economy Ministry said the pace will accelerate in the second half of the yearRussia’s credit score at Fitch Ratings is back to where it was before the crisis in Ukraine almost half a decade ago, but uncertainty over U.S. penalties still stifles the nation’s rankingThe European Union’s eastern economies downshifted last quarter along with the rest of the bloc, but a job boom and stimulus helped them withstand the brunt of global headwinds that sent the U.K. and Germany into contractionUkraine’s economic growth unexpectedly accelerated to the fastest pace since 2016, helped by a strong grain harvest and domestic consumptionThe Turkish government plugged its deteriorating finances in July with an outsized cash infusion from the central bank. The monetary authority transferred around 22 billion liras ($3.9 billion) to the Treasury last month, the biggest deposit since an annual dividend payment in January, according to data on its websiteSouth Africa’s rand was back as the world’s most-volatile major currency on Thursday, with options pricing suggesting it’s not going to lose that status any time soonRetail sales rose for the sixth straight month in JuneMozambique’s central bank cut its key rate for a second time this year as the inflation outlook improved following a new peace deal. The Monetary Policy Committee reduced the benchmark interbank rate to 12.75% from 13.25%, Banco de Mocambique said ThursdayLatin America:Argentina’s presidential front-runner Alberto Fernandez criticized Macri for increasing short-term debt to unsustainable levels, although he said he doesn’t want to default on the country’s obligationsMacri tweeted Wednesday that he had a long phone conversation with Fernandez, who committed to collaborate so that political uncertainty affects the economy as little as possibleThe drastic change in the political outlook had analysts and traders scrambling to re-calculate the fair value for Argentine assets. Bank of America Merrill Lynch calculated the recovery value for the sovereign bonds at around 40 cents on the dollar in case of a restructuring in 2020Macri announced measures to support the economy, including freezing fuel prices for 90 days, increasing the minimum salary and modifying taxes paid by workersInvestors now focusing on incoming T-bills rollovers, as government may struggle to find demand for new notesArgentine savers pulled more than $700 million from their dollar-denominated accounts on Monday and TuesdayBrazil’s economy likely fell into recession in the second quarter according to a key gauge of economic activityThe lower house of Congress approved the base text of a measure aimed at reducing bureaucracy and restrict the regulatory power of the state. Speaker Rodrigo Maia said the tax reform can be approved by the end of the yearBrazil will leave the South American trade bloc Mercosur if conflicts arise with the winner of Argentina’s election, President Jair Bolsonaro saidMexico’s central bank reduced borrowing costs for the first time in five years after inflation slowed, the economy faltered and the U.S. cut its own ratePresident Andres Manuel Lopez Obrador wants to upgrade ports and refineries to help trigger growth at the Isthmus regionLower revenue will drive a wider-than-anticipated fiscal deficit this year, despite underspending, according to Moody’s Investors ServicePemex’s business plan is expected to weaken its credit metrics, Fitch saidLopez Obrador ratcheted up his attacks against credit-rating companies on Friday, saying he hopes they act more objectively and noting that Mexico pays them as much as $300 million a yearA Mexican judge ordered the detention of a former cabinet minister facing corruption chargesColombia’s economy grew more than expected in the second quarter, as the retail, wholesale and transport sector expanded along with the financial industryPeru economic activity exceeded expectations in JuneCentral bank increased currency intervention, selling three times more foreign currency swaps than in previous time\--With assistance from Julia Leite, Yumi Teso, Alex Nicholson and Philip Sanders.To contact Bloomberg News staff for this story: Lilian Karunungan in Singapore at email@example.com;Aline Oyamada in Sao Paulo at firstname.lastname@example.org;Selcuk Gokoluk in London at email@example.com;Colleen Goko in Johannesburg at firstname.lastname@example.orgTo contact the editors responsible for this story: Tomoko Yamazaki at email@example.com, Karl Lester M. YapFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- Set your alarms for 9:30 a.m., Beijing time, on the 20th of every month.The community of central bank watchers, not to mention China's domestic economy and the global environment it helps shape, just got a new benchmark. Or, at the very least, a long overdue additional reference point for figuring out where the world is going.That's the time and day that the People's Bank of China will announce its new loan prime rate. The diary entry, beginning Tuesday, is part a package of changes to the structure of interest rates that the PBOC hopes will ultimately allow lower borrowing costs to flow through to companies.The timing might just turn out to be the most significant part of the whole endeavor. For years, people have wanted China to become more transparent about its policy settings, in line with Western peers. Things have been heading that way, but the main levers to shape the price of money and, by implication, the direction of the economy have been communicated in haphazard fashion. This appears to be changing and is most welcome.Despite its growing economic size and clout, China long refrained from specifying a time and date for interest-rate decisions. That set it apart from the Federal Reserve, Bank of Japan, European Central Bank and a score of other institutions of lesser significance in both the developed and emerging world.That exception became increasingly jarring as China's economy catapulted ahead of Germany and Japan, and predictions proliferated about when it would overtake the U.S. The world grew accustomed to the PBOC announcing changes to the yuan's trading band and other key policy decisions over Christmas holidays or at obscure hours of the weekend. This isn't the way grown-up economies behave.The central bank appears to concur. Now a significant mechanism to modulate the flow of money in the economy and, by extent, influence the shape of the world will have a bit more transparency and regularity.Granted, eyeballs have been glued lately on the PBOC's morning yuan fix shortly after 9 a.m. each day, the reference point for trading in the currency. When the PBOC recently allowed it to slip below 7 to the dollar, it was seen as a step of great consequence. The yuan's move, in itself was tiny, but because of the psychology of a round number and the way President Donald Trump rants about China's markets, the baby step reverberated in asset markets the world over and got China branded a “currency manipulator” by the U.S. Treasury.Now eyes will be on an interest rate at 9:30 a.m. every four weeks. Might as well keep them there after the yuan fix minutes earlier. Whether the prime rate becomes, in time, the de facto primary benchmark rate for China will be one of the more fascinating aspects of the new regime.It's absurd the amount of attention that’s devoted to Bank of England or European Central Bank deliberations relative to the People's Bank of China. The clarity and method of messaging explains at large part of that lopsidedness.A humble diary note this past weekend just might change a lot.To contact the author of this story: Daniel Moss at firstname.lastname@example.orgTo contact the editor responsible for this story: Matthew Brooker at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. China’s central bank said it’ll start releasing a new reference rate for bank loans, a further step in a long-awaited reform to interest rates that’s set to bring lower borrowing costs to the economy.The People’s Bank of China will announce the new loan prime rate, or LPR, at 9:30 a.m. on the 20th of each month, starting this month, according to a statement on Saturday. The central bank will require commercial lenders to set the price for new loans to businesses and households “mainly” with reference to the LPR, while the price for outstanding loans can stay unchanged for now, it said.The use of the new reference rate signals policy makers are completing the last mile of an overhaul to the country’s rates system, which still bears some hallmarks of the Communist command system. If successful, the revamp can stimulate demand for new credit and aid growth in the world’s second-largest economy as it remains embroiled in a protracted trade war with the U.S.Why China’s Getting Ready to Shake Up Interest Rates: QuickTakeThe central bank said Saturday that commercial lenders submitting prices for the calculation of the new LPR will report in terms of a spread on top of the interest rate of the PBOC’s medium-term lending operations, currently at 3.3%. As the current benchmark 1-year lending rate stands at 4.35%, new loans priced from the LPR could carry a significant discount.The reform of the LPR can “achieve the effect of lowering the real interest rate for loans,” the central bank said.The reform will make the “overall lending rate for the real economy move downward, which will achieve an effect similar to that of cutting interest rates,” Li Qilin, chief economist at Lianxun Securities Co., wrote in a note. Its effectiveness can only be seen in the pricing on Tuesday, he said.The number of banks participating in the pricing will be increased to 18 from 10, with the types of lenders expanded to include city and rural commercial lenders, foreign lenders with operations in China, and privately-owned lenders, the central bank said.China’s economy weakened more than expected in July after a brief bounce in the previous month, and the effects of the trade war with the U.S. are expanding into finance and the currency. While the PBOC has been providing liquidity to the banking system to reduce interbank borrowing costs, the easing has only passed through into the real economy to a limited extent.A key reason preventing the effective transmission of cheaper market rates to the economy is that banks set the price of loans with reference to the old benchmark lending rates, the PBOC said. Some banks have even taken concerted actions to “set a hidden floor” for loan prices, it said.More details about the new LPR:18 reporting banks will add a few basis points on the MLF interest rate based on their own funding costs, market demand and risk premiumBanks will submit prices before 9 a.m. on the 20th of each month to the National Interbank Funding Center, which will leave out the highest and lowest values and then calculate the arithmetic mean of the remaining 16 to form the LPR. That will be released at 9:30 a.m. of the same dayThe LPR will be released once a month, rather than the current practice of reporting daily, in a bid to improve the quality of the pricingThe LPR will cover more maturities, including tenors longer than five years, in addition to the current one-year tenor. The LPR with longer-tenor can help banks set the price for long-term loans such as mortgagesWhile the LPR only references new loans for now, it will be used for outstanding long-term loans in the futureEnterprises can report to regulators if banks keep a “hidden floor” for loan rates, and the PBOC will include the use of the LPR into its macro-prudential framework and its quarterly regulatory checks with commercial banksInitiating the interest-rate reform to lower borrowing costs for the economy, rather than cutting existing interest rates straight away, signals a continuation of China’s targeted approach to easing. The PBOC called for a “rational” view on current headwinds in a key policy report earlier this month, signaling that large-scale stimulus isn’t the first option as it tries to fend off rapid debt growth and asset bubbles.The changes will eventually enable the PBOC to influence the entire economy and financial markets via the price of its short-term loans in the open market, similar to other major central banks.Most central banks govern the price of money in an economy via the rate which banks are charged to borrow cash over short periods. In China, that approach has long divided into two steps. Currently, the PBOC sets a rate that prices mortgages, business loans and other commercial lending -- the one-year lending rate. Separately, the 7-day reverse repo rate is considered the benchmark for short-term inter-bank borrowing.To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at firstname.lastname@example.org;Miao Han in Beijing at email@example.com;Lucille Liu in Beijing at firstname.lastname@example.orgTo contact the editors responsible for this story: Jeffrey Black at email@example.com, James MaygerFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
Moody's Investors Service ("Moody's") has completed a periodic review of the ratings of Industrial & Comm'l Bank of China (NZ) Ltd and other ratings that are associated with the same analytical unit. "IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. This publication does not announce a credit rating action and is not an indication of whether or not a credit rating action is likely in the near future.
(Bloomberg) -- As China moves toward a more market-based approach to determining the cost of money in its economy, one metric suggests corporate debt is going in the opposite direction.Some 17% of company bonds in the first half were sold at yields at least 50 basis points below rates in the secondary market, according to data from China Chengxin International Credit Rating Co. That’s a jump from 9.9% in the second half of 2018. Globally, only the most in-demand issuers can raise funds in line with where their existing debt is trading; almost everyone pays a premium.Analysts interviewed by Bloomberg said the trend shows the distorted credit risk pricing as cash-strapped firms turn to opaque ways to raise funds. One phenomenon is related to a practice known as structured issuance, where companies subscribe to their own offerings to inflate demand. It’s storing up more mispriced debt in China’s financial system, cutting against efforts to foster markets where funding costs correspond with a company’s prospects.“A big yield divergence suggests the coupon rate of the new bond does not reflect the fair market value it is supposed to indicate, nor the actual risk of the debt,” Yang Hao, a fixed-income analyst at Nanjing Securities Co., said in an interview.Regulators have been seeking to curb structured sales. Pan Gongsheng, deputy governor of People’s Bank of China, said China should improve its credit rating and risk pricing mechanisms to make hidden debt issuance cost more explicit, according to a Caixin report on Aug. 9.Read more: A Dark Alley in China’s Credit Market Suddenly Getting RoughThe yawning gap can be seen in China Wanda Group Co. In July, the tire maker sold a three-year note with a coupon at 6.8%, according to bond issuance document on the Shenzhen stock exchange. Its three-year bond due July 2021 traded at about 15.5% that same day, showing a yield gap of more than 800 basis points, Bloomberg-compiled prices show.Oceanwide Holdings Co., which printed a note at 7.5% last month, saw its similar bonds trading at a yield higher than 20%. Officers responsible for securities information disclosure at China Wanda and Oceanwide Holdings declined to comment when contacted by Bloomberg.Baoshang EffectAnother contributor to the trend may have been secondary market distortions caused by the collapse of Baoshang Bank Co. The shock seizure sparked a wave of risk aversion as bond defaults in China hit a four-month high, marring refinancing prospects at weaker firms. The spread between three-year top and AA- rated corporate bonds reached 263 basis points on Wednesday, the widest level since March 12, according to data compiled by Bloomberg.Secondary market bond yields of some of these companies jumped higher than their new issuance cost as investors cut their risk tolerance, said Mei Dongya, executive director at Shanghai Maodian Asset Management Co. “Some institutions were selling off bonds in need of cash after the bank seizure triggered a liquidity crunch,” Dongya said.Read: China Bond Defaults Reach 4-Month High After Baoshang SagaTo be sure, structured debt issuance is just one method that troubled companies adopt to sell debt. “Many investors buying bonds not only pursue gains, but also out of some non-economic concerns,” said Shen Chen, a partner at Shanghai Maoliang Investment Management.For Lu Lingge, an analyst at China Chengxin, such companies may find it hard to keep financing sustainable. “To fix the distortion not only needs a long-term debt pricing mechanism, but more importantly the information disclosure transparency”, she said, adding that it will improve market efficiency and boost pricing discovery.(Updates with spreads in eighth paragraph.)\--With assistance from Matt Turner.To contact Bloomberg News staff for this story: Yuling Yang in Beijing at firstname.lastname@example.org;Tongjian Dong in Shanghai at email@example.comTo contact the editors responsible for this story: Neha D'silva at firstname.lastname@example.org, Chan Tien HinFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- It only took a small taste of what a U.S. recession might be like for President Donald Trump to suggest that he wants a trade deal with China after all.The Dow Jones Industrial Average plunged 800 points in its worst rout of the year after the gap between the two-year and 10-year Treasury yields turned negative for the first time since 2007. An inverted yield curve has preceded the last seven recessions in the U.S.Ever sensitive to stock movements, the president tried to calm the markets after the close. Abandoning his hawkish trade rhetoric, Trump extended an olive branch to Chinese President Xi Jinping in a series of tweets, calling him a “great leader” and a “good man.” He ended his posts with “Personal meeting?,” without specifying whether he was proposing a summit.The question is how Xi will respond to Trump’s overture. Who’s more desperate for a trade deal right now? Consider where China and the U.S. are in their respective business cycles. Since the trade war started, American consumers have sat tight and enjoyed their prosperity – just as Trump has boasted. China’s economy, by contrast, has been having a much tougher time. In the past year and a half, Beijing has had to deal with all sorts of credit issues that could escalate into a wider economic crisis.Examples abound. Last year, regulators changed margin-financing rules as the stock market suffered one of the world’s worst routs. The declines stemmed partly from listed companies pledging shares as collateral to secure short-term bank financing. This spring, the People’s Bank of China undertook the first commercial bank seizure in two decades and was forced to calm ensuing jitters in the interbank market. Meanwhile, Beijing has had to deal with periodic peer-to-peer lending crises and bond defaults by state-affiliated entities. That might sound bad, but it helps China now. If a fireman has to put out fires every day for a year, he gets more proficient. That’s where Beijing is now.The same can’t be said of the U.S.. The slide in its sovereign long-term bond yields – a measure of investor confidence – has been fast and furious. Just two weeks ago, when Federal Reverse Chairman Jerome Powell described the U.S. rate cut as a “ mid-cycle adjustment,” the gap between the 2-year and 10-year bond yields was still 21 basis points. On Thursday morning in Asia, the 30-year yield, which more reflects traders’ view of the overall health of the economy rather than the depth of the current easing cycle, fell to a record low below 2%. To be sure, China’s economy is slowing: Industrial output growth is at its weakest since 2002. But digging deep into the data, the picture that emerges is of a government that’s measured and confident. For instance, some of the weakness in the July data reflected moves to rein in shadow financing and restart property deleveraging. If Beijing wants better-looking industrial output numbers, it just needs to reopen the liquidity taps – as we saw in the first quarter.On Thursday, the PBOC was showing no signs of panic. The central bank rolled over 383 billion yuan ($54 billion) of medium-term facility loans with interest rates unchanged. While the world's largest central banks are racing toward zero rates, the PBOC has been sitting on the sidelines, saving its firepower for later.China’s system has its advantages when it comes to economic management, as I’ve written. The ability of ministries to co-ordinate their policy responses means China can practice the ultimate in modern monetary theory, which is probably what the U.S. needs right now to restore its yield curve.So while Trump may think his olive branch is a big deal, the message to Washington is: Don’t think you’ve got China on the ropes. Xi was panicking a year ago; he can afford to wait now. To contact the author of this story: Shuli Ren at email@example.comTo contact the editor responsible for this story: Matthew Brooker at firstname.lastname@example.orgThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
Could Bank of China Limited (HKG:3988) be an attractive dividend share to own for the long haul? Investors are often...
(Bloomberg) -- China’s 10-year sovereign bond yield fell to 3% for the first time since 2016, joining a global rally of government debt as the nation’s economy slowed and its trade dispute with the U.S. worsened.The yield on the country’s most-active notes due in a decade fell 1 basis point to briefly trade at 3% in Shanghai. Escalations in the trade war since April have put a damper on sentiment in equities, helping spur a rally in Chinese sovereign bonds. The yield on the country’s 10-year debt, which hadn’t touched 3% since November 2016, is down about 40 basis points since its April peak.The advance in Chinese bonds followed a rally in their U.S. counterparts, as the yields on American long-end debt approached an all-time low overnight amid rising global trade concerns, political upheaval in Hong Kong and a crisis in Argentina. China’s economy also showed fresh signs of slowing, with data released on Monday suggesting the nation’s credit demand tumbled to the second-lowest amount this year in July."The drop in the yield is probably a result of the rally in U.S. government bonds and the disappointing credit data," said Wu Sijie, a senior trader at China Merchants Bank Co. "The room for the decline is limited if China doesn’t lower rates for its medium-term lending facility."The yield on the 10-year sovereign note was at 3.01% Tuesday afternoon in Shanghai. The returns still stand out just as the world’s stockpile of negative-yielding bonds nears $16 trillion for the first time.China’s Lowest Bond Yields Since 2016 Look Really Juicy to SomeChina’s sovereign bonds lagged a global rally in recent months with one of the worst performances among the world’s biggest debt markets. Even as weak economic data strengthened the case for further stimulus, concern over credit risks after the government takeover of a lender were among the reasons seen deterring investors.The bull case for Chinese bonds is pegged on potential easing by China’s central bank and an increase in foreign flows helped by their inclusion in global indexes. But risks include a potentially wild yuan, which makes assets denominated in the Chinese currency less attractive to overseas investors. An escalation of the trade war could send the yuan to as low as 7.7 per dollar, according to Societe Generale SA.China’s stimulus plans may also disappoint bond bulls -- the People’s Bank of China signaled Friday it will hold back from deploying large-scale measures for now.Stocks fell across Asia on Tuesday and bonds rallied as investors shunned risk assets. Hong Kong’s deepening political crisis -- which now risks becoming an economic one -- and fears of another default in Argentina are adding to the concern over global growth.“The world is in risk-off mode due to rising geopolitical tensions globally, and the Hong Kong unrest is part of the puzzle affecting the sentiment," Tommy Xie, economist at Oversea-Chinese Banking Corp. in Singapore. It’s a good time to buy Chinese government bonds at the moment, he added.Here’s what some fund managers say:Pengyang Asset Management Co. (Yang Aibin, portfolio manager)China’s bond rally isn’t over yet and the 10-year government bond yield may still challenge the 2016 low of around 2.65% The downward trend that pushed the yield down to 3% is mainly being driven by global trade concerns and China’s slowing credit growth Hexa AMC (Li Haitao, deputy director of fund investment)We expect further upside in China’s bond market The 10-year yield will likely retreat to around 2.75% to 2.85% by the end of the year HFT Investment Management Co. (Yiping Chen，deputy head of fixed-income investment)The current yield for 10-year sovereign notes is still relatively high given the general economic environment We expect it to fall further as the Chinese bond yield’s slide was "tiny" compared with U.S. Treasuries and other global debt To contact Bloomberg News staff for this story: Tian Chen in Hong Kong at email@example.com;Claire Che in Beijing at firstname.lastname@example.org;Xize Kang in Beijing at email@example.com;Jing Zhao in Beijing at firstname.lastname@example.orgTo contact the editors responsible for this story: Richard Frost at email@example.com, Sofia Horta e Costa, Magdalene FungFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Pressure on Chinese officials to boost stimulus has ratcheted up after credit growth tumbled to the second-lowest amount this year in July amid weak demand and seasonal factors.Aggregate financing was 1.01 trillion yuan ($143 billion) last month, compared with about 2.26 trillion yuan in June, the People’s Bank of China said late Monday. The median estimate of economists was 1.63 trillion yuan.Unlike global peers, China’s policy makers have shown little sign that they’re contemplating more aggressive monetary stimulus as they remain focused on keeping a lid on debt and financial stability risks. As the trade war with the U.S. dents confidence at home and abroad, economists say there’s now an increasing need to loosen policy.“The key constraint has become credit demand,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “In the coming months, credit growth would remain constrained by the lack of credit demand until stimulus has to go to Level-3, under which policy makers would artificially create credit demand through loosening shadow banking and property.”China’s 10-year sovereign bond yield fell to 3% for the first time since 2016 Tuesday. Escalations in global trade tensions since April have put a damper on sentiment in equities, helping spur a rally in Chinese sovereign bonds. The yield on the country’s 10-year debt is down about 40 basis points since a peak that month, and hasn’t traded below the 3% threshold since November 2016. A lack of demand for loans from companies is also prompting banks to park extra funds in the bond market, helping push down yields on the 10-year bond, said Hu.The drop in credit was at least partly due to seasonal patterns with July’s credit growth usually slower than that in June. The only month this year with a lower total was February, when Lunar New Year falls.New yuan loans to the real economy were 808.6 billion yuan in July, down by 477.5 billion yuan from a year earlier, according to the central bank.“It reflects weak loan demand and tight credit conditions after the credit events in the regional banks,’’ said Michelle Lam, greater China economist at Societe Generale SA in Hong Kong. “With such a weak set of credit data there is now more pressure on policy makers to deliver more easing.’’Lam said a step up in property tightening also likely weighed on lending.Financial institutions offered 1.06 trillion yuan of new loans in the month, versus a projected 1.28 trillion yuan while banks’ new yuan loans to non-financial enterprises was lowest since October. Broad M2 money supply grew 8.1% from a year earlier, slower than in June.Macquarie’s Hu said policy makers are pressuring banks to lend, but the banks are finding it hard to do so due to a lack of credit demand and are also worried about bad loans. So banks are dishing out short-term lending to fulfill quotas while minimizing credit risks, but such lending “is neither significant nor sustainable,” Hu said.Lending via shadow banking fell by 622.6 billion yuan in July on tighter property financing, the biggest contraction since June 2018.“It’s worrying that the credit data, a key gauge of China’s monetary policy, is weakening at a time when the trade and tech frictions with the U.S. are escalating.’’ said Rob Subbaraman, head of global macro research at Nomura Holdings Inc. in Singapore.(Adds details of bond yields falling to 3% in the fifth paragraph. An earlier version of this story was corrected to amend economist title in final paragraph.)\--With assistance from Miao Han and Malcolm Scott.To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at firstname.lastname@example.org;Kevin Hamlin in Beijing at email@example.comTo contact the editors responsible for this story: Jeffrey Black at firstname.lastname@example.org, Chris BourkeFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- China’s benchmark government debt is the closest in years to yielding just 3%. Escalations in global trade tensions since April have put a damper on sentiment, helping spur a rally in Chinese sovereign bonds. The yield on the country’s 10-year debt is down about 40 basis points since a peak that month, falling as low as 3.03% Friday. It hasn’t traded below the 3% threshold since November 2016. The returns still stand out for bond investors just as a record $15 trillion of the world’s debt yields less than zero. While bulls are expecting China to add stimulus to counter the economic risks of a protracted trade war with the U.S., the People’s Bank of China signaled Friday it will hold back from deploying large-scale measures. Retail sales and credit data due this week are forecast to confirm a slowdown in growth. The bull case for Chinese bonds may be tempered by the yuan, as well as risks in the credit market. While the currency slump last week did little to hold back the rally, there’s concern that further depreciation could keep foreign buyers away, even if the cost to hedge the yuan remains near its lowest since 2014. Donald Trump has threatened more tariffs and surprise interest-rate cuts around the world have stoked fear of a currency war. Credit risks at home include the kind that were sparked by the sudden seizure of a small Chinese bank in May, rippling across credit markets. The event also tightened interbank liquidity and forced financial institutions to sell holdings of sovereign bonds for cash. The yield on China’s 10-year government bonds was steady at 3.03% as of 5:06 p.m. in Shanghai. Here’s what some fund managers say:UBS Asset Management (Hayden Briscoe, head of Asia-Pacific fixed income)Chinese debt is probably the best asset now among global government bonds Investors should keep adding the debt as hedging costs are very low relative to returns China’s 10-year sovereign yield will break 3% in the near term PBOC will cut the reserve-requirement ratio and rates for open-market operations and its medium-term loans to banks in the second half of the year Pictet Asset Management (Cary Yeung, head of Greater China debt)Positive on both the yuan and Chinese sovereign bonds Downside of yields is limited given China won’t loosen aggressively, while upside is also constrained as the economy slows Appetite for yuan-denominated debt will likely return once the currency stabilizes; the yuan will be buttressed by foreign capital inflows, as onshore bonds get included in global indexes China will support its interest rates at "relatively higher level," though the Fed may cut borrowing costs in September, as Beijing doesn’t want leverage to rise Yeung is expanding his team as yuan assets become more mainstream BNP Paribas Asset Management (Jean-Charles Sambor, deputy head of emerging-market fixed income)Cautious for now, though optimistic on Chinese debt in the long term China will see $300 billion of inflows into its onshore bond market in the next two to three years It may not be the right time to add more debt now as Chinese bonds have rallied strongly recently Yuan will stabilize around 7 in the near term as Beijing knows a weak currency will lead to capital outflows Investors should buy if the 10-year government bond yield rises to 3.15% to 3.2% Nissay Asset Management (Toshinobu Chiba, chief portfolio manager of fixed-income investment department)China’s 10-year sovereign yield will drop to 2.6% to 2.9% by year-end as the central bank eases further due to the trade war and weakening economy Index players and active managers will keep buying Chinese bonds because of index inclusions Chiba’s firm is underweight Chinese credit, especially bank papers, due to sluggish fundamentals Aberdeen Standard Investments (Edmund Goh, Asia fixed-income fund manager)Bullish on Chinese government debt and has some currency risk hedged in his investments; "we added more Chinese government bond risk recently before and after the yuan slid past 7": Goh The trade war escalation "surprised" Goh, but convinced him that China’s economic slowdown will be prolonged China won’t use yuan depreciation to fight the trade war as it needs stable capital flows for now \--With assistance from Yuling Yang and Claire Che.To contact the reporters on this story: Tian Chen in Hong Kong at email@example.com;Qingqi She in Shanghai at firstname.lastname@example.orgTo contact the editors responsible for this story: Sofia Horta e Costa at email@example.com, Magdalene FungFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- The People’s Bank of China is “close” to issuing its own cryptocurrency, according to a senior official.The bank’s researchers have been working intensively since last year to develop systems, and the cryptocurrency is “close to being out,” Mu Changchun, deputy director of the PBOC’s payments department, said at an event held by China Finance 40 Forum over the weekend in Yichun, Heilongjiang. He didn’t give specifics on the timing.Mu repeated the PBOC’s intention that the digital currency would replace M0, or cash in circulation, rather than M2, which would generate credit and impact monetary policy. The digital currency would also support the yuan’s circulation and internationalization, he said.The remarks signal the PBOC is inching toward formally introducing a digital currency of its own after five years of research. Facebook Inc.’s push to create cryptocurrency Libra has caused concerns among global central banks, including the PBOC, which said the digital asset must be put under central bank oversight to prevent potential foreign exchange risks and protect the authority of monetary policy.“Libra must be seen as a foreign currency and be put under China’s framework of forex management,” Sun Tianqi, an official from China’s State Administration of Foreign Exchange, said at the forum.Unlike decentralized blockchain-based offerings, the PBOC’s currency is intended to give Beijing more control over its financial system.According to patents registered by the central bank, consumers and businesses would download a mobile wallet and swap their yuan for the digital money, which they could use to make and receive payments. Crucially, the PBOC could also track every time money changes hands.The central bank will “expedite the research of China’s legal digital tender” and monitor the trends of virtual currency development at overseas and at home, the PBOC said in a statement listing its work plan for the second half of 2019 released in early August.“It is without doubt that with the announcement of Libra, governments, regulators and central banks around the world have had to expedite their plans and approach to digital assets,” said Dave Chapman, executive director at BC Technology Group Ltd. They have to consider the possibility that non-government issued currencies could “dramatically” disrupt finance and payments, Chapman said.(Updates to add quote from analyst.)\--With assistance from Eric Lam.To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at firstname.lastname@example.orgTo contact the editors responsible for this story: Jeffrey Black at email@example.com, Jiyeun LeeFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Emerging-market investors head into a new week smarting from a fresh reminder that moments of optimism can be swiftly snuffed out at the whim of the Chinese central bank or U.S. President Donald Trump.A day after cheering markets with a stronger-than-expected yuan fixing, China again let it weaken below 7 per dollar on Friday, while the White House delayed licensing decisions for American companies to restart business with Huawei Technologies Co. Trump later added it would be “fine” if the September trade talks with China are canceled. That leaves the daily yuan fixings -- and any other comments or tweets by the president -- in focus as never before.“We expect uncertainty to remain high in August as the next chapter of the U.S.-China trade war unfolds,” Claudio Irigoyen, a fixed-income and currency strategist at Bank of America Merrill Lynch in New York, wrote in a note.Stocks and currencies from the developing world retreated over the five days through Friday, the longest streak of weekly losses since May, amid mounting concern the trade war will sap economic growth, prompting policy makers to redouble stimulus measures. A rally on Thursday, which came a day after India and Thailand cut interest rates, quickly evaporated as the yuan fixing allowed the bears to take hold again. The Philippines lowered rates on Thursday and Peru cut on Friday.Listen here to the emerging markets weekly podcast.With several markets in the Middle East and Asia closed this week for holidays, Latin America may come under special scrutiny. The continent’s economies are most exposed to the trade war, Irigoyen said, as demand for commodities declines.Argentine assets face a rough open to the week after President Mauricio Macri lost the key primary vote by a landslide on Sunday, foreshadowing a defeat of his market-friendly policies in the upcoming October election. Mexico will be in the spotlight Thursday with some analysts expecting it will join Latin America’s rate-cutting wave by reducing borrowing costs for the first time in five years.Yuan FixingThe People’s Bank of China weakened the yuan’s daily fixing for an eighth day on Monday, in line with expectations, following the currency’s slide beyond 7 per dollar for the first time since 2008 last week. It has assured foreign companies that the currency won’t weaken significantlyThe yuan lost 1.7% last week, the biggest drop since 2008Easing WaveMexican TIIE swap rates on Friday were pricing in about 43 basis points of rate cuts in three months and about 80 basis points of easing in six monthsMexico’s annual inflation rate fell in July to the lowest level since 2016, supporting expectations for monetary easing after the economy stagnatedArgentina’s PrimariesWith 88% of ballots counted, Alberto Fernandez, the opposition candidate who has former President Cristina Kirchner as his running mate, had 47% of votes versus 32% for Macri. If that result stands in October, Fernandez would win the presidency outrightThe results are poised to trigger a market sell-off on Monday as investors come to terms with the possibility of the type of interventionist measures that were common place under KirchnerTraders will also eye the nation’s July inflation data due on Thursday that is expected to have cooled down for the fourth straight month, a welcome sign for Macri as he seeks to restore confidence in the economyEconomic Data HighlightsBrazil traders will watch for Monday’s release of the central bank’s economic activity index for June for signs as to whether the nation’s economy fell into a recession in the second quarter. Weaker data may reinforce the conviction that more monetary easing is needed. The country’s swap rates are pricing in around 75 basis points of cuts through the end of the yearColombia is set to release June retail sales and manufacturing production data on Wednesday and second-quarter gross domestic product data on ThursdayChina’s data will be in focus as traders assess the health of the economy before the imposition of new U.S. tariffs on Sept. 1. Figures on industrial production and retail sales are due on WednesdayMalaysia’s second-quarter GDP data is due on Friday. Growth probably picked up to 4.7% from 4.5% in the first quarter, according to Australia and New Zealand Banking Group Ltd. Taiwan is scheduled to report final second-quarter GDP data the same dayInflation reports from India and Malaysia are due this week, while the Philippines also releases remittances dataRussia’s growth probably rebounded slightly in the second quarter, but at a pace that implies lingering weakness in demand. Expectations that the economy will accelerate in the second half of the year may be waning as international demand for commodities weakens amid the global trade war. Russia’s credit rating was lifted by Fitch on Friday to BBB from BBB-Investors in Poland will be watching for the GDP and July inflation prints on Wednesday; Polish bond yields fell to an all-time low on Friday and the central bank governor didn’t rule out ending the nation’s unprecedented pause in rates amid the dovish global policy tilt(An earlier version of this story was corrected to say Russia’s credit rating was lifted from BBB-, and not BB- under the Economic Data Highlights.)\--With assistance from Alex Nicholson and Karl Lester M. Yap.To contact the reporters on this story: Aline Oyamada in Sao Paulo at firstname.lastname@example.org;Lilian Karunungan in Singapore at email@example.comTo contact the editors responsible for this story: Julia Leite at firstname.lastname@example.org, ;Justin Carrigan at email@example.com, Alec D.B. McCabeFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Chinese stocks might be about to face more headwinds.Goldman Sachs Group Inc. cut its earnings-per-share estimates for the MSCI China Index amid increased U.S.-China trade frictions and lower potential for valuations to rise, while JPMorgan Chase & Co. says investor flows show that the country’s stocks are currently overbought.Estimated EPS growth on the MSCI China Index for 2019 will be 6% from 8% and in 2020 9% from 10%, Goldman strategists led by Kinger Lau wrote in a note Saturday. That’s as market-implied probability of a trade resolution falls to 12% and Goldman’s economists no longer expect a trade deal before the 2020 U.S. presidential election. They have a 12-month target of 82 for the index, to September 2020, implying a gain of 12% through then.Read: China’s Profit Warnings Signal More Gloom for the EconomyJPMorgan cites flows as a reason to be bearish.Positioning measures including margin transactions suggest that leveraged institutional investors, such as hedge funds, rather than retail, are more likely to have been responsible for this year’s rally in Chinese onshore equities, strategists led by Nikolaos Panigirtzoglou wrote in a note Friday. There has been a sharp increase in net long positions by futures investors this year, according to the strategists.“The Chinese equity market looks currently pretty overbought especially compared to last year,” the report said.Chinese stocks enjoyed a heady rise at the beginning of the year, with the MSCI China gauge rallying 23% from the start of 2019 through early April as fears about an economic downturn subsided and the People’s Bank of China loosened some policy measures.The index, which has large- and mid-cap stocks and covers about 85% of the Chinese equity universe according to MSCI, has fallen 16% in the past four months as concerns about trade and earnings have come back to the fore. It’s now up 2.8% in 2019, compared with a 16% gain for the S&P 500 Index and a 12% advance for the MSCI All-Country World Index.While China’s equities are likely overbought, the yuan appears to be oversold, JPMorgan said, citing a steady rise in long dollar/short yuan positions since mid-2018. The strategists also noted that Chinese onshore bonds should benefit from increased expectations of rate cuts by the People’s Bank of China in an escalation scenario.“FX investors have been preparing for a Chinese currency depreciation for some time,” the strategists said. “So from an investor positioning perspective, Chinese onshore equities look more vulnerable than the Chinese currency if the U.S.-China trade war escalates further from here.“To contact the reporter on this story: Joanna Ossinger in Singapore at firstname.lastname@example.orgTo contact the editors responsible for this story: Christopher Anstey at email@example.com, Andreea Papuc, Adam HaighFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. Chinese policy makers are holding back from rolling out the big guns of monetary stimulus, keeping options in reserve as the trade standoff with the U.S. risks morphing into a global currency war.The People’s Bank of China late Friday called for a “rational” view on current headwinds, signaling that the targeted approach to shoring up output would continue. Investment, retail sales and credit data due this week are expected to confirm the ongoing slowdown in the world’s second-largest economy.Officials are sticking to a cautious monetary strategy even after tensions with the U.S. worsened, with President Donald Trump’s accusations of Beijing’s currency manipulation adding sensitivity to any stimulus measures that would depress the yuan. At the same time, the weakening of the currency past 7 per dollar removes one barrier for a cut to interest rates should the trade war deteriorate to the point where stronger action is needed.“Policy makers are fine with the current state of the economy,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “But if growth continues to slow, at certain point, the priority will shift to growth stabilization.”Former central bankers gathered for a policy symposium in the far North East warned Saturday that the confrontation with the U.S. is deepening.The U.S.’s labeling of China as a currency manipulator “signifies the trade war is evolving into a financial war and a currency war,” and policy makers must prepare for long-term conflicts, Chen Yuan, former deputy governor of the People’s Bank of China, said at a China Finance 40 meeting in Yichun, Heilongjiang.Former PBOC Governor Zhou Xiaochuan called for efforts to improve the yuan’s global role to deal with the challenges of a dollar-denominated financial system.The challenges aren’t just from the dollar. The International Monetary Fund said in its annual report on the Chinese economy released Friday in Washington that if the U.S. escalates its current threat to add 10% extra tariffs on the remainder of its imports from China to 25%, growth would be trimmed by 0.8 percentage point, leading to “significant negative spillovers globally.”It’s in that kind of scenario that China may be forced to turn to more aggressive monetary support, even in the face of rising domestic debt risks and asset price bubbles. Efforts to prop up growth have already propelled the stock of corporate, household and government debt to more than 300% of gross domestic product, according to an Institute of International Finance report last month.Nevertheless, having allowed the yuan to weaken past 7 per dollar, the PBOC has freed itself from an artificial constraint that it has been bound by for years, allowing borrowing costs to be reduced further without -- in theory -- the need to prop up the currency.What Bloomberg’s Economists Say“In our view, the PBOC will cut benchmark interest rates in the coming months. The near-term risk is obvious, including increased market volatility and pressure for capital flight. Our view, though, is that the PBOC has the capacity to prevent currency depreciation from getting out of hand.”\-- Qian Wan and David Qu, Bloomberg EconomicsFor the full note click hereSo far, policy makers haven’t given any hint of changes to the 1-year lending rate which would affect the price of borrowing across the whole economy, or reducing the price of loans to banks in the wake of the U.S. Federal Reserve’s latest cut. Instead, officials from PBOC Governor Yi Gang downward have signaled that an impending reform of the interest rate system could do the work of a rate cut, by transmitting policy more effectively.In the meantime, China’s leadership appears to want to manage the economy’s long-term slowdown rather than arrest it, and smooth shorter-term weakness in consumption and output with about 2 trillion yuan ($283 billion) in tax cuts, as well as localized investment incentives.Auto sales -- about one quarter of reported offline retail consumption -- resumed contraction in July, data released last week show. Infrastructure investment will likely pick up marginally, and credit growth is under pressure as property financing tightens and local governments finish bond sales.An “objective and rational view” should be taken on those headwinds, the PBOC said in the report released Friday evening. The central bank should “stay confident, be focused, mind our own business,” and use a combination of tools to form new growth drivers, it said.Targeted reductions in the amount of money banks park at the central bank and use of medium-term loans to ease funding constraints are likely to continue. Above all, with domestic monetary policy unchanged, the yuan’s dip to 7.1 to the dollar could, if sustained, essentially absorb the impact of Trump’s latest tariff increase, according to China Merchants Bank Co.“Stability is still the focus with quality growth, and the employment market more important than GDP,” said Jeff Ng, chief Asia economist at Continuum Economies in Singapore. “China will allow a slowdown and is prepared to do so.”To contact Bloomberg News staff for this story: Yinan Zhao in Yichun, China at firstname.lastname@example.orgTo contact the editors responsible for this story: Jeffrey Black at email@example.com, Shikhar BalwaniFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. As they look to ease monetary policy, central bankers are also singing from the same songsheet when it comes to government support for their economies. They want more of it.With the global growth outlook darkened by trade wars and borrowing costs already low, central banks say they can’t dispel the clouds on their own. From Federal Reserve Chairman Jerome Powell to European Central Bank President Mario Draghi, the demands are mounting for governments to loosen their budgets if the slowdown takes hold.Markets are flashing a green light. It’s rarely been cheaper for governments to borrow -- in many cases, investors end up paying them, since yields are negative. All kinds of economists, including the ones at the International Monetary Fund, agree that fiscal support is probably the way forward.The questions are: which finance ministries have room to help and which are listening?It’s harder to track fiscal stimulus than the monetary kind. There are more instruments, with taxes and spending split across national or local levels that are hard to condense into a single number. (And different calculations can produce different results -- here, IMF numbers are used throughout). The greater complexity is one reason why fiscal policy, while critical to understanding the economic outlook, gets less attention than central banks.Following is an overview of the fiscal state of play in the world’s most important economies -- what governments are doing, and what they’re talking about doing.U.S.: Loose -- But Gridlocked?2018 Budget Balance: -4.3% of GDP (deficit)2019 Forecast: -4.6%The U.S. has been loosening fiscal policy under President Donald Trump. His combination of tax cuts and higher spending is unorthodox in an economy that’s been expanding for a decade. It did deliver a bump in growth last year, which is now fading. It also left the U.S. looking a bit like Japan a few years earlier -- with a deficit above 4% of GDP and forecast to stay there for a decade.Markets seem to be fine with the Trump stimulus. The president’s problem is that he has no easy way to repeat the trick. His Republican Party lost control of Congress, and therefore the purse strings, as of this year.America has a debt ceiling that has to be increased before spending can rise, and there’s usually a political row. The latest one just got resolved, in a deal that suspends the ceiling for two years and edges spending higher. But there’s little incentive for Democrats, who want to beat Trump in next year’s presidential election, to juice the economy in ways that might help him.What Bloomberg’s Economists SayFiscal hawks are a rare breed in Washington at the moment, and economic momentum is in any case not sufficiently robust to endure any meaningful austerity--after all, the Fed has deemed the economy frail enough to warrant renewed policy accommodation.The chance of additional stimulus being incorporated ahead of the 2020 election is remote, given the nearly insurmountable hurdle of crafting a package that would appeal to both House Democrats and Senate Republicans.\--Carl Riccadonna, Bloomberg EconomicsEurozone: Germany Says ‘Nein’2018 Balance: -0.6% (deficit)2019 Forecast: -1%Budget politics in the euro area make the American debate look friendly.Europe is hobbled before it comes to the fiscal starting line, because there’s no authority parallel to the European Central Bank that can tax and spend on the continent’s behalf -- while individual members lack the flexibility that comes with printing your own currency. Plus, the most powerful country, Germany, is obsessed with balanced budgets.What Bloomberg’s Economists SayFor the first time in many years, the euro area is loosening fiscal policy, but not by much. Some countries, such as Germany, have considerable fiscal space and, when the next recession hits, the debate on government spending is likely to heat up considerably.The new ECB President, Christine Lagarde, will try to convince policy makers that monetary policy can’t be the only show in town. However, politics may end up preventing any significant loosening of the purse strings.\-- David Powell, Bloomberg EconomicsIt’s at the national level that budgets get decided, though the EU’s central authorities can intervene to cap deficits. Out of the three biggest Euro economies, one is injecting stimulus; one wouldn’t dream of it; and one is desperate to do so, but has been told it’s not allowed.France: Yellow-Vest Boost2018 Balance: -2.6% (deficit)2019 Forecast: -3.3%President Emmanuel Macron’s tax cuts in response to the Yellow Vest protests are lifting the economy just as the euro area slumps. They’ll amount to a stimulus of around 17 billion euros, or 0.5% of GDP. That’s on top of a one-off boost for businesses this year from changes in tax credits.France isn’t the obvious candidate for belt-loosening in the euro area. With debt already near 100% of GDP, the national auditor has warned that Macron’s largesse has derailed efforts to repair the public finances from the last global crisis, and won’t leave much room if there’s another one.France plans to resume tightening next year, with spending cuts and the removal of corporate tax-breaks, to get the deficit down to 2.1% of GDP. It’s hoping Germany will pick up the baton of fiscal stimulus, and has proposed a deal along those lines known as the “growth contract.” So far, Berlin hasn’t responded.Germany: Balancing Act2018 Balance: +1.7% (surplus)2019 Forecast: +1.1%The German government’s own numbers show the budget in perfect balance for a sixth straight year – as it’s constitutionally required to be, outside of recessions. (The IMF calculates that it’s actually in surplus.)Zero deficits have been a hallmark of Chancellor Angela Merkel’s government, and not one that’s likely to be abandoned easily, even as economic sentiment at home worsens and external pressure grows. When analysts calculate which countries have “fiscal space,’’ Germany is usually top of the list – and it’s likely the main target of ECB chief Mario Draghi’s increasingly loud demands for some spending support.But the government brushes off such calls. The public argument is that current economic problems aren’t too severe yet, and are global in nature anyway. Behind the scenes, finance ministry officials are wary that a deep slowdown could be on the way –- and their mantra is that Germany needs to keep its fiscal powder dry so it can pull itself, and maybe all of Europe, out of a recession.Italy: Battling Brussels2018 Balance: -2.1% (deficit)2019 Forecast: -2.7%Italy, with a long-stagnant economy, wants to kickstart growth by widening its deficit, but it’s run up against EU rules. Twice in six months, it’s had to compromise over budget targets to avoid giant fines.The populist government in Rome may yet have some cards to play, though. It’s seeking to avoid implementing an already legislated sales-tax increase next year, while speeding up cuts in income and corporate tax rates –- and leaving income-support and early-retirement programs intact.To avoid another blowup with Brussels, the government may have to consider taking away a host of tax breaks enjoyed by various groups, which won’t make voters happy. And it has a couple of other avenues for raising revenue – like squeezing more dividend payments out of state-owned companies, and extending a crackdown on evasion that has already netted settlements from UBS and the Gucci fashion empire.Japan: Taxing Time2018 Balance: -3.2% (deficit)2019 Forecast: -2.8%Japan has a big budget landmark coming up: a proposed increase in the sales tax in October. It’s been in the pipeline for a long time, and the government says it’s essential to trim the world’s biggest national debt.But as the date nears, some policy makers are getting edgy. They’re arguing that Japan has got burned this way before -- by withdrawing fiscal stimulus too soon, with tax increases that tipped the economy back into recession. Some lawmakers want a spending boost alongside the tax, to make sure that doesn’t happen again.Japan has been tightening policy after running some of the world’s biggest budget deficits in the five years after the financial crisis -- averaging almost 9% of GDP. It’s often cited by Modern Monetary Theory, an economic school which backs active use of fiscal policy, to show that deficit-spending needn’t trigger inflation or scare bond vigilantes. Now Japan is having a lively domestic debate about MMT, whose advocates say the sales-tax increase is a mistake.What Bloomberg Economists Say:Victory for Prime Minister Shinzo Abe’s ruling coalition in the upper-house election will reinforce Abe’s plan to go ahead with a sales-tax hike in October. The hike could add about 5 trillion yen in revenue, according to government estimates.But much of that will go on funding free education and providing subsidies for the low-income elderly, not to reining in the budget deficit. This will be a short-term positive for growth, but a negative for Japan’s debt trajectory in the longer term.\-- Yuki Masujima, Bloomberg EconomicsU.K.: Austerity Over?2018 Balance: -1.4% (deficit)2019 Forecast: -1.3%Britain has spent the years since the financial crisis bringing down the biggest budget deficit in peacetime history. It stood at 10% of GDP when the Conservatives took office in 2010; last year it fell to little more than 1%, the lowest for 17 years.New Prime Minister Boris Johnson and his chancellor, Sajid Javid, appear intent on throwing off the shackles with promises of income-tax cuts and money for health, education and policing. It’s part of what the government calls economic “boosterism” as it prepares for Brexit on Oct. 31 and even a possible general election. Johnson’s tax cuts could lift GDP by 0.3% but the benefits would be dwarfed by a no-deal Brexit, according to Bloomberg Economics.What Bloomberg’s Economists SayAfter nearly a decade of austerity, the tide appears to be turning for U.K. fiscal policy. Boris Johnson, the new prime minister, has touted 20 billion pounds of tax cuts (about 1% of GDP) and has made a series of spending pledges. Delivering on those promises will be made all the more difficult if the U.K. crashes out of the EU without a deal. We think that could blow a 30 billion pound hole in the public finances.\-- Dan Hanson, Bloomberg EconomicsChina: Quietly Loosening2018 Balance: 4.2% (deficit)2019 Forecast: 4.5%China has stepped up its use of fiscal firepower this year, rolling out tax cuts estimated to be worth 2 trillion yuan ($280 billion) At about 4.5% of GDP, the official deficit covers only part of the government-led expenditure planned for 2019. When off-balance-sheet spending is taken into consideration, the actual deficit forecast widens to at least 6.2% of GDP.The whole system in China is different, though. The central bank has few claims to independence, and the government officials who control policy can boost the economy by pumping loans into chosen sectors, as well as direct spending. (They also might face pressure to rein that credit in). So the fiscal numbers only capture part of what the government’s doing to stimulate or cool the economy.The splurge has increased debt, but it’s also alleviated some pressure on China’s central bank, enabling the People’s Bank of China to refrain from broad-based easing for now. How well this year’s massive fiscal stimulus can feed into the economy is unclear. Infrastructure investment growth is still hovering at a low level, and a considerable part of government-bond proceeds have been used for reserves, not in projects that can generate steady cash flow or drive production along the supply chain.What Bloomberg’s Economists SayFacing the escalation of the trade war and the slowing in the growth, the government has pledged to run a proactive fiscal stance. So far this year, it has cut taxes and increased the quota for local government bond issuance. There is still room to use fiscal policy to stabilize growth. Although we do not expect the government to widen the general budget deficit, the special government bond issuance quote could be increased to provide stronger support for infrastructure spending. Regulatory relaxations such as controls on public-private partnerships could also provide a meaningful boost to demand.\--David Qu, Bloomberg Economics\--With assistance from Andrew Atkinson.To contact the reporter on this story: Ben Holland in Washington at firstname.lastname@example.orgTo contact the editors responsible for this story: Simon Kennedy at email@example.com, Andrew Atkinson, Lucy MeakinFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. Former China central bankers warned Saturday of currency-war risks with the U.S. after an abrupt escalation of trade tensions between the world’s two biggest economies this week.The U.S.’s labeling of China as a currency manipulator “signifies the trade war is evolving into a financial war and a currency war,” and policy makers must prepare for long-term conflicts, Chen Yuan, former deputy governor of the People’s Bank of China, said at a China Finance 40 meeting in Yichun, Heilongjiang.Former PBOC Governor Zhou Xiaochuan said at the gathering that conflicts with the U.S. could expand from the trade front into other areas, including politics, military and technology. He called for efforts to improve the yuan’s global role to deal with the challenges of a dollar-denominated financial system.The PBOC allowed the yuan to weaken below 7 to the dollar this week, prompting the U.S. to accuse China of currency manipulation. President Donald Trump said talks with China planned for next month could be called off. Domestically, the conflicts added a new dimension to China’s balancing act: how to support the economy while avoiding an exchange rate that widens its rift with the U.S.The U.S. currency-manipulation charge is part of its trade-war strategy, and it’ll impact China “more deeply and extensively” than the trade differences, Chen said Saturday. While China should try to avoid further expanding the disputes, policy makers must be prepared for long-lasting conflict with the U.S. over the currency.“The U.S. believes, in a geopolitical point of view, it’s being contained by China with China’s holding of its sovereign bonds,” Chen said,. “That means the U.S. is not completely without weakness.”China should work to increase the use of the yuan in global trade such as the purchase of commodities, he said.Read more: IMF Says China Should Keep Yuan Flexible as Trade War WidensOne of the PBOC officials at the meeting signaled that tensions with the U.S. could increase. Zhu Jun, director of the PBOC’s international department, said “more ensuing measures are likely coming.” She didn’t elaborate.The U.S.’s move is an “appalling” act to gain an advantage during trade negotiations and is doomed to fail, the Communist Party’s flagship newspaper People’s Daily said in a commentary Saturday.While markets haven’t reacted too strongly to the weakening yuan this week, it is possible that “the yuan could weaken further on unexpected shocks in the future,” Yu Yongding, a researcher at the Chinese Academy of Social Sciences, said in Yichun.With policy makers seemingly determined to make the yuan more flexible, the PBOC “should be patient and not adjust policies in haste because of short-term market volatility,” Yu said. “It won’t benefit the PBOC’s credibility and won’t benefit forex reform.”(Update to add more comments in the 6th and 8th paragraphs.)\--With assistance from Amanda Wang.To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at firstname.lastname@example.orgTo contact the editors responsible for this story: Jeffrey Black at email@example.com, Stanley JamesFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg Opinion) -- In the fable, the tortoise wins the race because the hare lies down to take a nap after bolting into the lead. Slow, dogged persistence triumphs over flighty arrogance. If this were the story of the U.S.-China trade war, it’s easy to see which would be which.Trade wars are good and easy to win, President Donald Trump famously declared on Twitter in March 2018. Since then, U.S. policy toward China has shifted repeatedly as the president bounced from one position to another, alternately offering taunts and peace overtures. Early this month, Trump ripped into China just as negotiators were about to resume trade talks in Shanghai, then overruled his Treasury secretary to announce extra tariffs in a tweet after the discussions broke down.China has been far more cautious. Even a leader as powerful President Xi Jinping must marvel at the speed with which decisions have been made in Washington. Last week, China let the yuan slide past 7 to the dollar for the first time since 2008. Within 24 hours, the Treasury Department had formally labeled China a currency manipulator after the president lambasted the yuan’s move – on Twitter, naturally.Caution has its advantages. Decisions are more deliberate, and there’s less chance of getting caught in a trap of your own making, as Bloomberg’s editorial board pointed out last week. Case in point, the dollar strengthened after Trump used the yuan’s slide to renew his call on the Federal Reserve to cut rates. Global investors reacted by fleeing risk for the safety of the greenback.However, too much caution can also be a problem. Look at the way China has managed its domestic economic challenges, and you may be doubtful that this tortoise will ever catch the hare.The government’s approach to tremors among the country’s regional banks provides a telling example. In May, regulators carried out the first bank seizure in two decades. The People’s Bank of China took over Baoshang Bank, a lender based in Inner Mongolia, citing “serious” credit risks. The central bank said that only interbank liabilities of less than 50 million yuan ($7 million) would be fully protected, in an attempt to break perceptions of an implicit government guarantee backing all lenders.That decision sent jitters through the interbank and shadow-lending markets, even though the PBOC ended up guaranteeing practically all of Baoshang’s short-term loans.The heat was too much for Beijing, however justified its handling of the issue may have been (after all, banks should consider credit risk rather than lending to each other on blind trust). Two months later, authorities took a different approach to solve another crisis case: Bank of Jinzhou Co., a regional institution that uses short-term interbank loans to fund shadow credit products.Instead of a full bank seizure, the government turned to the national team, calling in state-owned heavyweights such as Industrial & Commercial Bank of China Ltd. and distressed-debt manager China Cinda Asset Management Co. to broker a rescue. The deal wasn’t cheap, as I’ve written. Investors didn’t take kindly to ICBC, the nation’s biggest lender, being press-ganged in this way. Shares of the “big four” banks sank to record lows after the bailout.Third time’s the charm, or maybe not. Central Huijin Investment Ltd., a unit of China’s sovereign wealth fund and the owner of major stakes in the big four, will buy into Hengfeng Bank Co., a regional lender in the northeast province of Shandong, the 21st Century Business Herald reported Friday. This approach brings the problem on to the central government’s balance sheet – quite a commitment, given that China has more than 4,000 regional banks. The industry has a potential capital shortfall of 2.4 trillion yuan, UBS Group AG’s Jason Bedford estimates.In these three cases, the Chinese bureaucracy has behaved like a timid tortoise. It sticks its head out tentatively to sniff the air and then pulls it back into its shell at the first sign of trouble. A few months later, the tortoise ventures forth once again – with a different face.What’s the moral of this modern tale? The U.S. hare is jumping around in all directions and appears not to know where the finish line is, or how to tell when it’s won. The Chinese tortoise, meanwhile, is moving so slowly that it may never get there. At least Aesop’s fable had a winner. Welcome to the never-ending trade war. To contact the author of this story: Shuli Ren at firstname.lastname@example.orgTo contact the editor responsible for this story: Matthew Brooker at email@example.comThis column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.For more articles like this, please visit us at bloomberg.com/opinion©2019 Bloomberg L.P.
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here. The ever-escalating U.S.-China trade dispute has made top-tier U.S. economic prints all but obsolete as bond traders scramble to keep up with plummeting Treasury yields.The week ahead brings U.S. inflation and retail sales -- data that would normally have market-moving potential as investors try to predict where the Federal Reserve is going to guide rates. However, after a plummeting yuan and fraying relations between the U.S. and China drove 10-year yields to the lowest level since 2016, the reports will likely take a backseat to any trade developments.John Briggs of NatWest Markets plans to monitor where the People’s Bank of China sets its daily reference rate for the yuan. He won’t ignore the U.S. economic data, but that’s not really where the action is these days. And, besides, the upcoming reports are staler than usual, Briggs said, given that they largely cover the period before U.S. President Donald Trump unveiled plans on Aug. 1 to slap a 10% tariff on $300 billion in additional Chinese imports.“All of that’s going to be secondary if Trump says something and China decides to let the yuan slip another 5%,” said Briggs, head of strategy for the Americas at NatWest. “So we’re going to be watching yuan-fixings and what’s going on with China.”The 10-year Treasury yield ended Friday at 1.75%, down 10 basis points for the week, and sank to a nearly three-year low of 1.59% on Wednesday. It all happened so rapidly that it sent Bank of America Corp.’s MOVE Index, a measure of bond-market volatility, to its highest level since June.After the yuan’s dive to a decade-low against the dollar spurred a global haven bid to start the week, China’s central bank helped soothe the panic. The PBOC delivered subsequent currency fixings that were in-line or stronger than analysts’ estimates, easing anxiety over a potential currency war.“The fix is the No. 1 game in town and will continue to dictate the pace of play for risk assets over the near-term,” Stephen Innes, managing director for VM Markets Ltd. in Singapore, wrote in an Aug. 7 note. “Nothing else matters at this stage.”Trade tensions showed few signs of abating Friday. Trump said it’d be “fine” if U.S.-China negotiations planned for next month were called off, adding that he’s “not ready to make a deal.”Futures show traders now expect about 61 basis points of additional Fed easing this year. It’s unlikely economic data will change that in the days ahead, according to Bank of America.“Even if we see a trade deal signed into law, corporations and investors may still have a hard time shrugging off the risk aversion mindset,” wrote strategists Carol Zhang and Olivia Lima in a note Friday. “We are back to wait and see mode as economic data for the rest of the month may already be obsolete due to the timing of recent events.”What to WatchHere are some of the highlights of the economic calendarAug. 12: Monthly budget statementAug. 13: NFIB small business optimism; consumer price index; real average hourly earningsAug. 14: MBA mortgage applications; import/export pricesAug. 15: Empire manufacturing; nonfarm productivity; Philadelphia Fed business; retail sales; jobless claims; industrial production; Bloomberg consumer comfort; NAHB housing market index; business inventories; Treasury International Capital flowsAug. 16: Housing starts; building permits; University of Michigan sentimentFed speakers are silentAug. 13: New York Fed to release Q2 household debt/credit reportAuctions are all about bills:Aug. 12: $42 billion 3-month bills, $42 billion 6-month billsAug. 13: $28 billion 52-week billsAug. 15: 4-, 8-week bills\--With assistance from Edward Bolingbroke.To contact the reporter on this story: Katherine Greifeld in New York at firstname.lastname@example.orgTo contact the editors responsible for this story: Benjamin Purvis at email@example.com, Nick Baker, Mark TannenbaumFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.
(Bloomberg) -- China’s central bank transferred $1 billion worth of funds to Turkey in June, Beijing’s biggest support package ever for President Recep Tayyip Erdogan delivered at a critical time in an election month.The inflow marks the first time Turkey received such a substantial amount under the lira-yuan swap agreement with Beijing that dates back to 2012, according to a person with direct knowledge of the matter who asked not to be named because the information isn’t public.The cash infusion boosted Turkey’s foreign reserves around the time of Istanbul local elections that had left international investors fretting about the country’s political and financial stability.While it marks a success in Erdogan’s effort to re-align Turkey’s international relations by forging new partnerships with the likes of Russia and China, those ties aren’t a match for traditional allies in the West it risks further alienating, said Ozgur Unluhisarcikli, Turkish head of the German Marshall Fund of the United States.“Such short term sources of financing can’t be a remedy for Turkey’s longer term needs,” Unluhisarcikli said by phone. “They are by no means a replacement for Turkey’s long-standing relations with the U.S. and the West.”Still, the Chinese funds show Turkey is making headway in its efforts to diversify sources of foreign investment amid unprecedented tensions with the West. Treasury and Finance Minister Berat Albayrak has said the Asian economy is a promising partner from which Turkey needs to attract investment.Turkey and China signed the currency-swap deal seven years ago and have renewed it every three years. However, until Friday’s balance of payments data release, there was hardly ever a transfer from China under the swap deal that made a significant contribution to Turkish holdings.The cash transfer “represents a step up in the central bank’s efforts to bolster reserves via swaps,” said Inan Demir, an economist at Nomura International Plc in London. “Although the increase in reserves is ultimately positive, the market would have preferred more transparent methods of reserve build up.”Turkey has been trying to sign similar agreements with other partners, and inked a deal with Qatar last year that dwarfed similar attempts. The agreement with Qatar at the height of a currency rout provided $3 billion in inflows from the Gulf state.The Turkish central bank declined to comment. The People’s Bank of China wasn’t immediately available for comment outside normal business hours on Friday.(Updates with more details on cash transfer from China.)To contact the reporters on this story: Kerim Karakaya in Istanbul at firstname.lastname@example.org;Asli Kandemir in Istanbul at email@example.comTo contact the editors responsible for this story: Onur Ant at firstname.lastname@example.org, ;Stefania Bianchi at email@example.com, ;Benjamin Harvey at firstname.lastname@example.org, ;Simon Kennedy at email@example.com, ;David Merritt at firstname.lastname@example.org, ;Constantine Courcoulas at email@example.com, Mark WilliamsFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.