China Congress muffles ‘Minsky moment’ message
As expected Chinese stocks barely budged over the Party Congress week, extending a record low volatility streak since the crash two years ago as benchmark indices fluctuate within a 1% daily range, with the so-called national team of captive state-owned institutional investors providing stability. Foreign investor strategy was to stay on hold and preserve 30% gains on the MSCI’s A-share and broader indices, as economic and financial sector policy took a back seat to President Xi Jinping’s indefinite reappointment with a standing politburo team and his socialist thought entry into the recognized leadership pantheon. His hours-long speech repeated standard themes of supply-side enterprise reform, productivity growth, and consumption and clean-energy diversification, but emphasized bigger, stronger government firms and stricter party control in the nominal private sector as well, following recent forays into well-known globally-traded technology companies like Alibaba.
The end-decade goal is “moderate prosperity” with rural poverty uprooted, but concrete steps were not outlined with the remarks’ abstract ideology. In contrast, at the meeting outgoing central bank chief Zhou Xiaochuan, with a reputation for literally speaking international investors’ language, was explicit in urging greater exchange rate flexibility while warning of an excess-debt unwind “Minsky moment.” He acknowledged a wider renimbi trading band was not a current priority and suggested “too many pro-cyclical factors” were in play that could portend “dramatic adjustment.” As fund managers position for the rest of the year, they will also be able to buy the first mainland sovereign bond in a dozen years, with the $2 billion issue roadshow kicked off in Hong Kong after the Congress ended. It is unrated following recent downgrades by Moody’s and Standard & Poor’s drawing attention to the same corporate and household debt accumulations cited by Governor Zhou, and these trends will sway underlying allocation more than immediate afterglow from the Party hierarchy affirmation.
Third-quarter GDP expansion was steady at 6.8%, but mainstay fixed-asset investment was up only 7.5% this year for the slowest pace in two decades
Economic data released around the session was favorable overall, with distinct blemishes. Third-quarter GDP expansion was steady at 6.8%, but mainstay fixed-asset investment was up only 7.5% this year for the slowest pace in two decades. Disposable income rose at the same clip, the best performance since 2015, as consumption contributed two-thirds to headline growth. Retail inflation fell in September to 1.5% while producer prices jumped another 1% to 7%. Industrial output increase continues to lag slightly behind at 6.5%, despite the positive PMI manufacturing index over 50. Ratings agencies raised the “Minsky” alert on several fronts: S&P projected total debt at $45 trillion by 2020, with “only tentative results” against runaway corporate borrowing, and decried “moral hazard” in direct state enterprise support. Fitch chimed in that state debt was no longer risk-free after company defaults, and that local governments reliant on property revenue may soon join the queue after completion of Beijing-organized rollovers. Officials preferred to set aside these alarms going into the Congress and instead criticized the international raters for unsound methodology and Western bias, despite corporate downgrades also from local counterparts as banks and bondholders entered restructuring.
In Thailand, a historic ceremony with King Bhumipol’s formal cremation after the one-year mourning period was also accompanied by new measures to curtail household and private sector debt, respectively at 80% and 140% of GDP, according to World Bank figures. The central bank has kept the benchmark interest rate at 1.5% but announced controls on credit cards and personal loans in September. The crackdown may hurt consumption, which has been lethargic since the military takeover and slow transition to election return now scheduled for November 2018 under a constitution guaranteeing army supremacy. Economic growth is forecast at 3.5% this year on a near 10% export jump, solid tourism, and heavy infrastructure spending, with the junta previewing a $45 billion stimulus package before the poll period. A large current account surplus, almost 12% of GDP in 2016 just behind Taiwan and Singapore in the region, persists and has lifted the baht 8% against the dollar while drawing bilateral trade deficit ire from the Trump administration. Officials eased outward portfolio investment and widened non-resident baht access to reverse pressure, and fluctuations hurt big bank profits, which were off 15% in the last quarter. Stocks rose 20% on the MSCI Index through September, but as in China investors await more than ritualistic privatization and debt deleveraging for lasting inspiration.