G-20 Summit’s empty talk embrace
Despite Chinese President Xi Jinping’s admonition, Hangzhou’s hollow rhetoric muffled concrete investor reassurance.
The G-20 meeting in Hangzhou, despite China’s pageantry display and announcement buildup, was hardly noticed in Asian financial markets, which were all positive through August with the exception of the host’s.
As President Xi Jinping warned against “empty talk,” participants again decried trade protectionism and competitive currency devaluation, and urged fiscal, monetary, and structural reform policies to boost global GDP growth after the IMF shaved this year’s forecast to 3%.
The US and China, with 40% of world carbon emissions, formally ratified reduction targets over the next decade, while Beijing agreed to tackle industrial overcapacity and corporate debt without similar binding commitments. Officials cited production-cutting “forceful action” against coal and steel companies, as high leverage raises default risk, according to credit rating agencies.
They emphasized exchange rate “equilibrium” under the new basket regime as the Yuan formally enters the SDR in the coming months, also coinciding with preparations for the 2017 Communist Party Congress. The country’s economic leadership signaled a strategy to buy time until this next milestone event, while neighbors likewise offered no major departures despite their own debt and slowdown qualms.
Chinese output and banking data released before the gathering provided relief from 2015’s crash fears, but underscored continued malaise. The 6.5% growth goal is on track, but the pace of import and export and fixed investment expansion has slackened, with the latter down to a decade low.
According to the national statistics bureau, services accounted for two-thirds and manufacturing one-third of GDP growth in the first half, with the PMI index around the neutral 50 level. Retail sales were steady, but government spending was up almost 15% from January-July, and the IMF cautioned in its latest Article IV report that the real fiscal deficit could be 10% of GDP, including contingent liabilities through policy bank and provincial financing vehicles.
Wholesale deflation was not as pronounced, with consumer inflation under 2%. In external accounts, outbound FDI jumped 60% to $100 billion by mid-year through the One-Belt One-Road program for developing economies and often controversial acquisition attempts in security-sensitive sectors in industrial countries. Capital outflows are no longer triple digits monthly but were $50 billion in July, as offshore renimbi deposits mainly in Hong Kong have fallen over 30% to $180 billion the past year.
The Hong Kong-Shenzhen Stock Connect launch announcement before the Hangzhou summit was designed to reverse these trends with direct access to hundreds of small and midsize firm listings, as unused quotas under Shanghai’s original arrangement were also recently abolished. However, Shenzhen’s price-earnings ratios exceed 20 times, and information and regulation is lacking in particular on the venture capital ChiNext tier.
The early action has been overwhelmingly southbound, supporting Hong Kong’s gains of 5% through August. China’s Postal Savings Bank will conduct its $8 billion initial public offering there, with an estimated 80% going to “cornerstone” big institutional buyers. At home by contrast, retail investors and mutual funds continue to shun banks, which need $75 billion in additional capital over the next year, according to an analysis by brokerage Sanford Bernstein.
Global distressed debt houses, working with local partners, have started to purchase bad loans calculated at 15% of the total by international standards versus the current 2% reported. Mortgage business has dominated in recent months to sustain 5% real estate investment growth and a minor uptick in the big city house price index, ahead less than 1% in July. However, outstanding credit is already $2.5 trillion, over half the economy’s size, and no resolution mechanism has been proposed in that category as with debt-equity swaps for companies, which Moody’s claims as “not successful or market-driven.”
Other G-20 Asian representatives were equally unconvincing about looming debt and fiscal problems. Korean households, with government aid, have increased their borrowing load to the highest in the OECD group, and the President just unveiled a third stimulus package focused on infrastructure and public works after failing to rescue shipbuilders.
Indonesia’s new Finance Minister declared that tax amnesty will close the budget deficit approaching legal limits despite traditionally poor collection.
Despite the Chinese President’s admonition, Hangzhou’s hollow rhetoric muffled concrete investor reassurance.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.
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