Market Overview

15 May 2020

Chinese Blueberry Fields of Foreign Investment Madness

Better than expected Chinese industrial production data helped the European stock markets to post some moderate gains on Friday along with a rather positive Thursday's close on Wall Street in New York. As China's Retail Sales on year-to-year basis showed 7.5% decline in April 2020 vs April 2019 after a similar 20.5% drop in February and 15.8% fall in March, the Chinese National Bureau of Statistics published its industrial production indicator, which increased 3.9% year-on-year, far beyond the average expert forecasts of only a 1.5% increase. It gives a sign that the Chinese industrial machine is picking up steam once again.

The revival of Chinese production happened on the background of a rather formal exchange of barbs between the Chinese and American sides. The US Senate by unanimous consent without a roll-call vote, passed a legislation seeking sanctions against several senior Chinese officials over the assumed crackdown on Muslim Uighurs minority in the Xinjiang province. The bill calls on President Donald Trump's administration to toughen its response to China's "actions", so it's another element from Washington in an attempt to punish China as Trump blamed Beijing for "covering up" the severity of the pandemic. The bipartisan bill specifically singles out one influential member of China's communist Politburo, Chen Quanguo, as responsible for "gross human rights violations". The Senate bill also calls on US companies or individuals operating in the Xinjiang region to take steps to ensure their supply chains are not "compromised by forced labour" there.

The US House overwhelmingly approved a version of the same bill at the end of 2019. At that time China's Foreign Ministry replied that the bill should not become law and issued an ominous warning: "For all wrong actions and words... the proper price must be paid." Now the corrected project is going back to the House of Representatives, which have to approve the final text before it is sent to the White House for Trump to sign into law or veto. Given the unanimity of the Senate, Trump is very likely to sign the law. However, it seems that the degree of confrontation is deliberately lowered by the US authorities, reducing the initial claims for cool retaliation in the form of new restrictive tariffs on imports to some separate and private sanctions against individual officials.

Meanwhile, Donald Trump appeared exclusively on "Mornings with Maria" TV-program on FOX Business Channel and made one of his formally strongest comments yet in dealing with China. "I have a very good relationship [with the Chinese General Secretary Xi Jinping] but right now I don't want to speak to [him]," said Mr Trump. In response to the suggestion of the host Maria Bartiromo to take some measures, for example, to restrict the issuance of American visas to Chinese students, the US President replied: "There are many things we could do. We could cut off the whole relationship. Now, if you did, what would happen? You'd save $500 billion if you cut off the whole relationship". But he added that "China is not the only country ripping us off", and the dialogue was still more in the style of alleged threats that the US does not plan to implement during Mr Trump's presidency, but rather like the threats to push some mutual agreements. The Trump administration on Friday made another "hostile" move against China by blocking shipments of semiconductors to Huawei Technologies from global chipmakers, in an action that could ramp up trade tensions with China, Reuters reported. Huawei became a trigger for wide scale US-China trade war as Meng Wanzhou, a CFO of the Chinese telecom giant was arrested at Vancouver International Airport by the Royal Canadian Mounted Police at the request of the United States for allegedly defrauding multiple financial institutions in breach of US imposed bans on dealing with Iran. On February 13, 2020 Meng was personally indicted by the US Department of Justice on charges of trade secrets theft.

At the same time, China is set to speed up purchases of US farm goods and will implement Phase One of the trade deal with the United States, an executive at state-owned agriculture trading house COFCO said during an online industry conference on Thursday. Beijing pledged to buy additional US agriculture products worth $32 billion over two years above a 2017 baseline under Phase One of the trade deal signed in January 2020. "Falling crush margins and an expected jump in China's soybean inventories in coming months could make buying U.S. beans uneconomical for soy processors... [but] China will still implement the trade deal and chances are high that China will speed up purchases," Zhang Hua, vice general manager of China, COFCO International said. Along with deliveries from Brazil the purchases from the US are pushing down meal prices in the country. China's soybean imports in the 2019/20 year to end (August) are expected to be at 87.50 million tonnes, Zhang said, including 63.73 million tonnes from Brazil and about 13.70 million tonnes from the United States. The Chinese authorities simultaneously portray a willingness to strictly follow Phase One, but also do not miss the opportunity to show that the US is not the only worthy supplier. China announced on Thursday that it would allow imports of barley and blueberries from the United States effective on the day, according to Reuters.

The combination of these news leaves markets wary and sensitive but, at the same time, keeps them moderately positive when it comes to expectations to do with the developments of the US-China relationship in general as markets hope that the possible damage would be rather limited and cosmetic, not fundamentally painful, as tension would concentrate more outside the field of trade. Meanwhile, there is a very interesting report from the Emerging Portfolio Fund Research (EPFR) at a time when the semblance of a spat between Trump and his aides with China was not yet so acute.

EFPR is one of Western New York's largest accounting and business consulting firms, which provides fund flows and asset allocation data to financial institutions around the world. Tracking over 123,500 traditional and alternative funds domiciled globally with more than $33 trillion in total assets, they deliver on a regular basis a complete picture of institutional and retail investor flows and fund manager allocations driving global markets. EFPR notes two of the most noticeable tendencies in April. The capital flows into money market funds, which invest in short-term government bonds with high liquidity and short-term deposit certificates of commercial banks, reached $1.1 trillion year-to-date (YTD). YTD refers to the period of time beginning the first day of the current calendar year up to the current date. In addition, managers of major investment funds are actively transferring funds to China from developed and other developing countries. As US stocks plunged to three-year lows in March, allocation to Chinese stocks among more than 800 funds reached nearly a quarter of their nearly $2 trillion in assets under management, according to fund flow data from EPFR. That's up from about 20% a year ago and roughly 17% six years ago. The data covers funds that breaks down holdings into nine categories of stocks listed in mainland China, Hong Kong, Taiwan, the US and Singapore.

If a crowded movement of the investment community from risk to cash seems very natural, the active buying of Chinese assets is more interesting and less predictable. Market dislocations triggered by the coronavirus crisis have sent more capital into Chinese stocks. Some strategists see this as part of a longer-term trend. "We're finding that a lot of foreign managers globally (are) reshuffling their holdings in this turmoil," Todd Willits, head of flow tracking firm EPFR, said in a phone interview in late April. "Allocations to China are something people are looking to increase", he stated. Although US stocks have recovered well in April, mainland Chinese stocks have held up even better. The Shanghai composite was down less than 5.2% so far, as the S&P 500 was down about 11% year-to-date as of yesterday's close. For investment funds that are focused on global emerging market stocks, the average allocation to China is 34%, while that for funds invested in Asian stocks excluding Japan, the China allocation is 38%.

The broad investment interest in Chinese equities remains high, even in the United States. As an example, on May 8, Kingsoft Cloud became the first Chinese company to go public in New York since the Luckin Coffee scandal and the coronavirus outbreak, which delayed some listings. Kingsoft Cloud shares have risen more than 40% just in the three first trading days, so the Chinese cloud computing company gained a valuation of $5 billion.

All these facts today suggest that investors are relatively relaxed about anti-Sino verbal gymnastics of US authorities, and just a few are deterred by American restrictions on Chinese assets purchases for retirement funds. With its more than one trillion of USD reserves in Treasury bonds China may even have more leverage over the US. And it seems that the threats of extended tension between the US and China are unlikely to strongly affect the cut of cards on the stock indexes and the cost of shares in European and American markets.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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