Asian Shares Slip, Though China Ekes Out Gain

Shares of China Eked Gains

Shares of China have eked out gains though most of the Asian markets have reviewed some of their latest rally, with traders assimilating weaker than expected trade data from the mainland. A market analyst at IG, Angus Nicholson had informed sources that plenty of the latest rally in stocks had been driven by major reversal or short covering in financials, materials as well as energy. However, he mentioned that momentum decreasing in the other sectors have now been falling in these sectors also.

The trade data of China that was released at about 10.30 a.m. SIN/HK time was also not positive for sentiments with the February exports dropping to 25.4% in terms of U.S. dollar, while imports fell by 13.8%, with the drops wider than anticipations. Since 2009, the decline in exports had been the largest on year drop according to Reuters.

 The Chinese markets ended higher with the Shanghai composite ending up 2.57, or 0.1% at 2,899.91 with the Shenzhen composite up 8.89 points or 0.51% at 1,750.56. Nicholson had noted that the foreign exchange reserves data of China, released overnight would probably have totally reassured markets around the prospect for further Yuan devaluation.

Official Data Released – Marked Fourth Straight Month of Decline

An official data released recently after the market close, portrayed foreign currency reserves on the mainland dropped to $3.2 trillion towards the end of February, declining from $3.23 trillion the earlier month, thus marking the fourth straight month of decline. However, the pace of outflows slackened substantially and the February figure was in line with analysts’ potentials portrayed in Reuter’s poll.Among other markets, benchmark of Japan, Nikkei 225 closed down 128.17 points or 0.76 percent at 16,783.15 extending Monday’s drop of 0.6%.

Reuters had reported revised government data, before the market opened, showing Japan’s economy had shrank at an annualized 1.1% in the final quarter of 2015 which was revised up from a initial reading of 1.4% contraction. Through the Korean Strait, the Kospi had closed down 11.75% or 0.60% at 1,946.12 while in Hong Kong; the Hang Seng index had closed down 148.14 points of 0.73% to 20,011.58.

Main Miners – Australia, Given up on Early Gains

The main miners in Australia had given up on early gains with Rio Tinto closing at 2.60% BHP Billiton less by 1.83% with iron ore producer Fortescue dropping 9.42% after surging almost 24% on Monday. Fortescue had announced before the market open that it had been in talks with Vale in order to work together to blend iron ore to meet up the demands of its consumers.

 According to the announcement there was a possibility of seeing the Brazilian miner take a 5-15% minority stake in Australian miner. On the other hand, Gold miners saw an uptick with the shares of Newscrest closing at 1.30% while Alacer Gold added 0.72%. HK/SIN time spot gold traded high at $1,269.57 for an ounce though below the Friday peak of $1,279.60, which was the highest since February 3, 2015 as of 3.13 p.m. U.S. gold for April delivery had gained overnight by 0.5% to $1,269.90 an ounce.

Suzuki Motor, Japanese automaker had closed at 3.76% after a report in the Nikkei stating that the company would issue 200 billion yen in zero-coupon convertible bonds, using most of the profits in spreading its setup in India.

China has a $1.2-trillion Ponzi finance problem

Chinese borrowers are taking on record amounts of debt to repay interest on their existing obligations, raising the risk of defaults and adding pressure on policy-makers to keep financing costs low.

The amount of loans, bonds and shadow finance arranged to cover interest payments will probably rise 5 percent this year to a record 7.6 trillion yuan ($1.2 trillion), according to Beijing-based Hua Chuang Securities Co., whose lead fixed-income analyst was top-ranked by China’s New Fortune magazine in 2012 and 2013. Dubbed “Ponzi finance” by Hyman Minsky, the use of borrowed funds to repay interest was seen by the late US economist as an unsustainable form of credit growth that could precipitate financial crises.

Chinese companies are struggling to generate the cash flow needed to service their obligations as economic growth slows to the weakest pace in 25 years and corporate profits shrink. While the debt burden has been eased by six central bank interest-rate cuts in 12 months and a tumble in corporate borrowing costs to five-year lows, the number of defaults in China’s onshore corporate bond market has increased to six this year from just one in 2014.

“Some Chinese firms have entered the Ponzi stage because return on investment has come down very fast,” said Shi Lei, the Beijing-based head of fixed-income research at Ping An Securities Co., a unit of the nation’s second-biggest insurance company. “As a result, leverage will be rising and zombie companies increasing.”

China Shanshui Cement Group Ltd. became the latest company to default on yuan-denominated domestic notes last week, as overcapacity in the industry hurt profits and a shareholder dispute stymied financing. State-owned steel maker Sinosteel Co., which pushed back an interest payment on a bond last month, postponed it again this week.

Metrics of corporate health in Asia’s largest economy have deteriorated as growth slowed. The number of Shanghai- and Shenzhen-listed companies that have less cash than short-term debt, net losses and contracting revenue has increased to 200 as of June, from 115 in the year-earlier period, according to data compiled by Bloomberg.

The amount of bad debt among Chinese banks rose 10 percent in the third quarter from the previous three months to 1.2 trillion yuan, about the size of New Zealand’s economy.

Total debt at listed companies has climbed to 141 percent of common equity, based on a market-capitalization weighted average, the highest level in three years.

While the total amount of debt issued to pay interest is projected by Hua Chuang Securities to increase, it’s taking up a smaller portion of overall new credit. The firm predicts such borrowing will account for 45 percent of new total social financing—which includes bank loans, shadow banking credit and corporate bonds—down from 50 percent last year, according to a November 4 report.

Plunging borrowing costs have made it less expensive for Chinese companies to gain access to fresh cash. The rate on five-year corporate debt with AAA ratings dropped to a five-year low of 3.69 percent on October 29 and was last at 3.95 percent.

At the same time, policy-makers are taking steps to insure credit keeps flowing to borrowers in need. Chinese banks shouldn’t cut or withdraw lending to companies in “temporary” difficulties, Premier Li Keqiang said last month, adding that the government will take steps to prevent systemic risks. The People’s Bank of China has cut its benchmark one-year lending rate to 4.35 percent, from 6 percent a year ago, helping to fuel 6.6-percent growth in outstanding corporate bonds this year to 19.2 trillion yuan as of October. “The lower funding rates have lessened the interest burden on Chinese companies,” said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA.

-- Bloomberg News

The Chinese Yuan is Going Global

Yuan Part of Selected Basket of Currencies

According to the International Monetary Fund – IMF, the Yuan is now part of selected basket of currencies which till now included only the US dollar, the Japanese yen, the euro and the British pound. The Yuan would not generally be a part of the basket till September 2016 and this move would not be having any immediate influence on the financial markets.

This gesture seems to be a significant one and an indication that China has been progressing faster and further on the global financial stage. It has been predicted by Nomura Securities that by 2030, the Yuan would become one of the highest three major international currencies, `a peer to the US dollar as well as the euro, as the most used currencies in the world’.

However, it all depends on whether China tends to continue its financial reforms which have been one of the major reasons of the IMF’s verdict of including the Yuan in this choice basket currency. The IMF has informed that` the decision was an important milestone in the integration of the Chinese economy in the global financial system’. It would bring a more robust international monetary as well as financial system.

China – Important to the Global Financial System

Nomura has informed that though the share of yuan’s trading volumes in the international currency market tends to be small, less than 2% comparative to China’s share of global gross domestic product, its daily trading volume had tripled between 2010 and 2014 from $34bn to $120bn. This indicates that there is a lot more yuan on the markets.

For the last few years, China had been working towards this and it is amazing that their extremely managed currency seems fit to enter this special basket of freely traded currencies. Beijing considers the inclusion of the yuan as an indication of how important China has become to the global financial system.

The world’s second largest economy had to push through numerous changes in recent times inclusive of enabling foreign investors in accessing its stock markets, to make this happen. The main determinant as to whether the yuan gets to the next step will depend on how transparent China would be about the way it tends to run its financial market.

Chinese Official under Pressure/Scrutiny

Considering the slowing economic growth in China, analysts have accepted that there have been some disturbing signs which the government is trying to either roll back on some the key financial changes or that those in charge may not know what they are doing. The point is that earlier this year, the effective devaluation of the year had taken the markets by surprise and the People’s Bank of China was disapproved for mishandling the communication around how the events had unfolded.

Chinese officials are now under more pressure as well as scrutiny in getting their message right. Moreover the world would also be watching to see what type of influence more yuan would have in circulating in the international markets. Should the yuan tend to be a fixture of the global economy, there is a possibility that the rest of the world would become even more exposed to what Beijing does, which will make it more important that the leaders of China push through meaningful financial changes.