LUNCHTIME UPDATE - Monday 27 March 2023, 13:00 Hong Kong
• China’s opening up is an “indispensable major national policy” • Industrial profits in China slump 22.9% in January & February • Deutsche Bank jitters send Hong Kong markets lower
China’s Opening Up is an “Indispensable Major National Policy”
China’s Commerce Minister Wang Wentao on Sunday told delegates at the China Development Forum in Beijing that China wants foreign companies, including those from the US, to continue to invest in the country. He told the conference that "foreign companies are not guests, but family", adding that China would step up efforts to strengthen intellectual property rights and serve foreign investors. Meanwhile, Chinese Vice Premier Ding Xuexiang said Premier Li will meet with key foreign guests attending the China Development Forum. Mr. Ding said opening up to the outside world is an indispensable major national policy and China will actively expand imports of high-quality goods and services, while he added China will further reduce tariffs, continue to expand market access and attract foreign investment. In his first public speech since becoming Vice Premier, Mr. Ding said, “China’s new development pattern is not based on isolated domestic circulation, but more open, dual circulation connecting domestic and external markets.” He added that the policy of opening up, launched four decades ago, was “a mark of modern China.” He also read a letter from President Xi Jinping who called for “consensus and cooperation” to facilitate the global economic recovery and repeated Beijing’s promises to open up its economy.
China Industrial Profits Plunge in First Two Months of 2022
China’s industrial profit slumped 22.9% in the January to February period compared to a year ago, data from the National Bureau of Statistics showed on Monday, as factory activity struggled to recover from the slump caused by pandemic disruptions. China’s industrial profit of 887.2 billion yuan (US$129bn) for the latest period marked the steepest decline since April 2020. The decline followed a 4.0% fall in 2022, as profits at state-owned industrial firms plunged 17.5% after rising 3% last year, while profits at the private sector dropped further by 19.9% versus a 7.2% decline in the previous period. Among the 41 industries surveyed, 28 saw profit falls, with computer and other electronic equipment being the worst hit, tumbling 77.1%.
China Economic Rebound “Weaker Than Expected”
Purchasing Managers’ Index data from China on Friday will give a sense of how much China’s reopening has boosted the domestic economy and the impact of challenges such as very weak external demand. Moody’s Analytics forecasts China’s manufacturing PMI will likely slip to 51.8 in March from February’s reading of 52.6. Analysts wrote Monday, “the economy has been steadily recovering since China dropped the zero-COVID policy in December and upstream domestic demand for goods grew in February. However, export orders are soft, and the global economic outlook is weak. With global interest rates still climbing, China’s industrial recovery is facing speed bumps.”
On Monday, one of world’s largest shipping groups, Maersk, said China’s consumers are still “stunned” by Covid disruptions, and the economic rebound is weaker than expected. Vincent Clerc, the new chief executive of the world’s second-largest container shipping group, said, “when we started the year, there was this hope that as China reopens after Covid we would see a really strong rebound. I think we’ve not seen it yet. The Chinese consumer is a bit more stunned by what’s happened and is not in a splurging mood right now.” Mr. Clerc, speaking at the annual China Development Forum investor conference, said some of Maersk’s customers were drawing parallels with the outbreak of Sars, in 2003, when consumers in the hardest-hit areas took time to recover their confidence. “It’s not like you get a lot of optimism around when you follow the news and so on, so there may be a bit of a delayed effect as people get back into their spending routines,” he said. However, trading volumes associated with the Chinese economy remained resilient with little sign of negative impact from US-led efforts to “decouple” from China, he said.
Speaking at the China Development Forum in Beijing over the weekend, the International Monetary Fund managing director, Kristalina Georgieva, pointed to China's rebound from Covid-19 as a bright spot for the world economy in 2023. The IMF forecasts China's economy to grow 5.2% this year, driven by a rebound in private consumption as the country reopens. "The robust rebound means China is set to account for around one third of global growth in 2023, giving a welcome lift to the world economy," she said. "A 1.0 percentage point increase in GDP growth in China leads to a 0.3 percentage point increase in growth in other Asian economies, on average, a welcome boost."
However, a senior Communist Party official said on Saturday that the foundation of China’s economic recovery is not solid enough and warned of possible spillover effects from global economic problems. Han Wenxiu, deputy head of the party’s office for financial and economic affairs, said some countries have to play a balancing act as they try to stabilise their economies, prices and financial markets, and the global economy was at risk of stagflation. Mr. Han went on to say that China is confident of reaching its annual economic growth target of around 5%. He said the growth target had taken into account the need to expand employment and improve people’s livelihoods, as well as the potential growth capacity and various difficulties.
First Citizens Bank to buy Silicon Valley Bank Deposits and Loans
US regulators announced Monday that First Citizens Bank will buy a large chunk of Silicon Valley Bank, the lender that specialises in funding tech start-ups and their investors, that collapsed earlier this month. The regulator transferred all SVB deposits and assets into a new “bridge bank” earlier this month in an effort to protect depositors of the failed lender. The deal includes the purchase of approximately US$72 billion of SVB assets at a discount of $16.5 billion, while around US$90 billion in securities and other assets will remain “in receivership for disposition by the Federal Deposit Insurance Corporation (FDIC).” The FDIC said in a statement, “in addition, the FDIC received equity appreciation rights in First Citizens BancShares common stock with a potential value of up to $500 million.” SVB’s 17 former branches will open as First Citizens outlets from Monday. First Citizens, based in Raleigh, North Carolina, describes itself as the US’s largest family-controlled bank and has been one of the biggest buyers of troubled lenders in recent years. The FDIC says the estimated cost of SVB’s failure is US$20 billion.
China Establishes Diplomatic Ties with Honduras
China established diplomatic ties with Honduras on Sunday as the Central American country severed links with Taiwan, with Beijing hailing the move as an ‘important decision’ that recognises the one-China principle. It ends more than eight decades of diplomatic relations between Taiwan and Honduras as the Central American country said it now recognizes the island as part of China. Taiwan said the Honduran decision was regrettable and hurtful, and linked it to the promise of financial support from China. The move means Taiwan now has full official diplomatic relations with just 13 countries.
Foreign Minister Qin Gang and his Honduran counterpart Eduardo Reina signed a joint communique following talks in Beijing to formally set up diplomatic links between the two sides. Xinhua News Agency reported that the communique said both governments have agreed to develop friendly relations on the basis of mutual respect for sovereignty and territorial integrity. The document also said Honduras “shall sever ‘diplomatic relations’ with Taiwan as of this day and undertake that it shall no longer develop any official relations or official exchanges with Taiwan.”
Week Ahead
On Wednesday, the Bank of Thailand will likely raise its policy rate another 25 bps to 1.75%, according to Moody’s Analytics. The central bank has been gradually lifting rates to tame price increases. Headline inflation moderated to 3.8% year on year in February but is still outside the central bank’s target range of 1% to 3%. Moody’s Analytics said, “another rate hike is expected in May. This should be enough to get annual inflation to 2.9% in the second quarter. By contrast, Thailand’s neighbours have stopped raising rates.”
In Japan, inflation data on Tuesday will be the highlight of the economic week. The report is expected to show that core inflation increased from 3.1% in January to 3.5% last month, topping the Bank of Japan’s 2% target for the tenth straight month. Outgoing BoJ Governor Haruhiko Kuroda has overseen a decade of ultra-loose monetary policy, including negative interest rates. Expectations are high that incoming BoJ Governor Kazuo Ueda will start the unwinding of yield curve controls and negative interest rates.
In a quiet week for US economic data, the highlight will be Friday’s core PCE price index, the Fed's favoured measure of inflation. It accelerated by 4.7% in January, adding to concerns over the prospect of a more hawkish Fed. Consumer confidence data for March is due out on Tuesday and investors will assess the impact of stresses in the financial system on consumers. Last week, Fed Chairman, Jerome Powell, said banking stress could trigger a credit crunch with significant implications for a slowing US economy. Other reports include data on pending home sales, revised GDP and initial jobless claims. Several Fed officials are also due to speak during the week, including Fed Governor Philip Jefferson, Boston Fed President Susan Collins, Richmond Fed President Tom Barkin, and governors Christopher Waller and Lisa Cook.
In the Eurozone, closely watched inflation data on Friday, is expected to show headline inflation slowed from 8.5% in February to 7.2%, largely due to a slide in energy prices, but the Core CPI is forecast to show a rise from 5.6% to 5.7% year-on-year in March. The European Central Bank raised interest rates by 50 bps earlier this month to 3%, but the banking crisis has prompted fears that lending will slow, acting as a drag on the economy. Bundesbank chief Joachim Nagel is due to speak on Monday and ECB President Christine Lagarde is to make a speech in Frankfurt on Tuesday. Investors will be on the lookout for any indications that policymakers are viewing the inflation threat as being lessened by the ongoing turmoil in the banking sector.
Asian Markets
Asia-Pacific markets were mixed on Monday as investors remain on edge over a banking crisis that has spread from the US to Europe. In the space of two weeks, three US banks have collapsed, with several other regional banks teetering on the brink, and Credit Suisse was forced into a bailout by its larger rival UBS. Deutsche Bank was the latest bank to be hit by concerns on Friday as the German lender’s credit default swaps jumped and its shares sank 8.5% in Frankfurt, adding to lingering fears of contagion from the turmoil seen in the banking sector. On Monday morning, the S&P/ASX 200 in Australia rose 0.2%. Japan’s Nikkei 225 gained 0.5%. South Korea’s Kospi fell 0.2%.
Hong Kong shares were the worst performers in the region. The Hang Seng index dipped 101 points, or 0.5% to 19,815. The Hang Seng Tech index fell 1.7%. In mainland China, the Shanghai Composite fell 1.1% to 3,231.
Shares of Chinese shopping platform Meituan fell over 4% in Hong Kong on Monday, despite the company posting better results for 2022, last Friday. Meituan posted a 21.4% year-on-year increase in revenue for the fourth quarter to 60.12 billion yuan (US$8.7bn) while full year revenue came in 22.8% higher at 219.95 billion yuan. Losses dropped 79.7% in the fourth quarter to just over 1 billion yuan, while full year losses were reduced by 71.6% to 6.69 billion yuan.
Shares in Sinopec dropped as much as 7.7% on Monday in Hong Kong, before ending the morning session 3.2% lower after the effects of China’s zero-Covid curbs knocked the group’s full-year profits. China Petroleum & Chemical Corporation, on Sunday posted profits of Rmb66.3bn (US$9.6bn) for 2022, down from Rmb71.2bn in 2021 and below expectations. There was softer demand for fuel because China’s roads and cities were intermittently locked down and international travel severely restricted for much of last year. Sinopec’s chemicals business suffered from falling prices for its products.
Peter Lewis’ Money Talk Podcast
On Tuesday’s “Peter Lewis’ Money Talk” podcast (available on Substack, iTunes, Google Podcasts and Spotify), I’ll be joined by Asian Fund Management Industry Consultant, Stewart Aldcroft, James Wong, Chief Executive Officer at Cathaysia Securities, and our US Economics Correspondent, Writer & Broadcaster, Barry Wood.