China Macro Reporter

<table class="nl_card"><tbody><tr><td class="nl-post"><p>We start with a report by Leland Miller, president of China Beige Book, that China’s economy is recovering.</p><p>I’ll review anything from Leland or the CBB. Deng Xiaoping encouraged us to seek truth from facts and that is what the CBB does by tracking 3,300 Chinese firms for its analyses.</p><p>The problem: the CBB serves mainly central banks and institutional investors – we generally don’t hear much about its findings. That’s why if you have a rare sighting of Leland Miller, pay attention.</p><p>China’s bond market also caught my eye. The IMF has recently published, <em>The Future of China’s Bond Market</em>. And, it’s terrific. Top western and Chinese experts have contributed chapters. It’s about as comprehensive and thorough as you could ask for.</p><p>I came across an interview with former freetrader, Larry Kudlow, director of the National Economic Council. Mr. Kudlow now believes that tariffs can pierce intransigence. Could be, but it’s a pretty blunt weapon that can have unintended consequences.</p><p>So, as a contrast, we end with an essay by Nobel laureate, Michael Spence, about an unintended consequence. Mike explains why we are in ‘a prolonged period of radical uncertainly.’ The major source: the U.S.-China trade war. But, wait there’s more. All together, very sobering.</p></td></tr></tbody></table>

1. 'An unmistakable first-quarter recovery' for China's economy

<table class="nl_card" id="19mar3001"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe src="" allowscriptaccess="always"></iframe></td></tr></tbody></table><p class="caption"></p></td></tr><tr><td class="nl-post"><p><strong>'China’s economy</strong> showed “an unmistakable first-quarter recovery” after a weak end to 2018, though the level of new borrowing casts doubt on the sustainability of the rebound, according to Leland Miller, president of the <a href="" target="_blank">China Beige Book</a>, on <a href="" target="_blank">Bloomberg</a>.'</p><ul><li><strong>'"The recovery extends</strong> across both sectors and geographies, with every major sector and each one of our regions showing better revenue results than Q4,” China Beige Book said in a report based on survey data from of over 3,300 Chinese firms across China.'</li></ul><p><strong>'Yet this rally</strong> didn’t appear out of nowhere, and there are at least three compelling reasons to doubt its staying power: credit, credit, and credit,'' says Leland.</p><ul><li><strong>‘Every time</strong> you see a recovery in China you know that there's going to be credit in the phrase, but, even by those standards, this is pretty extraordinary.’</li><li><strong>‘We're not only</strong> seeing some of the highest borrowing levels we've seen in the last six years, but we've seen the types of firms that are typically disadvantaged get credit.’</li><li><strong>‘Private firms</strong> that are supposedly credit starved, small- and medium-sized enterprises (SMEs) that are supposedly credit starved - they are borrowing more than State-Owned Enterprises (SOEs).’</li><li><strong>‘That's very unusual in China,</strong> but it shows there's clear policy support for these types of firms.’</li><li><strong>‘China</strong> is forcing a recovery by giving everybody a loan to everybody who wants one.’</li></ul><p><strong>'Usually,</strong> when you see an expansion of access to credit, you have easing rates - rates get cheaper and cheaper.’</p><ul><li><strong>‘This time,</strong> we see higher rates across the board.’</li><li><strong>‘An economy</strong> can withstand that for a quarter or so at the beginning of a rally.’</li><li><strong>‘But, not</strong> for two or three quarters in a row.'</li><li><strong>‘To the extent</strong> that the Chinese want to use this to continue to push momentum and it doesn't take off on its own, then you're going to see the PBOC further subsidize rates and probably subsidize them quite dramatically.’</li></ul><p><strong>‘Shadow banking</strong> is another really big headliner here.’</p><ul><li><strong>‘Our data</strong> showed that shadow finance was being cracked down 2017 and earlier.’</li><li><strong>‘Now, we saw</strong> the highest level of shadow bank usage since early 2016.’</li><li><strong>‘This is the second</strong> consecutive quarter that we've seen the shadow bank usage increase.’</li><li><strong>‘China swore</strong> this was something they wouldn’t do, and now they have.’</li><li><strong>‘Just another indication</strong> that the priority has absolutely shifted from reform and restructuring and deleveraging to growth at all costs.’</li><li><strong>‘The Beijing leadership</strong> said not too long ago that the path of reform and restructuring and deleveraging was irreversible - well, they’ve reversed it.’</li></ul></td></tr></tbody></table>

2. China’s Bond Market Comes of Age—Sort of

<table class="nl_card" id="19mar3002"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="chinadebate"></td></tr></tbody></table><p class="excerpt">Chinese bonds are finally joining a global bond benchmark, meaning soon most bond managers will own them. The Chinese government bond market, however, isn’t quite what it appears.</p></td></tr><tr><td class="nl-post"><p><strong>China's</strong> has an almost $13 trillion onshore bond market - the third largest after the U.S. and Japan.</p><ul><li><strong>But,</strong> foreigners only have 2-8% invested.</li><li><strong>'That could change</strong> when Chinese sovereign bonds and debt go onto the Bloomberg Barclays Global Aggregate Index - a benchmark for portfolio managers worldwide - on April 1.</li><li><strong>This is the</strong> 'seal of approval for its efforts to modernize its bond market and make it easier for foreign investors to participate,' according to <a href="" target="_blank" rel="nofollow noopener">Bloomberg</a>.</li><li><strong>'Citigroup says</strong> foreigners will buy $100 billion to $130 billion of mainland bonds this year, while Standard Chartered Plc forecasts $286 billion by 2021.'</li></ul><p><strong>Curb your enthusiasm</strong>. 'The headline numbers on foreign ownership of central-government debt look impressive,' <a href="" target="_blank">writes</a> Nathaniel Taplin in the Wall Street Journal.</p><ul><li><strong>'But China’s</strong> total sovereign-bond market is far larger than it appears.'</li><li><strong>'The real heavyweight</strong> in the Chinese bond market is local-government debt — roughly 25% larger than central-government debt at 19 trillion yuan ($2.8 trillion) and growing far faster.'</li><li><strong>'Local governments’ net debt</strong> financing needs were more than twice the level of the central government’s last year.'</li><li><strong>'Local-government bonds</strong>, which won’t be included in the Bloomberg index, have always traded within a tight range of central-government bonds, because investors think Beijing would never allow a province or major city to go bankrupt.'</li></ul><p><strong>'Investors in Chinese treasuries</strong> should therefore be aware that they are essentially along for the ride with China’s local-government bond market. That isn’t such a comfortable place to be'.</p><ul><li><strong>'Local governments</strong> have in the past issued piles of bonds to fund bailouts of dubious local state-owned corporate debt.'</li></ul><p><strong>'Given China’s economic slowdown</strong>, that could easily happen again —and soon.'</p><ul><li><strong>'Chinese banks</strong> are still sitting on plenty of such dodgy state-owned company debt and are undercapitalized, a major reason why growth in bank lending has been so slow to recover.'</li><li><strong>'One way to fix the problem</strong> is by magically converting high-risk state-owned corporate debt into low-risk official government debt.'</li><li><strong>'Hey, presto,</strong> better bank balance sheets: But all of this would effectively be underwritten by Beijing, meaning higher sovereign-debt yields.'</li><li><strong>'So, foreigners</strong> could be exposed to the huge local-government debt market, whether or not they want to be.'</li></ul></td></tr></tbody></table>

3. 'The Future of China's Bond Market'

<table class="nl_card" id="19mar3003"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src=""></iframe></td></tr></tbody></table><p class="caption"></p></td></tr><tr><td class="nl-post"><p><strong>For an in-depth understanding</strong> of China'a bond market, read the IMF's recently published <em>The Future of China's Bond Market</em> (below).</p><p><strong>Top western and Chinese</strong> analysts cover different aspects of the markets. Comprehensive.</p><p><strong>The Center for Strategic and International Studies</strong> (CSIS) hosted a discussion of the book. Watch the <a href="" target="_blank">1hr 32m CSIS overview.</a></p><table class="multi-block"><tbody><tr><td class="pdf-container"><iframe src=";embedded=true" style="width:100%; height:500px;border:none;"></iframe></td></tr></tbody></table><p class="caption"><a href="" target="_blank">open in a new window</a></p></td></tr></tbody></table>

4. 'The president has taught me that tariffs have an important use in trade negotiations': Larry Kudlow

<table class="nl_card" id="19mar3004"><tbody><tr><td><table class="multi-block"><tbody><tr><td class="embed-responsive embed-responsive-16by9"><iframe width="720" height="405" src=""></iframe></td></tr></tbody></table><p class="caption"></p></td></tr><tr><td class="nl-post"><p><strong>‘Well, I will tell you</strong>, as a confirmed free trader, that the president has taught me - and a lot of other people - that tariffs have an important use in trade negotiations. ,' says Larry Kudlow, the National Economic Council director, in a <a href="" target="_blank">1m 40s CNBC interview</a>.</p><ul><li><strong>‘You can get</strong> through the intransigence.’</li><li><strong>‘If your goal</strong> is free fair and reciprocal trade; if you believe, as the president does, that in a pure world we should have zero tariffs and non-tariff barriers and subsidies, you’ve got to get there.’</li></ul><p><strong>‘A lot of the</strong> world's trading system is broken down.’</p><ul><li><strong>‘The WTO</strong> has not done its job.’</li><li><strong>‘China</strong> has been in non-compliance in many different areas - others believe that in Europe and Japan.’</li></ul><p><strong>‘So, tariffs play</strong> a role, and I've learned that.’</p><ul><li><strong>‘I've watched,</strong> particularly in the Chinese negotiations - that's probably the best example - the President get tough on China with tariffs.’</li><li><strong>'We hurt China</strong> economically - they're already on the downslope.’</li><li><strong>‘Here we are,</strong> deep into negotiations, that perhaps will turn out very well.’</li></ul><p><strong>What changed?</strong> ‘I am now involved in it hands on, in the real world. And, I'm not the free trade purest I once was.’</p><ul><li><strong>‘The president’s</strong> a pretty good negotiator - that's what I've learned.’</li></ul></td></tr></tbody></table>

5. 'A prolonged period of radical uncertainty' - 'a major source is the Sino-American trade war': Michael Spence

<tr><td class="nl-post"><table class="multi-block"><tbody><tr><td class="bg-holder"><img src="" alt="chinadebate"></td></tr></tbody></table><p class="excerpt">With new sources of uncertainty proliferating by the day, the world should brace for a broad economic slowdown or, at minimum, a lengthy period of slower growth.</p></td></tr><tr><td class="nl-post"><p><strong>‘The global economy</strong> is weakening, in no small measure because of a deep, widespread sense of uncertainty,' <a href="" target="_blank">writes</a> Nobel Laureate Michael Spence on the Council on Foreign Relations website.</p><p><strong>'And a major source</strong> of that uncertainty is the ongoing Sino-American “trade war,”’</p><ul><li><strong>‘The conflict</strong> has cast doubt on the future of global economic connectivity, which has led to lower investment and consumption in China and the United States, and among their respective trading partners.’</li></ul><p><strong>‘The global economy</strong> is undergoing a major transition, owing to the rise of emerging economies, especially in Asia, and the digital transformation of business models and global supply chains.’</p><p><strong>‘And while it is obvious</strong> that global-governance structures and rules need an overhaul, existing international institutions lack the power to push through such changes on their own, and the governments of the world’s leading economic powers do not seem up to the task.’</p><p><strong>'Taken together</strong>, these diverse economic and political trends may or may not lead to another global crisis or sudden stop.’</p><ul><li><strong>'Either way</strong>, they will sustain a prolonged period of radical uncertainty.’</li></ul><p><strong>‘Under such conditions</strong>, caution may seem like the best policy for companies, investors, consumers, and even governments.’</p><ul><li><strong>‘But caution carries its own costs</strong>: companies and countries that fail to invest enough in, for example, new digital technologies may well fall by the wayside.’</li><li><strong>‘And as long as</strong> the rules and institutions governing the global economy remain in doubt, continued underperformance is to be expected.’</li></ul></td></tr></tbody></table>