There are two Chinas.
There is Hong Kong and there is the Mainland. There is the China that sees itself as preeminent and the China that opponents see as troublesome. There is the China that outsiders think they know. And hidden behind deafening state control, propaganda and an ancient culture, there is the real China.
Last week, you could glimpse these two Chinas in the reaction of its two largest share markets when retiring People’s Bank of China Chairman Zhou Xiaochuan warned of a potential “Minsky Moment”. The overseas-dominated Hang Seng index of Hong Kong plummeted while the Mainland exchanges, where locals overwhelmingly trade, dipped only slightly.
A “Minsky Moment”, named after Hyman Minsky, is the theoretical point where a period of financial stability and calm has injected enough complacency (and Ponzi-like debt) into a banking system that it has become unstable. At that moment, investors re-evaluate asset prices and risks, causing a slump in the value of shares and debt. The global financial crisis in the West is held out as an example of such a moment.
China is so vast, vibrant, and remote that it’s impossible to get a handle on its entirety. Most foreigners investing in China are always worried about whether it’s a river full of fool’s gold. So it’s no surprise that the foreigners’ index took fright at the central banker’s words. It’s a bit of a strange time for getting spooked, however.
China has been growing strongly lately and President Xi Jingping is a reformist leader. His first five-year term offered less progress toward market-led policies than some wanted, but we believe this ideological delay was typical. Modern Chinese leaders spend their first term consolidating their power and stripping back the control networks of their predecessor. Last week’s leadership convention showed that Mr Xi is definitely entrenched at the top of the party and in a better position to push the economy towards lesser – but better-quality – growth.
Mr Zhou is right to draw policymakers’ attention to rising debt levels and complacency. But we don’t think the country is near the moment where it would crumble under its own weight. Part of this resilience is due to the lack of reform – much of China’s debt is lent by one arm of government through state-owned banks to other state organisations and businesses. But there are many side-effects to this heightened liquidity showing that it can’t continue to march on forever. China continues to use debt to boost its economic growth, but the amount of growth each borrowed renminbi delivers has fallen considerably over the past decade.
|Index||1 week ||3 months ||6 months ||1 year |
|FTSE All-Share ||-0.2%||1.9%||7.5%||12.3%|
|FTSE Emerging Index ||0.2%||4.2%||12.3%||13.0%|
Source: FE Analytics, data sterling total return to 20 October
Tax and bend
It is one of the great ironies of America that Republicans are most vocal about the perils of government debt, yet they always blow the Budget whenever they get the chance. The tax-cuts are always too alluring and welfare programmes too entrenched.
The Republican-led Senate agreed a Budget resolution last week that will start a legislative sprint toward delivering a tax reform package for President Donald Trump to sign before Christmas. The method means it won’t need a three-fifths majority in the Senate to avoid a filibuster or greater debate, simply 51% is enough for the tax plan to be enacted. It’s not a done deal, however, the final plan still needs approval by the Senate and the House of Representatives. And it still needs to be finished!
Mr Trump leaked some details of the plan in September, including a corporate tax rate reduction from 35% to 20%, cutting the number of tax brackets, doubling of the tax-free personal allowance while stripping away many other tax credits, and an amnesty for companies’ overseas cash piles. But the actual programme is still being haggled over behind closed doors by the Republican leadership.
If they can come to an arrangement with the fiscally sound right-wing Senators – which is by no means assured – this tax-cut may actually come to pass. It would be breath-taking watching hundreds of men and women who spent the better part of a decade howling about spendthrift policies suddenly about-face and vote to foist about $2tn of debt onto the “shoulders of their children”, in their own language. But there is plenty of wiggle room here. They will argue – spuriously – that the extra revenue gained from stronger economic growth over the next 10 years will more than offset the trillions of dollars that will be foregone in lost taxes.
This will be bad news for US debt levels, and the increased bond issuance could exacerbate rising yields driven by a tightening Federal Reserve. It may even push the central bank to step up its interest rate rises because of the fiscal splurge. Equities should benefit, however. A tax-cut should boost consumer mood, leading them to spend more on products and services. And with more cash on hand after repatriating their foreign stockpiles, companies are likely to use it. Whether that’s by returning it to shareholders or investing it in offices, research and development, new factories or even higher wages, it should flow down into the real economy.
In fairness to the Republicans, they have been coached to talk one game and play another. George H W Bush, the one Republican president of recent times who did practise fiscal prudence – he raised taxes in 1990 to combat a $200bn deficit – was thrown out before his second term. So you could say that Republicans are simply giving the people what they vote for.
UK 10-Year yield @ 1.33%
US 10-Year yield @ 2.38%
Germany 10-Year yield @ 0.46%
Italy 10-Year yield @ 2.05%
Spain 10-Year yield @ 1.66%
Economic data and companies reporting for week commencing 23 October
Monday 23 October
US: Chicago Fed National Activity Index (Sep)
EU: Consumer Confidence (Oct)
Trading update: GKN
Tuesday 24 October
US: PMI Manufacturing/Services/Composite (Oct), Richmond Fed Manufacturing Index (Oct)
EU: FRA: Business Confidence/Manufacturing Confidence (Oct), Own-Company Production Outlook (Oct), PMI Manufacturing/Services/Composite (Oct); GER: PMI manufacturing/Services/Composite (Oct)
Quarterly results: Anglo American, Bunzl
Trading update: IPF
Wednesday 25 October
UK: GDP (Q3)
US: MBA Mortgage Applications (Oct), Durables Ex Transportation (Sep), New Home Sales (Sep)
EU: SPA: PPI (Sep), GER: IFO Business Climate/Expectations/Current Assessment (Oct)
Quarterly results: GlaxoSmithKline, NOVATEK
Quarterly production results: Antofagasta
Interim management statement: Lloyds Banking Group
Thursday 26 October
US: Wholesale Inventories (Sep), Initial Jobless Claims (21 Oct), Continuing Claims (14 Oct), Pending Home Sales (Sep)
EU: M3 Money Supply (Sep), ECB Main Refinancing Rate/Asset Purchase Target; GER: GfK Consumer Confidence (Nov); SPA: Unemployment Rate (Q3); ITA: Consumer Confidence Index (Oct)
Full-year results: Debenhams
Quarterly results: Barclays, KAZ Minerals
Trading update: Cherkizovo Group, RELX
Friday 27 October
US: University of Michigan Sentiment (Oct), Retail Sales (Sep)
EU: FRA: Consumer Confidence (Oct); SPA: Retail Sales (Sep)
Quarterly results: Computacenter Hastings, Laird, Royal Bank of Scotland, Shire Pharmaceuticals
Trading update: Elementis
, Chief Investment Officer
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