China stocks too far gone to save for Magnus seeing deeper rout

Chinese stocks are nowhere near bottoming out, said George Magnus, a senior independent economic adviser to UBS Group AG, who correctly predicted in July the rout would deepen. 

PHOTO: EPA

SEP 4, 20154:46 PM

[HONG KONG] Chinese stocks are nowhere near bottoming out, said George Magnus, a senior independent economic adviser to UBS Group AG, who correctly predicted in July the rout would deepen.

Policy makers should stop intervening in the market and allow the Shanghai Composite Index fall to between 2,500 and 2,800, in line with its long-run average, Mr Magnus said. For equities to rally from there, investors need to see improving company profits and evidence that the government is committed to reform, he said. The Shanghai gauge slipped to 3,160.17 on Wednesday, before markets shut for a two-day holiday.

"When the equity market was falling in August, some people said this is a buying opportunity, that this is a multi-year bull market," said Mr Magnus.

"I don't think we will see that unless there is a very significant change in the politics of China. We need to see significant change in the way in which the economy is working and in the way in which the reform is working and both of these things are on the rack at the moment."

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The Shanghai Composite has tumbled 39 per cent since June 12, when the gauge reached its highest in more than seven years as mainland investors borrowed record amounts of funds to buy equities. The gains were never justified given the weak growth backdrop, according to Magnus. Analysts expect China's economy to expand 6.9 per cent this year, the slowest pace in 25 years.

From the start of 2010, the Shanghai Composite traded roughly between 2,000 and 3,000 until the end of last year. Now, even after a rout that erased US$5 trillion in value, valuations on mainland bourses are among the highest in the world and dual- listed shares cost more than twice as much on the mainland as in Hong Kong.

In July, Mr Magnus said Chinese equities will extend their retreat by as much as 35 per cent to the 2,500-2,800 trading range. The measure has since fallen 17 per cent.

The Hang Seng China Enterprises Index dropped 1.4 per cent on Friday to close at its lowest level since July 2013.

In an effort to stop to the plunge, China's regulators have banned major shareholders from selling stakes, suspended new listings and asked brokerages to help boost the market. In the latest salvo, the China Financial Futures Exchange on Wednesday moved to limit trading of stock-index futures by lowering the bar for "abnormal trading" and increasing margin requirements and settlement fees. A Caijing magazine reporter was detained for spreading false information, Xinhua News Agency reported last month.

"You've really got to have confidence that they're not going to arrest journalists who spread rumors about the market, to have confidence they are going to allow market forces to some degree influence resource allocation," before stocks can rally, said Mr Magnus. "You've got to have some confidence about openness and transparency and the rule of law."

China's economic policy makers have been just as busy as stock-market regulators, cutting interest rates five times since November and easing bank lending restrictions to bolster growth. An official manufacturing gauge fell to the lowest reading in three years in August, while profits at the nation's industrial companies declined 2.9 per cent in July.

"What we know now is that the rise in the market took place without any reference to what was going on in the economy or to the profits," said Mr Magnus. "I don't see any major risk of reigniting the boom in the equity market."

BLOOMBERG

 
 

US: Wall St opens lower after August jobs data

US stocks rose, following their biggest gains since 2011, amid a relief rally throughout global markets and as data showed the economy grew more than previously estimated. 

PHOTO: REUTERS

SEP 4, 20159:45 PM

[NEW YORK] US stocks opened lower on Friday after the August jobs report showed moderate job growth and the lowest unemployment rate in more than seven years, increasing chances the Fed could raise interest rates sooner rather than later.

The Dow Jones industrial average fell 205.71 points, or 1.26 per cent, to 16,169.05, the S&P 500 lost 23.48 points, or 1.2 per cent, to 1,927.65 and the Nasdaq composite dropped 55.43 points, or 1.17 per cent, to 4,678.07.

REUTERS

Yen strengthens ahead of US jobs report

The yen strengthened on Friday as nervous investors pushed into safer assets ahead of a closely watched US jobs report later in the day and amid ongoing concerns about China's slowing growth. 

PHOTO: BLOOMBERG

SEP 4, 20153:50 PM

[TOKYO] The yen strengthened on Friday as nervous investors pushed into safer assets ahead of a closely watched US jobs report later in the day and amid ongoing concerns about China's slowing growth.

In Tokyo, the dollar slid to 119.34 yen (S$1.42) from 120.01 in New York while the euro weakened to 132.91 yen from 133.53 yen.

The euro edged up to US$1.1136 from US$1.1127, but was still under pressure following losses Thursday that came after the European Central Bank's cut its growth and inflation estimates and said it could expand its stimulus programme to battle deflation.

Friday's US payrolls report could be used by the Federal Reserve's policy committee to determine whether or not to start lifting interest rates - for the first time since 2006 - when it meets in the middle of this month.

However, the bank's decision has been muddied by the Chinese economic crisis, which has rattled markets from Asia to New York for months owing to fears of another global downturn.

"It's all pretty much about payrolls now until Asia opens on Monday with China coming back then after their special four day-long weekend," National Australia Bank said in a commentary, referring to a World War II commemoration in China.

Any rise in Fed borrowing rates would lead to a shift of capital back to the United States as dealers look for better returns on their investments, particularly hurting emerging economy currencies.

"There's nervousness in the market about growth in Asia and the implications of the Fed changing policy, should payrolls be seen as clearing the way for a hike," Sean Callow, a strategist at Westpac Banking in Sydney, told Bloomberg News.

"The fact that dollar-yen in particular is looking soggy is obviously a bad sign." Investors usually flee to safer units such as the yen in times of uncertainty and turmoil.

The resources-reliant Australian dollar is struggling at six-year lows owing to the China crisis, easing to 69.71 US cents Friday from 70.20 US cents on Thursday.

The euro is also being sold after ECB head Mario Draghi indicated the bank could expand its quantitative easing asset purchase programme if needed.

He said QE "provides sufficient flexibility in terms of adjusting the size, composition and duration", if the region's economy remains weak.

It was "intended to run until the end of September 2016, or beyond, if necessary", he added.

AFP

    
 

Experts propose to G20 two-stage approach for TLAC bank buffers: source

SEP 4, 20154:06 PM

[ANKARA] A group of financial stability experts has proposed to G20 finance ministers and central bankers a two-stage approach for introducing Total Loss Absorption Capacity (TLAC) buffers for big banks, a G20 source told Reuters on Friday.

The proposal to the Group of 20 leading economies would see the introduction of a buffer of 16 per cent of a bank's risk-weighted assets from 2019 and 20 per cent from 2022, the source said.

The United States had pushed for 20 per cent, where as some in Europe had been arguing for 16 per cent on the grounds that their banks were still recapitalising after the financial crisis.

The buffer is a new layer of debt the world's biggest banks like Goldman Sachs and Deutsche Bank AG must issue to write down in a crisis and bolster their capital situation.

REUTERS

Australia court fines Visa arm US$12.6m, cites anti-competitive conduct

Australia's federal court has ordered a subsidiary of credit and debit card issuer Visa Inc to pay a fine of A$18 million (US$12.55 million) for blocking a rival currency conversion service on its payment terminals. 

PHOTO: BLOOMBERG

SEP 4, 20155:03 PM

[SYDNEY] Australia's federal court has ordered a subsidiary of credit and debit card issuer Visa Inc to pay a fine of A$18 million (US$12.55 million) for blocking a rival currency conversion service on its payment terminals.

The proceedings were brought by the Australian Competition and Consumer Commission (ACCC). The agency said in a statement that the domestic arm of Visa Worldwide infringed competition blocking a rival currency conversion service on its payment network between May and October 2010.

The court also ordered that Visa pay the ACCC A$2 million in legal costs.

Visa did not immediately respond to an email seeking comment outside normal working hours.

REUTERS

Investors buckle up for expected drop in China's forex reserves 

Global investors are bracing for data next week that could show a big drop in China's foreign exchange reserves as the central bank steps up its intervention to stabilise the yuan currency after its shock devaluation last month. 

PHOTO: AFP

SEP 4, 20154:39 PM

[BEIJING] Global investors are bracing for data next week that could show a big drop in China's foreign exchange reserves as the central bank steps up its intervention to stabilise the yuan currency after its shock devaluation last month.

China has been so surprised by the global market reaction to its devaluation that it is likely to keep the yuan on a tight leash in the near-term to head off fears of a global currency war, policy insiders told Reuters.

But many traders believe there is political pressure to allow a deeper depreciation in coming months as the world's second-largest economy slows.

China's foreign exchange reserves, the world's largest, have been falling from a record US$3.99 trillion in June 2014 due to a wave of capital outflows fuelled by jitters about its economic slowdown and an expected move by the US Federal Reserve to raise interest rates.

Foreign exchange reserves fell by US$42.5 billion in July to US$3.65 trillion, the sharpest monthly drop since March.

The decline appeared to have quickened after China's near 2 per cent devaluation of the yuan on Aug 11 stoked fresh concerns about its economy. The move sparked heavy selling of the yuan, and the central bank has intervened repeatedly since then via state banks to sell dollars to shore up the currency.

Analysts at Barclays Capital estimate the People's Bank of China (PBOC) stepped up its foreign exchange intervention to US$122 billion in August from about US$50 billion in July.

"If the current pace of FX intervention continues, we estimate that the PBOC could lose up to around 14 per cent of its FX reserves (ex valuation adjustments) between June and December," Barclays said in a research note.

"We estimate the PBOC would have to reduce the reserve requirement ratio by around 40 basis points a month just to offset the impact of its FX operations on domestic liquidity."

Moreover, much of the money released into the economy by cutting banks' reserve requirements may merely replace funds being moved offshore, rather than finding its way into new loans to companies which would support the real economy.

"We do not believe the present policy is sustainable given the associated costs in terms of FX reserves depletion and liquidity imbalances," Barclays said.

"As such, we maintain our view that the yuan will need to depreciate further to stabilise capital outflows; we forecast a further 7 per cent fall by year-end."

A Reuters poll on Friday showed strategists expect the yuan to weaken another 2 per cent in six months, though some were more pessimistic and predicted it would dive to 6.80 in 12 months from around 6.35 on Friday.

Nomura said on Thursday that intervention in August could be around US$170 billion, an unprecedented amount for just one month.

Analysts at Dutch bank Rabobank estimated that China sold up to US$200 billion of reserves in the last few weeks of August alone.

Central banks will sell US$1.5 trillion of forex reserves by the end of next year as they try to counter capital outflows stemming from China's slowdown, low oil prices and a rise in US interest rates, Deutsche Bank said on Tuesday.

That would mark a major shift in global capital flows, ending two decades of reserve accumulation by emerging markets.

The PBOC in July shifted to reporting its foreign exchange reserves monthly from a quarterly basis.

REUTERS

      

Greece's Tsipras hints at possible vote deal with socialists  

Greece's former leader Alexis Tsipras has opened the door to a coalition with rivals on the left should his Syriza party fail to win a majority in elections in two weeks' time. 

PHOTO: AFP

SEP 4, 20158:07 PM

[ATHENS] Greece's former leader Alexis Tsipras has opened the door to a coalition with rivals on the left should his Syriza party fail to win a majority in elections in two weeks' time.

Mr Tsipras, who quit as prime minister last month triggering a snap vote on September 20, had previously ruled out any cooperation with the Pasok socialists or the conservatives of New Democracy, who have alternated in power for much of the last four decades.

But in an interview late Thursday with the TV channel Kontra, he hinted Syriza could work with Pasok if its new leader Fofi Gennimata "distances herself from the right". Pasok and New Democracy have previously governed together in coalition.

"Fofi Gennimata has adopted the position of the right and not that of European social democracy. If that does not change - and I'd be happy if it did change - there cannot be any prospect of cooperation," Mr Tsipras said.

Radical-left Syriza swept to power in January, but Tsipras quit after a major rebellion over Greece's huge new financial bailout left him forced to rely on the opposition to ensure the rescue package was adopted by lawmakers.

Opinion polls suggest Syriza has little chance of winning an absolute majority, running neck-and-neck with New Democracy.

A poll Thursday by the TV chain Mega showed Syriza only 0.5 percent ahead of the conservatives. Another poll had on Wednesday given New Democracy a wafer-thin lead for the first time, with 25.3 per cent of respondents saying they would vote for the party, ahead of 25 percent for Syriza.

Mr Tsipras had previously only supported an electoral deal with the nationalist Independent Greeks, Syriza's junior coalition partners for the last eight months.

But the nationalists appear unlikely to garner the three percent of the vote needed to stay in parliament, and analysts say Mr Tsipras will have to seek compromises if he wants to stay in power.

Pasok has plunged in popularity in recent years after it signed Greece up for two previous international bailouts that forced the government to introduce sweeping austerity measures.

Opinion polls suggest Pasok currently has less than five per cent of the vote but Gennimata hopes to boost the party's chances after announcing it will team up with the small leftist party Dimar.

AFP

      

HKMA sells HK$17.7b to keep Hong Kong dollar in trading band

SEP 4, 20158:01 PM

[HONG KONG] The Hong Kong Monetary Authority (HKMA) stepped into the currency market and sold HK$17.7 billion (US$2.3 billion) in Hong Kong dollars on Friday as the currency hit the strong end of its trading range.

According to the HKMA, the latest intervention will lift the aggregate balance - the sum of balances on clearing accounts maintained by banks with the authority - to HK$323.843 billion on Sept. 9, when the injected funds will be settled.

The Hong Kong dollar is pegged at 7.8 to the US dollar, but can trade between 7.75 and 7.85. Under the currency peg regime, the HKMA is obliged to intervene when the Hong Kong dollar hits 7.75 or 7.85 to keep the band intact.

REUTERS

China seeks to calm global markets forecasting yuan stability

China sought to ease concerns that its slowing economy could drag down global growth and signaled it won't get dragged into tit-for-tat currency valuations. 

PHOTO: REUTERS

SEP 4, 20156:02 PM

[ANKARA] China sought to ease concerns that its slowing economy could drag down global growth and signaled it won't get dragged into tit-for-tat currency valuations.

Yi Gang, deputy governor of the Chinese central bank, said Friday that his country's economy is solid despite the stock market selloff and the yuan will be stable. He spoke in an interview in Ankara where finance ministers and central bankers from the Group of 20 nations.

"The Chinese economy's fundamentals are fine," Mr Yi said. "No one can predict exactly on the market volatility, but I'm confident that the renminbi exchange rate will be more or less stable around the equilibrium level."

The deepening slowdown and devaluation in China are chilling investors' sentiment, roiling currencies and leaving the MSCI emerging market index down more than 16 per cent so far this year. A draft communique prepared before the meeting cited "recent volatility in financial markets" and the need to monitor potential spillovers.

Policymakers will discuss the problems in China without directly referencing them in the final statement, according to a member of the Russian delegation who spoke on condition of anonymity.

Once the darlings of the world economy as they helped lift it from its 2009 recession, emerging markets from China to Brazil have now slid amid declining trade, mounting debt, falling commodity prices and a rising US dollar. The sell-off in equity markets is already prompting parallels to be drawn with the Asian financial crisis of the 1990s.

"The Chinese slowdown is going to be a bumpy landing but something short of a rough landing," Nouriel Roubini, chairman of Roubini Global Economics, said in an interview in Cernobbio, Italy.

"Markets are now becoming too pessimistic about Chinese economic growth and the ability of their policy authorities to manage that growth slowdown and also manage the movements of the currency and stock market."

China's slowdown comes as the Federal Reserve is considering raising interest rates in the US for the first time in nine years The odds of an increase in September have fallen to 28 per cent from 40 per cent at the end of July, according to futures data compiled by Bloomberg. October's probability is 40 per cent and December's is 57 per cent.

"In line with the improving economic outlook, monetary policy tightening is more likely in some advanced economies, which may remain one of the main sources of uncertainty in financial markets," the draft communique said.

For evidence of how economies can be roiled by the global cross-currents, look no further than the G-20's host.

Turkey saw its currency plunge more than 20 per cent this year while bonds and stocks also tumbled. Foreign investors pulled out more than US$5.5 billion from Turkish government debt and listed-company stocks from the beginning of the year through Aug 21, according to a Bloomberg calculation based on official data.

Capital flows into such emerging-market economies fell in August by the most since 2013, according to the Institute of International Finance. Morgan Stanley this week cut its growth forecast for emerging markets in 2015 to 4.1 per cent from 4.8 per cent. Russia's economy will contract 3.4 per cent this year, according to the International Monetary Fund.

"The Chinese slowdown has a significant impact on the Russian economy," Russian billionaire Alexey Mordashov, executive chairman of steelmaker Severstal OAO, said in a television interview in Ankara. "We all know that the commodities boom of recent decades was largely driven by Chinese demand."

Complicating the outlook is China's surprise August decision to revalue the yuan, which caused the currency to drop the most in 21 years, triggering exchange-rate declines elsewhere in the emerging world on concern a weaker yuan will hurt exporters.

All the same, the deputy central bank governor, Mr Yi, forecast the economy would grow by 7 per cent this year. That would still make China the second-fastest economy in the G-20, according to International Monetary Fund forecasts.

"You see a lot of things happen in China making a lot of people outside of China concerned," former Sinopec Chairman Fu Chengyu said in a television interview. "But actually if you look into the details, the fundamentals of the economy, it doesn't change much."

BLOOMBERG