Chinese economic strategy “as clear as mud” - Richmond

It was a busy period for economic announcements for the Central Committee at the tail end of this year. Their Third Plenum set of reforms consisting of 70-points is generally enough to keep the most die-hard economist reading for a while.

Then there was the Central Economic Work Conference two months later, which put forward 5 core tasks, in which China’s leaders insist needed to be confronted if the country is to continue being the world’s second largest economy and maintain the kind of expansion that investors and corporations at large expect.

Michael Richmond, Senior Vice President at Sinolink Japan, says that when you look at the suggested measures from a broader point of view there are many contradictory and incoherent positions even to the untrained eye.

“On the one hand, the Work Conference’s core tasks are pushing the idea that China needs to maintain the core growth it has enjoyed for the past decade and a half. But that philosophy really doesn’t tally with the Third Plenum initiatives which promote reform, pro-consumption and a move into more advanced markets like the technology and services sectors, and to be honest the entire strategy is about as clear as mud even to the layman” Richmond said in a presentation to the company’s investors.

“If they want to restructure the balance of the economy then they seem to be at a very important crossroads at the moment. You can’t maintain traditional growth and transform the economy at the same time,” he added.

Indeed, Chinese policymakers are going to find it nearly impossible to accomplish all the tasks presented by their economic bodies, and this is by no means a new kind of problem with both developed and emerging markets going through this phase at some point. The choice is quite simple at the bare bones of it, long-term or short term?

Japan’s economy suffers further shrinking

The new administration in Japan, led by Prime Minister Shinzo Abe, will face an uphill struggle to reinvigorate the country’s flagging economy as recent data revealed continued contraction.

The 0.2 percent decline compared with the previous quarter will mark the third straight quarter the economy has shrunk, with most specialists projecting 0.2 percent growth for that period.
When the numbers are dialled in for the annualized figure it equates to a 0.5 percent fall in GDP.

Domestic consumption has been a problem in the last 20 years at least, due to the nation’s ageing and shrinking population. However, things have got worse recently due to the drop in demand for Japan’s key exports, like cars and household appliances, from their biggest trading partners, the U.S.

“Of course when exports dry up it hits our economy very hard,” said Mitsubishi UFJ Morgan Stanley Securities analyst Shuji Tonouchi. “Companies cannot expect to get by on domestic markets.”

In a meeting last week, the Bank of Japan (BOJ) left their basement interest rates unchanged. The rate has been around the zero mark for over a year now.

Many voices in the corporate landscape, notably the outspoken trading firm Sinolink Japan, have said it is not essential to leave rates at zero until the government hits its 2 percent inflation target.

Deflation has been rampant for the last two decades in Japan, and a natural knock on effect is a decline in household spending as people hold off purchases on the assumption prices will continue to fall.

The key factor in kick starting domestic spending, according to most financial specialists, is to stoke inflation and reverse the trend.

The government, and especially the finance minister Taro Aso, have repeatedly announced that breathing life into the country’s stagnant economy is at the top of their priority list. The traditional method for reviving the domestic situation has been for the central bank to enter the markets with monetary stimulus and easing techniques.

Stimulus includes outlay for added infrastructure as well as numerous incentives for corporations to increase capital outflow. Recent stimulus is thought to have created half a million jobs and boosted the economy by 1 percent.

“It’s true that the economy has been on a bad run but hopefully the markets will react positively to government steps and we should see a slowdown in the decline in the next year,” said Mr Tonouchi.

Nervy Q3 see stocks drop with precious metals the stand-out performer

Amid a plethora of financial news headlines, the predictable early POMO ramp drifted away and U.S. equity markets were left in a volatile state in the mid-morning session with many short term stocks falling.

The PMI and POMO ramp came at the forecast time and ended at EU closure as Washington took the reins once more.

Following the political upheaval in Italy, commodity and FX prices jumped and dumped in a familiar fashion spurred by an early EUR boost which pushed the greenback down again, encouraging investors to go risk-on once more.

“We’ve experienced a recovery of the dollar for the rest of the day and its now unchanged,” said Michael Richmond, Senior Vice President at Sinolink Japan in an email to clients. “Commodities have settled down and are at a comfortable level, with gold and silver leading the way.”

Commodities are now shackled at -0.5 percent right in their comfort zone, especially considering the turbulence in the morning session. The S&P reflected this by underperforming the precious metals as it dropped 4 percent from its record highs.

The last second rally was mostly due to the MSFT which drove a large amount of selling in the midday session. News from Italy regarding a division in Berlusconi’s party led to a battering for the greenback but other positive rumours around Europe drove the market back to acceptable levels.

Japanese crude sector planning four way merger

Sumitomo Corp., one of the largest trading companies in Japan, said that plans are in place to tie-up three prominent oil refining firms with their own company in an effort to acquire the largest market fuel share in the nation.

Cosmo Oil Co., TonenGeneral Sekiyu K.K., Showa Shell Sekiyu K.K. – the three refiners, plus Sumitomo will be hoping to reach a preliminary agreement by next month and move forward into a merger in a year’s time, according to a joint press release.

The country’s Liquefied petroleum gas (LPG) importers have been under serious threat from green energy innovations, electricity and regular gas over the past decade and have seen demand for their raw material weaken, and revenues slump.

An advisory panel which included many industry specialists, including Sinolink Japan who has a stake in two of the three refiners, reported to the government that demand for LPG will decline even further towards the end of the fiscal year ending April by as much as 1 percent. That equates to about 18 metric tons drop in demand compared to the previous 12 month fiscal period.

Assuming the merger goes through, the new entity would have revenue totalling around 500 billion yen or $4 billion and sell on nearly 4 million tons of LPG annually. That would be around a quarter of the country’s total LPG market, easily the biggest share.

An executive for TonenGeneral, Kentaro Take, said that details of stake sizes and share ratios have not been finalized yet and that discussions are ongoing. One anonymous source close to the deal said that each of the four companies will end up with an equal stake.

Japan has always been one of the world’s biggest importers of fuel. According to data by the Japan LP Gas Association, in the last fiscal year ending April they brought in 13 million tons of LPG, equating to over three quarters of its total LPG requirements.

In a related but separate arrangement, Showa Shell, Cosmo Oil and Sumitomo Corp. have plans to combine their LPG retail units in late 2014. The merged retail operation will consist of a quarter of a million customers and be worth around 70 billion yen annually, they said in a joint statement.

Japan and Myanmar resume trade relationship

After a break of nearly 50 years, Japan will resume its rice imports from Myanmar, a landmark economic agreement between Tokyo and the former military dictatorship of the country previously known as Burma.

In a statement yesterday, the trading firm who triggered the renewed relations between the two nations, Mitsui & Co. Ltd, said that six thousand tons of rice would arrive in Japan from Yangon, the largest city in Myanmar.

Mitsui also commented that the purchaser, the government’s agriculture department, is likely to resell the rice to several diverse firms who make products like crackers, beer and other distilled beverages.

Since President Thein Sein took over the country in 2011, Myanmar has distanced itself from harsh military rule and is looking to build an era of economic reforms and political stability. Consequently, the nation, which is home to more than 100 ethnic groups, has begun to build closer trading ties with several regional governments, most notably Tokyo.

Last year Japan waived a substantial loan owed to the country by Myanmar, and since then Japanese companies have been developing relations with the Sein government, with the nation’s agricultural area being seen as an exceptional investment opportunity.

There will be much work to do however, and any investment will to go towards badly needed development of Myanmar’s infrastructure.

“The irrigation systems and fertilizers are well below standard,” said Satoru Shimoishikawa, a trading manager at Mitsui. “I’m sure our company and others will be able to help greatly with their sales network also.”

That sentiment has been mirrored by other trading and investment firms, such as Sinolink Japan, who have been very active trying to get into the Myanmar market in the last few months.

Myanmar Agribusiness Public Corporation (Mapco), the seller of the rice, was newly formed last year and began selling rice to Mitsui, one of Japan’s biggest trading firms by revenue, soon after that. Mitsui has revealed they plan to build four rice processing factories near Yangon at a cost of 20 billion yen.

Myanmar is no stranger to mass rice production. When the nation was known as Burma and still under British rule it was the world’s largest rice exporter, shipping a staggering 3.5 million tons in 1935.

Now that the nation has shrugged off its military rule and embraced democracy and reform, it represents one of the best growth opportunities in Asia.

Revenge of the Keynesians

New Japanese Prime Minister Shinzo Abe has only been in office for one month and he is already being attacked by die-hard, but nonetheless prominent, proponents of the British economist, John Maynard Keynes.

Abe has been outspoken in his defence of the “Abenomics” plan he set in place during his campaign which calls for the curbing of the power of central banks and a need for them to assist governments erase their deficits in order to revitalise the world economy.

The new PM has won a fair amount of praise from certain areas of the financial community, but it seems there are most definitely limits to Mr Abe’s plans.

Although the Bank of Japan (BOJ) agreed to buy up bonds and other assets, which injected trillions of yen into the monetary base and also set a 2 percent inflation mark, the central bank did not do so without a fight.

From the minutes of the BOJ meetings it would be very difficult to glean any optimism that the inflation target is at all reachable. Not any more than the previous goal of 1 percent anyway. There have only ever been half-hearted comments over the time it will take to reach this highly unlikely target also, with phrases like “as quickly as possible” being bandied around in the last few months. Most of the onus seems to be on Abe’s administration to reach the inflation goal, with the BOJ acting as a mildly disinterested junior partner in the dream.

Indeed, none of the banks major forecasts have changed a significant amount since the new government came to power.

The BOJ are due to start their open ended asset buy up next year, and have not made any clear announcement that they feel this, and other monetary easing techniques, will help kick start Japan’s stagnant economy. They even went as far as attempting to tone down the idea that fiscal stimulus is the solution to Japan’s economic quagmire.

Some reports, like that released by trading company Sinolink Japan, have shown that even when the monetary base is strengthened, the amounts being considered are so small that they are unlikely to have any effect on growth.

These reports, and similar data, are welcome ammunition for those dyed in the wool Keynesians who believe it is up to governments to spend more, and lower taxes to spur consumer spending and achieve economic development.

Fed corners nearly one third of the Treasury market

Trying to get a handle on Ben Bernanke's holdings can be difficult at the best of times as the central bank continues to buy $50 billion in Treasury securities across the spectrum every month.

A relatively easy way to keep track of the Fed chair’s consolidated, risk-adjusted totals is to break down his balance sheet, which now stands at around $4 trillion, and to visualize it as ten-year equivalents, of which nearly half of the total is in the form of Treasuries.

The Fed must hold a certain amount of 10-year notes if they are to eject the same amount of interest from the market as it is holding. This is a “ten-year equivalent” and it allows for a streamlined viewpoint that does away with the time variation along the curve.

When looked at from this vantage point, the Fed actually have around one third of the total marketable ten-year equivalents in play in the whole of the American bond system. The total is 28 percent to be exact. This figure might come as a shock to many analysts.

“The Fed has basically doubled the amount of ten-year equivalents it held at the same point 3-years ago.  Not many economists saw that coming,” said Elliot Parker, Head of mergers and acquisitions at Sinolink Japan in a phone interview for Bloomberg. “They now have around a third of the total bond market and that could rise in the near future if Bernanke sticks to his general strategy.”

Most forecasts put Bernanke’s total bond holdings at around 40 percent in 12-months time and that figure could have been much higher were it not for the fact Bernanke is working hard to monetize.

The U.S. Treasury is also keeping up with the printing, and pumping it into the TSY market in order to balance the Fed’s holdings and maintain a constant flow from the central bank to peripheral institutions.

The need for liquidity is forcing the Fed to keep only those maturities that are the risk equivalent of a ZIRP, that is, 3-years or higher. Bernanke has almost nothing that is lower than that, which makes sense because those papers would explode the yield curve and put the central bank over the statutory limit for Cusips, which is set at 70 percent.