By Michael Every of Rabobank
Pollyannas, Politicians, And Politburos
Indicative of the globalized financial economy we all live in (for now?), the central foci for most markets is the confluence of US politicians (and regulators), the Chinese Politburo (and regulators), and market Pollyannas, who always take a Panglossian approach: “All is for the best for markets in the best of all possible worlds for markets - because markets.”
Following the drama of the China Securities Regulatory Commission (CSRC) de facto banning US IPOs by Chinese firms --sparking Bloomberg to write the headline ‘Xi Jinping’s Capitalist Smackdown Sparks a $1 Trillion Reckoning’-- China’s Politburo Friday said it was not against such IPOs entirely – but wants tighter supervision and control of data (and of ride-sharing apps.) “Who’s a pretty boy, then?” said the Pollys – who always expect a cracker. However, within hours the US SEC responded with its own ban on IPOs of Chinese firms unless they provide disclosures of political risk and detailed financial information. The CSRC reply: “Chinese and US securities regulators should step up communication on the supervision of US-listed Chinese companies in a spirit of mutual respect and win-win cooperation to seek solutions and foster policy predictability within an institutional environment.”
Pollys loved the win-winnery. But will the Politburo reverse what it said? If not, US politicians will harrumph and the SEC will stand firm; and like the Norwegian Blue, Chinese US IPOs may then have snuffed it, no matter how beautiful their plumage. “But,” squawk Pollys, “This must be good for Hong Kong!” As things stand, yes. Unless the same White House that just warned about the political dangers for US firms doing business in Hong Kong acts against IPOs there to close the loophole. If it does, a key conduit of capital from the US to China will be pushing up the daisies, and we will be a large step closer to the partial decoupling that has been warned of here as an underlying market risk since December 2017.
This drama is of course part of a larger debate: is China really having a “Capitalist Smackdown”? Allow me to add to what I said about what the Pollys were saying about this last week:
“They don’t mean it.” In which case, the miscommunication between what markets thought Beijing was going to do and what Beijing did implies $1 trillion worth of political risk;
“They mean it - but had flagged they were going to do it.” In which case, why were you invested in impacted areas? And what else have Beijing flagged that will come as an equal shock ahead?; and now
“They mean it - but had flagged they were going to do it; and it doesn’t have any broader ramifications.”
So these actions are piecemeal, and over, rather than being part of a larger, on-going strategy? That’s *very* Polly! As the Bloomberg article makes clear, this rather looks like a “new development phase” in economic policy. Beijing now wants to focus on its enormous problems with demography and related inequality; or as Bloomberg says, “Swinging the cudgel of state power in support of the squeezed middle class.” Shocking! But is that not the same kind of policy Western politicians talk about under the umbrellas of ‘Build Back Better’ and ‘Levelling Up’?
The key point for Pollys is that while foreign capital will still be welcome in areas Beijing wants, those are not going to be as high growth and high return as before. High growth/return areas are socio-politically disruptive and destabilizing by their nature, and lead to monopoly/monopsony. I struggle to think of any sector globally that meets the twin criteria that also *reduces* inequality and *increases* market competition. Yes, all things ‘Green’ will grow ahead: but does that mean high returns, or just high growth? Ask yourself: if Green capital is to make such huge returns, how is the labor-capital gap to be closed? Pollys have to be crackers not to see this – but Pollys and crackers, right?
(Meanwhile, Nikkei Asia reports China’s regional governments and regional state-owned banks have collectively prepared $32.5bn in funds to help ensure struggling SOEs can “guard against defaults”, for example by swapping high-interest short-term loans for low-interest longer-term loans, and/or debt-for-equity swaps. The report also reiterates S&P recently warned that while such funds help “calm investor sentiment”, they will also serve to prop up “zombie companies” if they focus on maintaining local employment and bailing out struggling firms. And which way is the wind blowing on employment and state vs. private sector right now?)
But is this just a China issue? No – some of the same dynamic is playing out in the US too. The FTC is looking to move against Big Tech; the anti-trust executive order is a longer-term slow burn of huge importance; and next month the decision has to be made on who will be the next Fed Chair. Will it be incumbent Powell or “card-carrying Democrat” Brainard, who over the weekend talked up her support for extraordinary monetary policy and regulatory measures to reduce speculation. In other words, vast central-bank liquidity – but not to flow to risky high growth/return areas – only for Building Back Better with lower returns? Brainard also championed the digital dollar, a mechanism for central-bank micromanagement, helicopter money, and/or MMT if needed. Do Pollys see the cage being built around them? Do I need to ask?
But what does this mean for markets nearer term?
In China, it means risk off for what had been the most dynamic sectors of the economy, and the prospect of lower GDP growth, stimulus or not; and if future growth relies more on the fiscal side to prop it up, also lower bond yields to finance it. Which also points to lower CNY for many reasons.
If the US is going in the same policy direction the same general dynamic holds true, with the big caveats that:
1) Unless/until regulators act, the US may look like a safe haven equity play for Big Everything;
2) US GDP growth --and inflation-- could be juiced by fiscal stimulus, if/when it arrives, which would mean even lower US real rates; and yet
3) If the SEC really cracks the whip, the US dollar will be moving significantly higher vs. CNY regardless – after a lag, no doubt.
Anyway, time to see what the Pollyannas, politicians, and Politburo are parroting today.