Much Trouble in China: Say Goodbye to International Transparency
Numbers go up, people cheer.
It doesn’t seem to matter how bad the economic climate gets, as long as there’s a positive number in the data, markets see a rally.
Overnight a bunch of data rolled out of China, and the US market rallied.
Then Australia woke up, and our market joined in on the bounce, and was 1% higher at the time of writing.
Not to be outdone, gold and oil went up overnight. As did bitcoin.
Markets are happy, crisis averted?
Or is it that we are just so desperate for good news, any news is good news?
Any news is good news
Yesterday Australia’s trade surplus increased for April to a record high of $10.6 billion. Driven by higher prices for iron ore and coal.
Yet as I’ve explained a few times now, rising trade surpluses for Australia really means imports are falling. If Australia’s imports are falling, that means consumption — a key driver of our economy — is falling too.
A growing trade surplus directly benefits a small section of the economy.
Although it’s worth noting higher exports do stop the Aussie dollar sinking. Given we’re not allowed more than a foot or two from our house, a stronger Aussie dollar probably helps for any online shopping we are doing.
Then this morning Reuters was celebrating because Chinese exports rose 3.5% for the month of April. Apparently, experts were tipping a 15% fall…
The experts were wrong! Yay, more good news for markets!
A 3.5% rise in data from a country known to manipulate the information it shares with the world, managed to offset the 3.16 million in new jobless claims in the US this week alone.
This good news out of China helped the US market shake off the 20 million who lost their jobs in April.
And this one piece of news also laid to rest the fears of the UK’s central bank. The Bank of England is warning the UK may see the country’s biggest economic slump in 300 years…
But hey, positive numbers are always good news, right?
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The hidden pieces of the Chinese market
The optimism in data surprises me.
China, a country responsible for almost a third of the world’s global growth was shut for almost two months.
The US — the world’s largest economy, by both numbers and might — is under an incredible strain right now.
And as long as Australia sells its rocks to anyone willing to hand over cash, it seems we apply the old adage ‘she’ll be right, mate’ and just get on with it.
Stock markets shake the backdrop off and just get on with rising.
The problem is, cheering and buying into this data is masking other problems.
While most are chewing on what number is assigned to growth, we are missing out on structural changes within the Chinese stock markets.
Over the course of January to March, eight state-owned (or state-supported) Chinese companies confirmed they are delisting from the Hong Kong Stock Exchange.
These companies are claiming it has to do with mainland restrictions on how they can issue new capital.
Chinese companies can’t issue new shares at a lower price if it is lower than the overall value of their assets.
Given the internal turmoil in Hong Kong long before this virus hit, share prices of Chinese companies on the Hong Kong Stock Exchange (HKSE) have been struggling.
Furthermore, one take on this is that mainland companies no longer need the access to international markets that Hong Kong gave them.
The Nikkei Asia Review noted some observers said what was in line with the Chinese Communist Party’s plan to ‘strengthen its industrial base’.
Yet taking state-owned companies away from an open market does the opposite.
Not only does it remove these companies from international markets, it completely removes international transparency.
The balance sheets, cash flows, and debt levels analysts use to judge the health of a company are likely to be lost. Taking them off the HKSE — and keeping these companies to mainland exchanges only — completely removes the transparency Western markets operate with.
Amongst all of this, it’s a lot easier to hide debt, increase debts, devalue assets, or write them off completely if no one is watching…
Rule change sleight of hand
The entire world has its eyes glued to two things: the virus count and when politicians will allow the freedom of movement again.
Yet as we wait for confirmation that we’ll be allowed further than our own postcode, traders seem to support any data that suggests the bad days are behind us.
The thing is, while we are too busy buying into the data given, we are missing small changes that could have large implications.
Political decisions in China influence market movements.
And the delisting of state-owned enterprises that operate on an internationally respected exchange is a curious move. Rhetoric from the Chinese Communist Party in the headlines on the virus and economic ‘rebound’ is masking changes that will only increase the murkiness of their stock markets.
Sure, the data looks good on the surface, but beware of the changes it hides.
Until next time,