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Only three trade war updates today worth mentioning, all of which should leave markets brimming with optimism. First, it has been reported that China has hacked 27 US universities to try to steal maritime defence technologies. Second, Zhang Shan, China’s Commerce Minister, has described the negotiations in Washington as “very difficult and very hard…There are significant differences between the two countries systems, culture, and development stages.” Third, US Secretary of State Pompeo stated Trump will walk away, just as he did from North Korea, if the proposed US-China trade deal is not “perfect”.
For optimists, the good news from China’s “twin sessions” so far is a promise to purchase more US goods, a line on intellectual property protections, and moves towards some form of new foreign-investment law. For pessimists there is the retreat back into massive off-book fiscal stimulus and a statement banks will have to increase lending to private enterprises 30% y/y this year. There is no way loans to SOEs, which make up 75% of new lending, are going to drop. Hence the 25% that does go to POEs rising 30% is going to mean an 8% increase in total lending even before we get any boost to SOE loans to allow them to roll their debts over. That smells like a mid-teens percentage-point increase in bank lending. Is that going to move the growth dial? Yes – but not as much as before because China is in a rapidly-decaying orbit. This investment-led strategy has failed in other countries before, and it will fail again.
Bank - Capital - Lending - Surge - Bonds
More specifically, where is the bank capital for this new lending surge to come from? From perpetual bonds the PBOC is buying from banks! What is the ratio of FX reserves to M2 going to do as this happens alongside the huge new pledged purchases...
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