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Tuesday, 12 December 2017

On Japan and China

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Anthony Peters sees Tokyo investors providing early warnings on Beijing’s monetary policy.

Anthony Peters

Anthony Peters, SwissInvest strategist

I woke this morning to the sound of howling over the near 2% drop in the Nikkei index which was bad enough on its own but looked much worse in light of yesterday’s strong sessions in both European and American equity markets. As usual, the pundits had simply plumped for the easy option and pressed the “Japan stocks fall on stronger yen” button and with which issue had been swiftly and painlessly dealt with. Pass the coffee.

However, the matter is not quite as easy as that. There are dynamics in Japan’s fastest growing market, China, which probably totally escape the uninitiated and in some respects still confuse the specialist. On one hand, there is the property bubble which should scare the living daylights out of global markets but which doesn’t because there is a belief that the grey men in Beijing know exactly what is going on, why it is going on and are in sufficient control to stop it if, as and when they choose to. The rest of the world’s belief that the Communist administration can turn the economy on and off at will seems, from here at least, to be nigh unshakable.

Nearly, I suppose, but not quite. Chinese money market rates have been creeping higher as the PBOC tries to put a squeeze on the excess amount of cash which is sloshing around the system. In just a week, the key seven day repo rate has leapt 140bp to within a sniff of 5%. While the rest of the world is celebrating the rebound in Chinese output figures – yesterday the HSBC Flash PMI reported a recent high at 50.9 – the central bank is struggling to find financial equilibrium. The fear in Japan is that this fight could well lead to a full-blown credit crunch, this putting something of an end to the Abenomic miracle.

Let’s face it; China remains something of a conundrum. We tend to believe what we want to believe about it and the administration is happy with that as it still largely controls what we believe we want to believe. The economy is far too large – I mean in terms of participants rather than simply output – for a little bit of tweaking here and there to keep it under control. In all, as far as Beijing was concerned, so long as it was generally growing all was well in the garden. But now, based on PBOC action, it is truly trying to slow things down and that is something which the Japanese have apparently cottoned onto before the rest of us.

Not unlike the West a few years back, bank balance sheets are loaded with many loans which are inherently bad but which, as long as the merry-go-round doesn’t stop, will somehow continue to perform. Asset quality, as we know, is not an absolute value but one which depends on the top continuing to spin and that, if you ask me, is nothing other than the manifestation of a bubble.

Old China hands will tell us, in case we didn’t know, that China is everything other than a ethnically homogeneous society and that there are civil conflicts which, under Mao were largely kept under wraps by dint of force and now, in the modern era, by way “panem et circenses”. If the Japanese sense that the PBOC is trying to shift the goalposts and are worried about it, maybe we should be listening.

On Carney and Moral Hazard

Meanwhile, back at the ranch, Carney the Magician gave a talk on the occasion of the 125th anniversary of the Pink’un. I have been very cautious in embracing this colonial interloper but I must confess that I was not only hugely impressed by most of what he had to say but above all of how he said it.

The fly in the ointment – and I may be wrong – is the way in which he intends to open up the Bank of England’s collateral books to a wider range of assets, much in the vein of the Fed and the ECB. I’m not sure whether the Old Lady should be involved in such a race to the bottom but if it levels the playing field for British banks, so be it. On the grounds that a longer list of eligible assets enlarged the entry marked “Moral Hazard”, Sir Mervyn King was quite against it and, instinctively, so am I. Apart from that, I don’t think it changes a world still swamped with credit for the better.

On the other hand, he did reflect the view once unsuccessfully expressed by the not particularly lamented Bob Diamond, namely that it’s time to stop the banker bashing. Finance is one of the country’s principal employers and certainly its largest tax payer. He appealed to the country to acknowledge this and to embrace the sector and its potential to drive growth in employment and contributions. However, if the populus can’t grasp that the Welsh footballer Gareth Bale gets paid more in a week than 99% of workers in the finance sector do in a year, then he’s preaching to the unconvertible.

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Alas, it’s that time of the week again and all that remains is for me to wish you and yours a happy and peaceful week-end. It has been an extraordinarily tricky week in markets and now they forecast a tricky week-end ahead as big Atlantic storms loom while the benign weather has kept the leaves on the trees. May your roof and your garden safely survive the tests ahead and may you not end up with a roof garden because one lands on the other or the other lands on the one.

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