Posts Tagged ‘International Monetary Fund’

A global recession is on the way and will be like nothing we’ve seen before — Obama, other have “illusion of sustainability”

February 6, 2016

Debt, defaults, and devaluations: why this market crash is like nothing we’ve seen before

A pernicious cycle of collapsing commodities, corporate defaults, and currency wars loom over the global economy. Can anything stop it from unravelling?

A global recession is on the way. This truism of economics holds at any point in which the world is not in the grips of a contraction.

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The real question is always when and how deep the upcoming downturn will be.

“The crash will come, but it would be nice if it came two years from now”, Thomas Thygesen, head of economics at SEB told over 200 commodity investors and analysts in London last month..

 

His audience was rapt with unusual attention. They could be forgiven for thinking the slump had not already arrived.

Commodity prices have crashed by two thirds since their peaks in 2014. Oil has borne the brunt of the sell-off, suffering the worst price collapse in modern history. Brent crude has fallen from $115 a barrel in the summer of 2014, to just $27.70 in mid-January.

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   “We are in a very unusual situation where market sentiment is of a different nature to anything we’ve seen before”
—Thomas Thygesen

Plenty of investors sitting in the blue-lit, cavernous surrounds of Bloomberg’s London HQ would have had their fingers burnt by the price capitulation.

“They tell you should start your presentations with a joke, but making jokes at a commodities seminar is hardly appropriate these days,” Thygesen told his nervous audience.

Major oil price falls have a number of historical precedents. Today’s glutted oil market is often compared to the crash of 1986, the last major episode over global over-supply. Back in the late 90s, a barrel of Brent crude fell to as low as $10 in the wake of the Asian financial crisis.

A perfect storm

But is the current oil price collapse really like anything the world economy has ever experienced?

For many market watchers, a confluence of factors – led by oil, but encompassing China, the emerging world, and financial markets – are all brewing to create a perfect storm in a global economy that has barely come to terms with the Great Recession.

“We are in a very unusual situation where market sentiment is of a different nature to anything we’ve seen before,” says Thygesen.

Unlike previous pre-recessionary eras, the current sell-off has seen commodity prices, equities and credit conditions all move in dangerous lockstep.

The S&P 500 trading pit at the Chicago Mercantile Exchange

Although a 75pc oil price collapse should represent an unmitigated positive for the world’s fuel thirsty consumers, the sheer scale of the price rout is already imperiling the finances of producer nations from Nigeria to Azerbaijan, and is now threatening to unleash a wave of bankruptcies across corporate America.

It is the prospect of this vicious feedback loop – where low oil prices create financial tail risks that spill over into the real economy – which could now propel the world into a “full blown crisis” adds Thygesen.

So will it materialise?

The world economy is throwing up reasons to worry, as the globe’s largest emerging markets have shown signs of deterioration over the last six months, says Olivier Blanchard, the former long-serving chief economist of the International Monetary Fund.

My biggest fear is precisely that the dramatic shift in mood becomes self-fulfilling
Olivier Blanchard

“China’s growth is probably less than officially reported. Russia and Brazil are doing very badly. South Africa is flirting with recession. Even India may not be doing as well as was forecast,” says Blanchard, who left the Fund after seven years late last year.

As it stands however, he says market ructions still represent a classic case of “herd” behaviour.

“Investors worry that other investors know something bad, and so just sell, although they themselves have no new information.”

Blanchard spent seven years firefighting the worst financial crisis in history at the IMF

But a tipping point may well be approaching. According to Blanchard’s calculations, a 20pc decline in stock markets that persists for more than six months, will translate into a decline in consumption of between 0.5pc to 1.0pc.

“This would be a serious shock. My biggest fear is precisely that the dramatic shift in mood becomes self-fulfilling”.

The first domino to fall

For now, oil-induced financial stress is concentrated in the energy sector.

With Brent set to languish around $30-35 barrel for the rest of the year, prices will persist below the $40-60 barrel break-even point that renders the bulk of US oil and gas companies profitable.

Spreads on high yield US energy corporates have soared to unprecedented highs. “They make Lehman look like a walk in the park” says Thygesen.

More than a third of the entire US high yield bond index is now vulnerable to crude prices remaining low or falling even further, according to calculations from Oxford Economics.

As a result, 2016 is set to see the first wave of corporate bankruptcies in the oil and gas sector. Highly leveraged US shale companies will be the first be picked off. Should escalating defaults have a further depressant effect on oil prices, it could unleash a tidal wave of corporate bankruptcies in the world’s largest economy.

Conditions that usually pave the way for mounting defaults are currently met in the US
Oxford Economics

Indebtedness is not just the scourge of the US. Globally, the oil and gas industry has issued $1.4 trillion of bonds and taken out a further $1.6 trillion in syndicated loans, driving the sector’s combined debt to $3 trillion, according to the Bank of International Settlements. They warn of an “illusion of sustainability” that could quickly turn toxic as the credit cycle unravels.

The question exercising the minds of economists and investors is the extent to which this contagion could metastasize beyond the energy sector, as banks cut off credit access, loans turn bad, and financial conditions enter a critical tightening phase.

“Conditions that usually pave the way for mounting defaults – such as growing bad debt, tightening monetary conditions, tightening of corporate credit standards and volatility spikes – are currently met in the US”, says Bronka Rzepkowski at Oxford Economics.

Such levels of financial distress, more often than not, portend a global recession.

In every instance of the US high yield spread rising above its long-term average, a recession or financial crisis has been nigh, says Rzepkowski, who cites 2011 as the only time the markets sent out a false signal, lulled by the Federal Reserve’s mega quantitative easing programme.

US shale break-even prices remain closer to $60 a barrel

We are not there yet, but worryingly for market watchers, a series of other indicators are also flashing red.

Global equity markets have endured their worst start to a year since the dotcom crash. To paraphrase Nobel prize-winning US economist Paul Samuelson, Wall Street has predicted nine out of the last five recessions, but the current turbulence has an ominous precedent.

Over the last 45 years, the S&P500 has suffered a loss of more than 12.5pc on 13 occasions. Six of these have given way to a recession in the US, providing a more than 50pc probability that a global downturn is just around the corner.

In Europe, stocks have now fallen by 10pc in the last six months.

“Of the 14 previous occasions equities have had a similar decline, seven have been associated with recession, with lacklustre returns thereafter,” says Dennis Jose at Barclays.

He notes investors have begun to pile into “defensive” stocks, such as healthcare and consumer industries.

“The weighting in defensives has increased to the highest levels seen since 1980 suggesting that investors may have already embraced the risk of a recession.”

Dollar danger

Macroeconomic indicators from the world’s largest economy are also beginning to turn sour. The US has already fallen prey to a manufacturing collapse. Service sector data for December showed the slowdown is spreading to the dominant driver of economic growth.

“The shine has come off the US”, says David Folkerts-Landau, chief economist at Deutsche Bank.

He notes the economy is “firing on one cylinder” with consumers the sole bright spot in an environment of still weak capital investment, and a crippling exchange rate that is hurting exporters and squeezing corporate profits.

“It is not a very healthy situation,” says Folkerts-Landau, who forecasts US growth will fall below 2pc this year. “That is a precarious number.”

A crucial part of the story has been the relentless appreciation of the US dollar. The greenback has risen by more than 22pc on a trade weighted basis since mid-2014.

The effects have been felt far beyond the US. The soaring dollar has put record pressure on China’s exchange rate peg, forcing Beijing to burn through its reserves with interventions amounting to $140bn-a-month in December to protect the renminbi.

Meanwhile, China’s capital outflows have accelerated to $676bn, according to the Institute of International Finance.

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This policy bind – known as the “Impossible Trinity” of managing a fixed exchange rate, maintaining independent monetary policy, and a open capital account – means a devaluation of some magnitude is all but inevitable.

• Has China lost control of its currency?

“It will definitely be in the double digits”, says Folkerts-Landau. “We will be lucky if the depreciation will be in the lower double-digits by the end of the year.”

“Once you anticipate that, and you are sitting in Indonesia or Latin America, it has an immediate impact on how you think about the world”.

A weaker renminbi would unleash a new wave of deflation in an already fragile global environment, and hasten the pressure on emerging market exchange rates as the world’s currency wars would renew apace.

Federal reverse?

What, if anything, could halt this pernicious cycle of events from unfolding?

In the short-term, analysts are unanimous: all eyes are on the US Federal Reserve. The central bank’s first rate hike in seven years last December has come to look frighteningly premature in the space of just eight weeks.

I have no doubt that the Fed would expand QE
—Olivier Blanchard

Events have forced the Fed’s policymakers to take to the airwaves and soothe fears that another four rate hikes are on the way this year. It is a welcome sign for jittery markets, but may not be enough to convince them that the Fed will be nimble enough to reverse course and begin easing should financial conditions worsen.

Others, like Blanchard, are more sanguine about the ability of central banks to ride to the rescue again.

 

“I have no doubt that, if there was such a decrease in consumption, or if the strong dollar proved to affect net exports more than is forecast, or any other adverse event for that matter, the Fed would wait to do further increases” he says.

“And if things got really bad, I have no doubt that the Fed would expand QE.”

Oil prices meanwhile are widely expected to rebound from their depths by the second half of the year, as dwindling investment and the buckling of the vulnerable shale players begins to bite on production levels.

This in itself presents its own set of challenges. The lower oil prices fall, the faster buyers are expected to flood back in, with violent upward movements already in evidence over the last ten days.

In the longer term, even the postponement of the next global recession will do little to assuage fears that world could find itself defenceless against another round of mania, panics or crashes.

Two of the world’s three major central banks have slashed interest rates in to negative territory. Monetary tools will need to be deployed more creatively, perhaps going as far as injecting stimulus directly into the veins of the economy.

Should the world ride out the perfect storm of 2016, next time round, answers will be difficult to find.

Related:


U.S. President Barack Obama delivers a statement on the economy following the release of the January jobs report, in the Brady Press Briefing Room at the White House in Washington, February 5, 2016. REUTERS/Jonathan Ernst

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Is China’s central bank beginning to believe its own lies?

January 25, 2016

Jake van der Kamp
South China Morning Post

The People’s Bank of China is reluctant to further reduce the required reserve ratio for fear of such a move resulting in the weakening of the yuan, according to a leaked document.

SCMP, January 25

I do not decry the occasional little piece of official deceit. After all, even the Ten Commandments do not say, “Thou shalt not lie.” They only say, “Thou shalt not bear false witness against thy neighbour.”

Central banks certainly find it useful to tell little white fibs from time to time. They worry that a public loss of confidence in the financial system can feed on itself and make things worse. They therefore like to make soothing noises to forestall misfortune. This constitutes bearing false witness to thy neighbour, not against him. I can’t get worked up about it.

Thus I think it entirely understandable that the PBOC should tell us just now that everything is fine and under control under the guiding hand of President Xi Jinping, even if everything is not actually fine and under control, which is more likely to be the case. I expect this from a central bank.

READ MORE: PBOC monetary management just official rigging of the exchange rate

But what I do not understand is why central bankers should wish to deceive themselves as well as the general public. Yet this seems to be the case at the moment. The PBOC believes its own lies.

Let’s get it straight right away. Statutory reserves in mainland China are not a tool of monetary management. They constitute a central government slush fund built up to rig the foreign exchange rate of the yuan at levels determined by official edict rather than market forces.

For many years this rigged rate was set at too weak a level. The result was a huge foreign trade surplus, all acquired in foreign currencies that are not legal tender in the mainland and that had therefore to be bought up by the PBOC and parked abroad as foreign reserves. At their peak in mid-2014 these foreign reserves amounted to a thumping US$4 trillion.

At the height of the foreign reserve build up, the PBOC required banks to put 21 per cent of all their deposits into statutory reserves. Photo: EPA

And here is the big problem the PBOC then faced – if we take US dollars from people because we do not want them to use US dollars within the mainland then we have give them yuan in exchange at the prevailing exchange rate. It will be a lot of money. Where do we get it?

Answer: From the banks because, as the old bank robber said, that’s where the money is.

The PBOC could not, of course, be quite as bald about it as the old bank robber was. It dressed thing up. It told the banks they were actually putting money into statutory reserves, which is an old-fashioned tool of monetary control little used elsewhere these days.

At the height of the foreign reserve build up, the PBOC required banks to put 21 per cent of all their deposits into these statutory reserves, a ratio so ridiculously high that elsewhere it would cause any financial system to freeze up in a juddering halt.

READ MORE: Beijing has confused yuan’s inclusion in International Monetary Fund’s Special Drawing Rights with winning a beauty contest

Elsewhere, however, statutory reserves would be kept cold in the central bank’s vaults, as good practice of this monetary tool requires. In the mainland the money is just pushed back out in the system to pay for mopping up the foreign currency inflow. The truth is that the PBOC’s statutory reserves have no monetary effect at all.

I fully understand why the PBOC should tell the general public a few little white untruths about this in order to pretend that it has its hands firmly on the monetary levers. It is what I expect from central bankers.

But if this leaked memo is right then the PBOC believes its own lies, which I find astounding. Surely they cannot have fooled themselves, can they? We’re in it up to our noses if that’s true.

http://www.scmp.com/business/banking-finance/article/1904903/chinas-central-bank-beginning-believe-its-own-lies

Saudi Arabia Refuses to Rescue Oil Price: We can withstand low crude prices for a “long, long time”

January 22, 2016

Reuters

Low oil prices have pushed top exporter Saudi Arabia to hasten difficult economic reforms and cut spending on popular benefits, but it has few options beyond sticking with a strategy to defend its market share – no matter how low prices sink.

A return of Iranian crude to the market after sanctions were lifted may now plunge prices to new lows after a 19-month drop of 76 percent that caused Riyadh’s $54 billion fiscal surplus in 2013 to swing to a $98 billion deficit last year.

Saudi Arabia’s reduced economic circumstances are already obvious in government spending cuts and a first rise in subsidized petrol prices for a decade, but Riyadh’s new rulers, King Salman and his two heirs, show no sign of changing course.

Khaled al-Falih, chairman of state oil company Saudi Aramco, reinforced the stance again on Thursday when he said the kingdom could withstand low crude prices for a “long, long time” and that it would not act alone to support the market.

It means other oil-producing nations and investors in shale and traditional energy firms should not expect the kingdom to ride to the market’s rescue, nor should private Saudi companies dependent on high government spending.

When the 2016 budget was announced in a glitzy TV studio in December, the minister responsible shed the gold-trimmed camel-hair cloak worn by important Saudis for formal occasions in an effort to project an air of austerity and hard work.

Belt-tightening is difficult in a country where the ruling dynasty’s mandate for power comes not from votes but largesse, though some officials have hinted they saw the low oil prices as an opportunity to pass reforms they regarded as long overdue.

Some drivers queued to fill their tanks on the cheaper petrol before prices went up in late December, but those approached by Reuters appeared sanguine about the change. How they may cope with new forms of parsimony – fewer new government jobs or student scholarships, for example – will become evident in coming years.

But whether austerity provides useful cover for economic change, or is regarded as a threat to the kingdom’s brittle social order, the reality of today’s oil market means Riyadh has little choice but to endure its reduced circumstances.

EPOCHAL SHIFT

In times past when prices sank, Saudi Arabia would leverage its unassailed position as the world’s main exporter to orchestrate cuts in output by the Organization of the Petroleum Exporting Countries (OPEC) and defend the market.

That would no longer work. The past 15 years of high prices were driven by rocketing Chinese demand and a high political risk premium thanks to Middle East wars threatening crude flows from the world’s most energy-rich region.

But facing an anemic Chinese economy and abundant flows of shale oil, OPEC has lost its clout. Saudi Arabia’s ruling Al Saud know that if they cut to defend prices, other producers will likely fill the gap with little impact on the market.

They believe that if they are unable to gather non-OPEC countries to join the cartel in a wider output cut – widely regarded as a dim prospect – they have no option but to wait out higher-cost producers.

It has led them to what, in the oil world at least, is an epochal change in policy, abandoning their position as a so-called swing producer that would raise or lower output as required to balance the market, and instead defend market share.

Hanging over them, senior princes and policymakers said in a private gathering attended by Reuters last year, is a failed 1980s attempt to prop up prices with unilateral Saudi output cuts, from which neither their market share nor fiscal balance recovered for two decades.

They now believe low prices alone can stabilize the market by re-stimulating demand and shutting out other producers, including upstart shale companies whose investment in new wells is already starting to flag. Brent crude at around $28 a barrel or lower – the cheapest since 2003 – may hasten that.

“If prices continue to be low, we will be able to withstand it for a long, long time,” Aramco boss Falih said at the World Economic Forum in the Swiss resort of Davos on Thursday.

“If there are short-term adjustments that need to be made, and if other producers are willing to collaborate, Saudi Arabia would be also willing to collaborate,” he added. “But Saudi Arabia will not accept the role by itself of balancing the structural imbalance that is happening today.”

HARDSHIP OR REFORM

The most potent test of Riyadh’s patience will be its ability to cut spending without causing enough public hardship for citizens to start questioning the underlying social contract that allows the Al Saud to rule without popular participation.

The need to show Saudis that they get a fair share of oil wealth caused the Al Saud to delay planned fuel price rises in 2011 for fear they might trigger Arab Spring-style protests. Instead it went on a $110 billion public spending spree.

It has promised to keep spending on big infrastructure projects needed to secure future economic growth, but there are signs it may pare back even these, with more modest stations being proposed for Riyadh’s new metro, for example.

Meanwhile, it hopes to shunt some of the burden of employment from the state on to private companies, with a vigorous quota policy aimed at replacing cheaper foreign workers with Saudis and pledges to cut red tape in the country to encourage private-sector growth.

Whether that will work – given that private-sector growth is tied closely to state spending – will define Saudi Arabia’s economic future, and may determine whether it will eventually revert to its past policy of trying to defend oil prices.

The massive kitty that Riyadh has accumulated over the past decade will give the government plenty of time to cushion the blow of cheap oil, however. Since the crude price started to fall, the central bank has been running down its net foreign assets at an annual rate of about $105 billion.

But it still had $628 billion at the end of November, suggesting it could continue paying the government’s bills and supporting its currency for several more years without reserves falling to levels that most economists would consider dangerous.

Its public debt of 5.8 percent of gross domestic product (GDP) at the end of 2015 is comparatively small too: Britain’s is 89 percent and Germany’s 71 percent.

Even though the International Monetary Fund estimates its debt will jump to 44 percent of GDP in 2020 to cover budget deficits, a rapid increase, it would not be high by international standards.

Top officials have said the government will benefit from $400 billion of underused state assets, from land to minerals resources, in coming years. That may also help Riyadh delay the crunch point and allow it to maintain a strategy that prolongs low oil prices.

(Additional reporting by Rania El Gamal in Dubai; Editing by Pravin Char)

Chinese regulator denies devaluation of currency is being used to boost exports

January 21, 2016
Fears that Beijing is following a stealth devaluation policy to boost its exports have helped convulse financial markets this year
By Ben Chu
The Independent
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Chinese Central Leading Group for Financial and Economic’s Fang Xinghai (R) gestures next to International Monetary Fund (IMF) Managing Director Christine Lagarde during a session at the World Economic Forum (WEF) annual meeting in Davos, on January 21, 2016. FABRICE COFFRINI/AFP/Getty Images

A senior Chinese financial regulator yesterday sought to reassure Davos delegates and global markets that the Beijing authorities are not seeking to pep up their slowing economy by devaluating the Renminbi (RMB).

 

Fears that Beijing is following a stealth devaluation policy to boost its exports have helped convulse financial markets this year and fed concerns that the economic situation in China is worse than reflected in the official statistics.

But Fang Xinghai, the vice chair of the Chinese Securities Regulatory Commission sought to scotch this view speaking at a World Economic Forum panel.

“There really is no basis for China to depreciate the currency” he said, pointing to the still large current account surplus being run by the country despite its falling exports.

“A depreciation is not in the interests of China’s rebalancing; a too deep currency fall would not be good for [domestic] consumption.”

It was a surprise 2 per cent depreciation of the RMB versus the dollar, the largest daily move in more than two decades, last August that helped set off the “Black Monday” panic in Chinese equities and world stock markets. Another yuan depreciation earlier this month precipitated further stock sales around the world.

Mr Fang, a graduate of Stanford University and former adviser to Prime Minister Li Keqiang who was appointed to the regulator last October, stressed that Beijing was no longer targeting the dollar but a basket of currencies, making the RMB’s moves against the Greenback much less relevant. He also hit back against the idea that China’s currency was not stable enough to be part of the IMF’s official basket of currencies, to which it was officially admitted last year. “That worry is completely unnecessary” he said.

Mr Fang did, however, admit that the communications of the Beijing authorities on its currency strategy could improve. “Our system is not structured in a way to communicate seamlessly with the markets” he said, adding “you bet we can learn”.

However, Ray Dalio, head of the giant Bridgewater Associates hedge fund, who was on the same Davos panel as Mr Fang , sounded a skeptical note about these assurances. “Most market participants think China will continue to devalue the currency further” he said.

http://www.independent.co.uk/news/business/news/davos-chinese-regulator-denies-devaluation-of-the-rmb-is-being-used-to-boost-exports-a6825021.html

China oil giant targets first output cut for a decade — world oil prices are at their lowest for over 12 years

January 20, 2016

AFP

Chinese state energy giant CNOOC has cut its targeted output for 2016

HONG KONG (AFP) – Chinese state energy giant CNOOC has cut its targeted output for 2016, the first such move in more than a decade, as fears grow over the health of the Chinese economy and plunging oil prices.China’s economy grew 6.9 percent last year, its slowest pace in a quarter of a century, while world oil prices are at their lowest for over 12 years.

CNOOC, China’s largest offshore oil and gas producer, said Tuesday it targeted production of 470 million to 485 million barrels of oil equivalent, a drop from 495 million barrels in 2015.

It would be the first decline since 1999.

“CNOOC is one of the first of the world’s majors to explicitly say it will cut production,” Michael Barron, director of global energy at risk consultants Eurasia Group, told Bloomberg News.

“The other big companies have all slashed spending and it’s implicit that production will fall at some point in the future.”

Shares in the company fell 6.13 percent in Hong Kong on Wednesday, where the benchmark Hang Seng Index also fell 3.82 percent.

The energy giant acquired Canada’s Nexen energy company in 2013 for $15.1 billion. CNOOC said Nexen was the focus of its overseas development.

US crude prices extended losses Wednesday, heading towards $27 a barrel, as the International Energy Agency warned that the oil market could “drown in oversupply”.

The International Monetary Fund said this week the collapse in the oil price was dragging down the global economy.

Royal Dutch Shell said Wednesday it expects a sharp decline in full-year net profit.

— Bloomberg News contributed to this report —

Key facts behind China’s warming ties with Saudi Arabia, Iran and Egypt as Xi Jinping signs mega oil deals during his Middle East tour

January 20, 2016

Oil giants Saudi Aramco and China’s Sinopec sign a framework deal worth up to US$1.5 billion during president’s visit: trips to Egypt and Iran next on agenda as Xi Jinping’s diplomacy push through the Middle East continues

By Zhuang Pinghui
South China Morning Post

China and Saudi Arabia agreed to expand their bilateral ties to form a comprehensive strategic partnership and boost industrial capacity cooperation on Tuesday during President Xi Jinping’s state visit in Riyadh.

Xi said China would expand oil trade with Saudi Arabia and promote cooperation over new energy, nuclear energy and security.

READ MORE: Xi Jinping to walk fine line on Middle East visit

The Saudi Arabian oil giant Saudi Aramco and China’s Sinopec signed a framework agreement for strategic cooperation on Tuesday, the Saudi state news agency SPA reported.

The deal is estimated to be worth between US$1 billion and US$1.5 billion

READ MORE: Is Xi Jinping the man to defuse tensions in the Middle East? Landmark visit to Iran and Saudi Arabia revealed

Xi will continue his trip to the Middle East by visiting Egypt and later travel to Iran.

Here we look at the background to China’s relationship with all three nations.

Saudi Arabia

China’s President Xi Jinping wears the Abdulaziz Medal, which was presented to him by Saudi Arabia’s King Salman bin Abdulaziz Al Saud on Tuesday after they held talks in Riyadh. Photo: XinhuaThe kingdom, once a staunch anti-communist nation and close ally of the United States, established diplomatic relations with China in 1990. Former Chinese president Jiang Zemin made the first state visit to Riyadh in 1999.

Relations between the two nations have developed slowly, but many Saudi officials and businesses have already said there should be broader ties with China.

Saudi Arabia is the biggest supplier of crude oil to China.

The International Monetary Fund said that as of 2013, trade between the two nations has increased from US$1.28 billion in 1990 to US$74 billion in 2012.

On the military front, China provided the kingdom with up to 60 CSS-2 intermediate-range ballistic missiles in 1988 – two years before they established diplomatic ties.

Saudi Arabia also operates a medium-range DF-21 ballistic missile system, which has upset the US.

Egypt

Egypt was the first country in Africa and the Arab world to establish diplomatic ties with China in 1956, The two countries began a strategic cooperation in 1999 and expanded this to a comprehensive strategic partnership in December 2014.

Egypt has a large trade imbalance with China that favours the mainland. The total trade volume reached US$11.62 billion in 2014 – a 13.8 per cent increase compared with the previous year.

China’s exports to Egypt increased by a quarter in 2014 to US$10.46 billion, while imports dropped 37.4 per cent to US$1.16 billion.

The mainland mainly exports machines, electronics and garments and import crude oil, liquefied petroleum gas and marble.

China set up a state-level overseas economic and trade cooperation zone in Egypt using investment of US$100 million in 2014.

READ MORE: ‘Solutions welcome’ as Tehran sees bigger role for China in Middle East

Iran

China helped mediate the Iranian nuclear deal last July and Xi will be the first state leader to visit Iran since the nuclear-related sanctions were lifted on January 17.

The mainland has been Iran’s biggest trade partner for the past six years and the biggest buyer of its crude oil and non-petroleum products.

Trade volume between the two nations surpassed US$50 billion in 2014 – up 31.5 per cent on the volume of trade the previous year.

In 2014 China’s export volumes to Iran in 2014 totalled US$27.5 billion, while the volume of imports from Iran totalled US$24.3 billion.

The mainland exports machines and electronics, textiles, chemical and steel products and import crude oil, ore and agricultural products.

http://www.scmp.com/news/china/diplomacy-defence/article/1903393/key-facts-behind-chinas-warming-ties-saudi-arabia-iran

China’s volatile stock markets fell more than 1 percent on Wednesday as oil slides, outweighing stimulus hopes — Indexes are down 15-16 percent so far in 2016

January 20, 2016
Markets | Wed Jan 20, 2016 2:40am EST

China’s volatile stock markets fell more than 1 percent on Wednesday, though mounting chatter about imminent policy stimulus provided some support against the backdrop of a fresh slide in oil prices, which hit stock markets across the globe.

Asian stocks were down sharply, and Wall Street saw its rally swamped overnight as U.S. crude sank beneath $28 a barrel for the first time since 2003, hammering energy stocks and boosting safe havens. [MKTS/GLOB]

The benchmark Shanghai Composite Index closed down a fraction over 1 percent after a 3.25 percent bounce on Tuesday [.SS], while the CSI300 index of the largest listed companies in Shanghai and Shenzhen lost 1.5 percent, having risen 2.95 percent the previous session.

Tuesday’s jump was fueled by expectations that the People’s Bank of China (PBOC) would soon act to loosen monetary policy further after the latest data confirmed economic growth hit a 25-year low last year.

The indexes are down 15-16 percent so far in 2016 after a series of sharp sell-offs.

On Tuesday, the statistics bureau also released weaker-than-expected readings on industrial output and retail sales for December, while the Commerce Ministry said on Wednesday that foreign direct investment fell in the final month of the year, and China’s external trade faced relatively severe pressure in 2016.

A new survey by the American Chamber of Commerce in China showed that the slowdown is hitting profits at more foreign companies operating on the mainland, and the vast majority believed China’s growth would fall well short of the central bank’s forecasts of 6.8 percent this year.

Economic concerns have also pressured China’s yuan currency, which is down about 5 percent since August, encouraging a destabilizing outflow of capital.

The PBOC has acted aggressively to deter speculators from shorting the yuan. But two surprise devaluation moves from the central bank in six months and a cooling economy have only reinforced market expectations of further yuan weakness.

On Wednesday, the PBOC set a firmer midpoint for the currency at 6.5578 per dollar, from which the spot rate can vary by 2 percent.

The spot yuan was little changed from its previous close, and offshore the currency was just a little weaker, trading about 0.3 percent below the onshore rate.

As authorities clamped down on speculative selling of the yuan offshore, the non-deliverable forwards (NDF) market for the yuan has become an easier and cheaper alternative for punters.

NDF pricing suggests that towards the end of April, the yuan will have declined 1.4 percent.

“Essentially, the market is betting on the yuan fixing flatlining for at least two months and then a big depreciation, just like in August last year,” said a trader in Singapore.

The impact of China’s sluggish economy and weak yuan has also hit Hong Kong, where many international investors place their bets on China.

The Hang Seng index was down 3.5 percent on Wednesday while the Hong Kong China Enterprises Index tumbled 4.9 percent. The Hong Kong dollar fell to an eight-year low against the greenback.

HOLIDAY CASH

A raft of new regulations have seen yuan trading volumes fall off sharply, pulling the gap between its onshore and offshore levels down from more than 2 percent in the first week of 2016. The gap was fuelling speculation and capital flight and damaging the credibility of China’s currency management.

Late on Tuesday, the central bank announced it would inject more than 600 billion yuan ($91 billion) into the banking system to help ease a liquidity squeeze expected before the long Lunar New Year in early February.

Such a move is usual before the holidays and stopped well short of an actual cut in bank reserve requirement ratios (RRR), which would have freed banks to lend more.

China’s woes combined with the slump in commodities to prompt the International Monetary Fund to cut its global growth forecasts again on Tuesday. It warned the world’s second-largest economy would see growth of only 6.3 percent in 2016.

The government-backed China Securities Journal reported that Beijing had the policy space for further easing to support the economy, including raising deficit spending to around 3 percent of annual economic output.

“The activity data, the domestic market sell-off and unsettled global financial markets require macro policies to stay accommodative for an extended period,” wrote David Fernandez, head of Asia Pacific fixed income research at Barclays, in a note to clients.

“We continue to look for two, 25 basis-point benchmark rate cuts in the first half of the year, and maintain our forecast of two RRR cuts.”

(Reporting by Pete Sweeney, Samuel Shen and Shanghai and Beijing newsrooms; Writing by Wayne Cole and Will Waterman; Editing by Kim Coghill)

President Xi Jinping pledges during opening ceremony for AIIB that China will devote itself to operation of new development bank — Throws in an additional $50 million

January 16, 2016

By Wendy Wu
South China Morning Post

President Xi Jinping has pledged during an opening ceremony for the Asian Infrastructure Investment Bank, or AIIB, that his country will devote itself to the operation of the lender, with China a major player in the global financial sector.

His comments came during a speech at the Diaoyutai State Guest House in Beijing on Saturday.

He also said China would invest an additional US$50 million in the lender, according to the Reuters news agency.

Premier Li Keqiang is due to give a speech in the afternoon on Saturday.

READ MORE: China-led Asian Infrastructure Investment Bank just months away from first loan

The launch of the lender, a possible rival to the Japan-led Asian Development Bank and the US-led World Bank, marks Beijing’s ambition to firm its influence in regional economic issues and to challenge the current US-dominated global economic governance system.

The bank, with 57 founding member countries, elected China’s Finance Minister Lou Jiwei chairman of the AIIB council. Jin Liqun was elected the first AIIB president.

http://www.scmp.com/news/china/economy/article/1901791/china-pledges-during-opening-ceremony-aiib-devote-itself

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China to Invest An Additional $50 Million

A worker installs a sign of Asian Infrastructure Investment Bank (AIIB) at its headquarters ahead of its opening ceremony in Beijing, China, January 12, 2016. Picture taken January 12, 2016.
REUTERS/CHINA DAILY

China will invest an additional $50 million in the Asian Infrastructure Investment Bank (AIIB), President Xi Jinping said at the bank’s opening ceremony in Beijing on Saturday.

The AIIB, which is seen as a rival to Japan-led ADB and U.S.-led World Bank, has become one of China’s biggest foreign policy successes, and was set up by Beijing after it became frustrated by delayed reforms at the International Monetary Fund.

(Reporting By Sue-Lin Wong and Nathaniel Taplin; Editing by Kim Coghill)

 

Sanctions impact on Russia to be longer term, U.S. says — As Putin Toys With The Idea of Asylum for Syria’s Assad

January 12, 2016

Western sanctions on Moscow are intended to exert long-term pressure on Russia and not to push it “over the economic cliff,” a U.S. State Department official said on Tuesday.

EU and U.S. restrictions imposed on Moscow in 2014 over the Ukraine conflict shaved about 1.5 percent off Russian economic output in 2015, the official said, citing data from the International Monetary Fund.

The effect of falling world oil prices was far greater, said the official, who requested anonymity, meaning that Russia’s economy shrank 3.8 percent in 2015.

“The direct effect is pretty small … at about 1 to 1.5 percent. It’s the indirect effect that’s larger,” the official said, adding that international companies previously considering 20-year investments in Russia were scaling back to five years.

“The sanctions are designed not to push Russia over the economic cliff,” the official, who was on a visit to Brussels, said. “That would be bad for the Russian people.”

Sanctions on Russia’s banking, energy and defense sectors, imposed from July 2014, are part of the West’s efforts to pressure Russia to help end the crisis in eastern Ukraine, which has killed more than 9,000 people since April 2014.

Russian President Vladimir Putin was quoted on Monday as telling Germany’s Bild newspaper that sanctions “are severely harming Russia”, although he also noted a bigger impact from global oil oversupply that is weakening energy prices.

With neither the West nor Russia able to resolve the Ukraine crisis so far, the European Union and the United States will keep economic sanctions on Russia until the end of July 2016.

That means Russian companies cannot borrow from the EU and the U.S. banks and on markets for more than 30 days, limiting oil producers such as Rosneft from raising funds for investment.

“From what we know and from my conversations with market participants, other countries are not bridging the gap,” the official said, although he added that China has offered some financing at higher rates and with shorter maturities.

Any lifting of sanctions on Russia is tied to the implementation of a peace deal on Ukraine which was negotiated by the leaders of France, Germany, Ukraine and Russia almost a year ago.

(Editing by Richard Balmforth)

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Putin: too early to speak about sheltering Assad in Russia

The Associated Press

MOSCOW (AP) — Russian President Vladimir Putin said on Tuesday that it would be too early to speak about granting political asylum to Syrian President Bashar Assad, a Putin ally and arguably the main obstacle in the Syrian peace process.

Russia began carrying out air strikes on the positions of Islamic State fighters in September in support of Assad’s army which critics say are aimed against Assad’s opponents.

Russia, the United States, Middle East nations are promoting talks between the Syrian government and opposition, and Assad has been seen as a highly divisive figure.

Putin said in an interview with the German daily Bild published on Tuesday that Moscow is advocating for a constitutional reform in Syria and if the next election is democratic, “Assad won’t have to go anywhere, no matter if he is elected president or not.”

While Putin refused to speculate on a possible Moscow’s role in helping to remove Assad, he indicated that it would not be too difficult for Moscow to do.

“We granted asylum to Snowden,” he said referring to the American whistleblower Edward Snowden. “That was more difficult than (it would be) to shelter Assad.”

 

Intervention by Beijing Is Worsening China’s Market Woes — Communist Party doesn’t fully control China’s economy

January 10, 2016

Economy is open enough that Communist Party doesn’t fully control it, but leaders can’t resist meddling, exacerbating market turbulence

An investor takes notes of stock information Friday in front of an electronic board at a brokerage house in Beijing.
An investor takes notes of stock information Friday in front of an electronic board at a brokerage house in Beijing. Photo: Jason Lee/Reuters

The convulsions in China’s stock and currency markets this past week fanned investors’ worst fears: The world’s second biggest economy is in trouble and the authorities are powerless to fix it.

The truth is less frightening, but still fraught. China is trying to shift economic growth to a slower, safer path, one less dependent on capital spending and debt. Chinese technocrats know that means opening to ever more market forces, but its ruling elite is still not willing to accept that loss of control.

China’s economy is now open enough that the Communist Party can’t simply state its preferred outcome and expect it to happen. Investors inside and outside the country now have a say, too. The result: As growth slows, its leaders repeatedly try to tame the accompanying market turbulence, often making matters worse. Whether that interventionist instinct ultimately derails the economy’s transformation is very much an open question.

This past week’s market plunge exemplifies the challenge. After a series of ad hoc measures taken to halt the stock bubble’s collapse last summer, China’s securities regulator proposed circuit breakers that would halt trading for 15 minutes if the main stock index rose or fell more than 5%, and for the day if it moved more than 7%.

“It was a sincere attempt on the part of regulators to have a mechanism to prevent panic,” said David Dollar, a China expert at the Brookings Institution.

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But the collar was far too narrow, perhaps reflecting an unrealistic aversion to the market’s inherently high volatility. Shortly after the circuit breakers took effect last week, they were triggered as downbeat economic news and a falling yuan spurred selling. Investors worried about being locked out rushed to sell more. That accelerated the slide and made it a foregone conclusion the circuit breakers would be triggered again. The unexpected halts sparked anxiety that spilled over to other countries.

A similar tension afflicts currency policy. China has long strictly controlled flows of capital across its borders, which helped it keep the yuan closely pegged to the dollar. But to make the yuan a more widely held global reserve currency, it has gradually relaxed those controls.

When the economy began to slow last year and the People’s Bank of China cut interest rates, investors naturally sought to take capital out of the country. The PBOC responded by devaluing the yuan last August, describing it as a move to make the currency more market-determined.

China’s political leaders, to whom the PBOC reports, had a more expedient motive: bolster exports and growth. As investors expected more of the same, capital outflows accelerated and the yuan’s value in offshore markets fell sharply below its more controlled onshore value.

The PBOC resisted those pressures, intervening heavily to buy up unwanted yuan. Between July and December, its foreign-currency reserves fell from $3.65 trillion to $3.33 trillion. It also intervened in the offshore yuan market to beat back selling pressure, while other officials ordered banks to crack down on currency speculators.

Then, as the dollar marched higher against other world currencies with the newly devalued yuan in tow, the PBOC resurrected a long-held pledge to manage the currency against a basket of currencies rather than just the dollar, which appeared to be the justification for engineering another devaluation against the dollar in the past week.

Deteriorating fundamentals, not just speculation, are weighing on stocks and the currency. The economy is slowing and may undershoot the party’s informal 6.5% growth goal. The slowdown has been led by heavy industry and real estate, which are plagued by excess capacity and unsold property, in part the consequence of prior stimulus ordered up by the government that helped repel the global recession.

Economists at UBS estimate that if China’s growth slumped to 4% this year (versus their forecast 6.2%), it would slice half a percentage point off U.S. growth, 0.8 point off Europe’s and 2.6 points off Japan’s. This is why global stock and commodity prices have been so sensitive to Chinese developments.

At their Central Economic Work Conference in December, party leaders recognized some slowdown was inevitable when they prioritized reducing excess capacity. That conference also suggested that monetary and fiscal policy would be used not to prop up obsolete industries, but to stimulate demand more broadly and thereby ease the transition for workers laid off by downsizing companies into new jobs. It also indicated that bankruptcy would no longer be off limits for state-owned companies. People’s Daily Online, a party mouthpiece, quoted an “authoritative insider” as saying. “Turbulence cannot be entirely avoided, but it is worthwhile turbulence.”

Such rhetoric isn’t new. A year after becoming Communist Party chief in 2012, Xi Jinping pledged to give markets a “decisive” role in the economy. But reality has been different. An overhaul of state-owned enterprises unveiled in September suggested bureaucrats would seek to merge companies suffering from excess capacity, rather than let such companies fail.

This may be less disruptive economically and politically in the short run because it would avoid loan defaults and minimize job cuts. But Haibin Zhu of J.P. Morgan notes that means debt will keeping mounting, productivity and growth will slide further, and rolling over loans to “zombie companies will crowd out the financing for other companies (especially from new sectors).”

In the long run, then, it might be better for China, and the world, that it suffer the turbulence of market forces now.

Write to Greg Ip at greg.ip@wsj.com and Bob Davis at bob.davis@wsj.com

http://www.wsj.com/articles/intervention-by-beijing-is-worsening-chinas-market-woes-1452449371

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