30.07.2019 – Special report. Who has the longer hand in the customs dispute – China or the USA? Perhaps we will find out later this week. Because the trade talks are to be resumed. Domestic political developments play into the hands of the Americans. Because the Chinese leadership apparently fears a revolution. This could be triggered by an economic crash. This seems quite possible: the second Chinese bank has just been saved by a bailout.
New round in customs dispute
As of Tuesday, traders will be paying particular attention to their trading platform as a U.S. delegation headed by Trade Representative Robert Lighthizer is expected to visit the People’s Republic for talks. The talks were frozen weeks ago with this state of affairs: The USA is withdrawing its sanctions against the telephone company Huawei. In return, the Chinese are increasingly buying agricultural products in the USA, especially soybeans. US President Donald Trump had recently been rather pessimistic and complained that the Chinese had not yet started buying agricultural products. He also said that Beijing might be waiting for a new president to negotiate further. Specifically, to a new fool who would give in to Beijing. The question is whether China has the time to sit out the conflict. The events in Hong Kong and in the banking sector at least raise doubts.
Beijing sees a colour revolution
The Chinese leadership has just spoken on the unrest in Hong Kong. For the first time a Chinese party newspaper has described the protests as a “colour revolution”. The official “China Daily” wrote on Monday that the protests “have the same hue as the colour revolutions instigated in the Middle East and North Africa: local elements critical of the government conspiring with outside forces to overthrow governments using modern communication technology to spread rumours, mistrust and fear”.
Three red lines
Also for the first time, the Hong Kong and Macao Bureau of Affairs made a statement. The statement goes in the same direction. A spokesman drew three clear lines: first, no threat to national security. Second, no challenge to the authority of the central government and the constitution (although this fact is ridiculous, since the party is already in power and in power as it pleases). Third, Hong Kong should not be misused as a basis for infiltrating China. After all, the spokesman also addressed a critical word to the administration of the former crown colony: it must ensure that the concerns of young people are taken seriously, that they need good economic development and career opportunities.
China fears its own people
Through these two speeches, Beijing revealed how the communists ticked: they are indeed afraid of a revolution. Beginning in Hong Kong, extending to Beijing. You may remember our Special Report in which we discussed the sanctions imposed by the USA on companies from the Chinese security sector. Washington has indeed hit a sore spot with this: If the millions of surveillance cameras in the country no longer work, the bigwigs in Beijing will have to tremble for their survival if the uprising breaks out in the heartland. The Tianmen massacre 30 years ago is still in the bones of those in power. Moreover, the Chinese have not forgotten the reign of terror under Mao Tse Dong. So there are still some outstanding bills here.
There is enough fuel for the bubbling mixture. Extreme housing shortage in Hong Kong, apart from the fact that the people there felt betrayed by their leadership in democracy because they wanted to extradite dissidents to Beijing. This raises the question of how the Chinese economy is really going, apart from the falsified statistics. And what about the banks and how secure people’s savings are.
Banks in the province on the move
So another piece fits into the possible revolutionary puzzle. In Germany so far little attention has been paid to the condition of the smaller banks. At the end of May, the Baoshang Bank with assets of around 576 billion yuan, i.e. around 75 billion euros, was taken over by the state. The news of the rescue of the rather unknown financial institution caused some experts to raise their eyebrows. What about the financial sector outside the metropolises? And Barclays Bank has already drawn up a list of those financial institutions that had delayed their 2018 annual financial statements. There are almost 20 of them that are subject to suspicion: Rotten loans, thin capital cover, collapse risk.
Also on the list was the Bank of Jinzhou (93.4 billion euros). This is precisely where Beijing has just set up the rescue. As the financial blog “ZeroHedge” reports, Jinzhou reported talks with government representatives on Thursday due to acute liquidity bottlenecks. The repo rate for Chinese government bonds shot up immediately. The banking supervisory authorities announced that the country’s largest donors would have to prepare for an intervention. Of course – China must avoid a credit crunch and bank runs at all costs. Reuters announced on Sunday that the move would be implemented, according to which three state-owned companies want to take a stake of at least 17 percent in Jinzhou in return for fresh cash; these are the Industrial and Commercial Bank of China (ICBC), China’s largest lender. China Cinda Asset Management and China Great Wall Asset Management.
Short and long opportunities
Our conclusion: It ferments in the Chinese province. At the behest of the Beijing leadership, many financial institutions have either invested themselves in real estate projects or granted mortgage loans. Outside of Beijing and Shanghai as well as other mega metropolises, however, there is acute vacancy, partly with entire ghost towns and empty shopping centres, whose dull shop windows are covered with logos of Western brands to camouflage them. If exports collapse in the customs dispute with the USA, many borrowers from foreign trade will tip over. China has still accumulated enormous reserves to save some companies and credit institutions – but the mass of American government bonds must first be sold.
For traders, this means the following: Keep an eye on the banks in the flat country. Ditto the small and medium-sized property developers and project developers. When a bank collapse eats through the market on a broad front, panic ensues. Then the Chinese indices will crash. If the Chinese elegantly rescue banks and property developers – for example by buying apartments – the danger will be averted. Another side: If there are really problems on a broad front in the country, Beijing has to give in in the dispute with Washington and conclude a customs agreement. The result would be a leap of joy on Wall Street, the DAX and other stock exchanges.
Bernstein-Bank wishes you very successful trades!
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