China’s MSCI Index comeback, with double-digit gains through February, continues on strong foreign-investor inflows. Morgan Stanley and Citigroup predict more than US$100 billion in allocation this year, even if “A” share weightings only increase incrementally. According to data trackers, around $10 billion went into equities in January, and the Shanghai exchange this week notched the biggest daily rise since 2015 and is up almost 20% for the first two months.
Lunar New Year retail sales climbed only 8.5% on an annual basis, the worst performance since coverage began in 2005, and with US trade tensions the current-account surplus was barely positive in 2018. However, GDP growth is expected to continue in the 6.5% range as the government again opened the fiscal and monetary spigots short of “flood-like” stimulus. It will likely widen last year’s declared budget deficit of 4% of gross domestic product, and total social financing hit a record 4.5 trillion yuan ($673 billion) in January with a raft of new state-bank facilities directed at small business in particular.
The enthusiasm sloughs off research, such as respective Morgan Stanley and China Beige Book criticism, that the economy is in “long-term decline” and published national account numbers are “garbage.” It ignores the first offshore state company bond default in 20 years when Qinghai Provincial Investment Group failed to pay $10 million due in Hong Kong on time, and stock-exchange price-earnings ratios tipping again into double digit toward recent averages.
Retail investor margin loans have resurfaced as a catalyst, and any Beijing-Washington trade truce may prove short-lived, as President Donald Trump extended the March negotiating deadline.
With Venezuela’s eruption spilling over into neighbors, emerging-market investors increasingly are wary about China’s large Latin American footprint as a new risk. Bilateral policy bank loans to Caracas totaled almost $70 billion over the past 15 years, according to a database compiled by the Washington-based Inter-American Dialogue. Opposition head Juan Guaido, whom several US allies have recognized as interim president, pledged to honor outstanding obligations estimated at $20 billion for principal alone, and Ecuador as another major recipient just agreed on an International Monetary Fund program to be able to settle its own oil for credit ledger, but both contingencies could further erode Chinese financial system and fiscal discipline commitments.
In 2018, the China Development and Export-Import Banks lent more than $7.5 billion to Latin American and Caribbean governments and state-owned firms, outstripping activity through the World Bank and Inter-American Development Bank. Venezuela took $5 billion, around two-thirds the sum, and Ecuador and Argentina, which received a record $50 billion IMF rescue last year, each got $1 billion.
The Dominican Republic’s electric utility borrowed $600 million, with the regional sector’s focus as in the past on energy and infrastructure. The arrangements do not attach policy conditions but require Chinese contractors and equipment, as in Argentina’s railway and Ecuador’s earthquake reconstruction. In Venezuela its stake increased in oil output, as the administration of President Nicolas Maduro announced the drilling of several hundred wells and a joint venture between the state monopolies China National Petroleum Corporation (CNPC) and Petróleos de Venezuela SA (PDVSA).
Chinese facilities are on commercial terms, but in Ecuador’s case the interest rate was half the 11% through standard global bond issuance. With Venezuela’s additional funding last year, Beijing stipulated an end to a previous principal payment grace period, implying a country exposure limit even before the confrontation between National Assembly leader Guaido and incumbent Maduro over presidential legitimacy.
Elsewhere, dams in Argentina were caught in corruption allegations, and a Bolivian one was halted after lack of local-community consultation, the Inter-American Dialogue finds. These projects are under pressure to improve risk assessment and preparation, especially since they were rejected on environmental and social grounds by other development lenders.
Latin America’s relationship to the multitrillion-dollar Belt and Road Initiative is also an open question, as Beijing emphasizes closer strategic areas geographically. Argentina and Ecuador reportedly wish to renegotiate loan terms, and Brazil’s new President Jair Bolsonaro campaigned on a platform of reducing oil company Petrobras’ ties to Chinese banks.
China’s big four state commercial banks at the same time have been more active in co-financing transactions and specialist funds, as the Asian International Infrastructure Bank also considers regional participation. The review suggests Chinese finance will turn more cautious, and investor sentiment as well, under near-term mounting losses.