E Markets: It Is Not Enough

The issue for China is not about stimulus but about debt. It is true that China’s external debt, public and private, is still very low by world standards, reaching only 13% of GDP. But debt issued overseas has grown significantly since the slowdown of China’s credit boom. As central authorities have attempted to regulate credit, enterprises have borrowed abroad. The movement in up debt in China has been led by companies many of which can sell out the assets to cover the loans but only when the markets are bid. This is the key for financial stability and for confidence to hold. There is a socialization of debt in Asia that isn’t well understood in the West (particularly in the US) where failure isn’t a cause for family shame but an incentive for better ideas. The risk/reward for 2019 rests on the believability of the China stimulus (read as renewed growth led by debt). 

What Happened?

  • Japan December machine tool orders drop 18.3% y/y after -17.0% y/y – back to June 2016 lows. On a monthly basis, preliminary machine tool orders rose by 3.0% following declines of 5.7% and 9.0% seen in November and October respectively. Regardless, when compared to a year ago, the volume of factory orders for both domestic and foreign/overseas orders are weak.

New CNY Loans don't reveal big demand for money

  • China December M2 money supply 8.1% y/y from 8% y/y – less than 8.2% y/y expected. The new CNY loans rose 13.5% up 1.08trn from 13.1% or 1.25trn – more than the 13.2% or 800bn expected. For all of 2018, new loans were CNY16.17trn with households 46% of them down from 53% in 2017, but corporate share rose to 51% from 50%. Total social finance was also stronger at CNY1.59trn from CNY1.52trn – better than the CNY1.2trn expected. The People’s Bank of China has revised the way it calculates TSF by adding financial institutions’ asset-backed securities and loan write-offs. It has also added local government special bonds issuance into the TSF calculation from September.
  • French December final HICP unrevised at 0.1% m/m, 1.9% y/ y after -0.2% m/m, 2.2% y/y – as expected. The national rate also unchanged at   0.0% m/m, 1.6% y/y after 1.9% y/y. 
  • Spanish December final HICP unrevised at  -0.5% m/m, 1.2% y/y after -0.2% m/m, 1.7%y/y – as expected. The National CPI also unchanged at -0.4% m/m, 1.2% y/y after 1.7% y/y. 

  • German 2018 GDP 1.5% y/y after 2.2% y/y – as expected. This was the 9th year of expansion but with some lost momentum given the last 2 years were 2.2% each. The 10-year average is 1.2% y/y. Both household consumption up 1% and government spending up 1.1% supported. Capex was up 4.8% compared to 4.5% in 2017. Exports were up but at a slower pace – with trade subtracting 0.2% from the headline GDP. The government budget surplus rises to 1.7% of GDP to E59.2bn a new record after 1% or E34bn in 2017 - more than the 0.6% surplus expected.  
  • Eurozone trade surplus E19bn after E14.7bn - more than the E13.7bn expected.Exports rose 1.9% y/y to E203bn while imports rose 4.7% y/y to E184bn. Trade within Eurozone rose 1.5% to E170.5bn. The biggest partners were US with total surplus E129bn Jan-Nov with exports up 8.5%; China with total deficit E169.9bn with imports up 5.2%; Switzerland with total surplus E45.2bn with exports up 5.6% and Russia with total deficit E75.6bn with exports up 16.9%. 
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