A thread: What is China’s energy import/export makeup? Have they historically been net importers? Starting in 2000s, as the economy grows, China becomes less energy dependent. 1/5
Coal dominates as the 2/3 source of energy supply in China. 2/5
The most dramatic domestic production/import mix change over time for China crude. 3/5
For total energy supply, both domestic and imports increased. China obviously likes to have some self-reliance, but it exports a lot, and imports a lot. It needs the world in many areas. The narrative of complete self-reliance is just narrative. 4/5
When push comes to shuffle, Coal imports <10% of Coal supply, is one energy resource China has most control, in production and domestic coal futures trading. Last few days it restricted financial speculation in onshore coal futures market which lead to coal price decline. 5/5
China becomes less energy independent over time, in 2019 with 1/4 energy supply imported. @Twitter when will you allow a word edit in a tweet?
🧵1/4 China's Equity and Currency:
Currency is likely on a meaningful but managed appreciation.
Equity is not similar to the 2015/2016 bubble/crash situation.
"Equity
Onshore A-share market has had a highly choppy streak of trading in the past two weeks with staggering volumes changing hands every trading day. The combined market volume reached the unprecedented 3.5 trillion CNY or roughly 690 billion dollars and stayed at that high level of volume before the military parade on Sept 3. The market is talking about “the moving of deposits”, that is, households are moving their cash deposits from banks and Wealth Management Products, WMPs, to equity on the back of bottom-low interest rates and the wealth creation effect of the equity market.
Part of the market fluctuation might have come from the chatter that the significant rise of the indices in the summer has been somewhat induced by the “National Team” for better optics before the military parade and these forces would wane down right after it, hence the profit-taking flows were particularly eager right before and after Sept 3. All major indices retreated sharply on Sept 4 with the Startup Board shaving 5%+. But the nice rebound on Friday seemed to indicate this notion that “national team bidding up the market for good optics” was most likely just the market’s own speculation without any concrete evidence. The rebound on Friday entirely reversed the drop on the previous day; moreover, its intra-day price action was steady throughout the trading session without any major sharp spikes; it was a healthy rebound with the liquidity on sidelines buying the dip.
Market starts to be concerned about potential froth in valuation, partially from the PTSD of the speculative frenzy and its ugly aftermath in 2015. Some observers made some points about the historical high of trading volume, the balance of margin loans (~ 2.2T CNY, roughly the same as 2015) etc. as causes of concern. These thoughts are certainly legitimate, but perhaps a bit too early. For starters, the size of the market and the liquidity pool as well as the interest rate environment are entirely different from those of 2015. Market valuation, even after the meaningful rise, is merely back to a level slightly above the historical average of A shares. Also, the super tight environment of external liquidity of recent years is likely to come to an end, or at the bare minimum, improve meaningfully on the margin. Personally, I’d tend to think the very recent mini-frenzy of late Sept-Oct in 2024 serves as a fresh warning against emotional trading; it is way too recent to fade in the collective psyche of investors. Suffice it to say -- bubbles are not produced by a cautious market.
FX
CNY is under meaningful appreciation pressure. The price action says it all – the spread between offshore USDCNH spot and onshore USDCNY has gone negative (around -30/-60 pips most of the time) and has stayed there in the past ~10 trading days. To make it more significant, this happened on the back of continued South-Bound inflows under the Stock Connect into the Hong Kong market (which should have made USDCNH stand above onshore USDCNY, other things being equal), and the net South Bound flows registered around 110 billion HKD (~15 billion USD) in the past month. The North Bound data is no longer updated in a timely fashion, but it is fairly safe to assume it is below that under the South Bound, that is, net net, there have been visible buying flows on USDCNH.
The appreciation pressure is likely to intensify for a slew of reasons, and there is market chatter that some state-owned banks have been buying USD in both markets to slow down the rise of RMB. If this is the case, the currency issue might be one of the many topics to be discussed in the US-China trade talks and the stance of the PBOC will not show meaningful change despite weak NFPs in the US or a sharply lower YC of the treasuries, until concrete deliverables are secured in the trade talks.
The immediate path forward might be a slow strengthening streak or the RMB, with its pace just matching the forward premium of the FX swap points dictated by the interest rate differential, so that it is tricky for speculators on the currency to make an easy profit on the move.
"
2/4
Friend let me share the full private note above.
On the Chinese currency, our current internal tactical model is 25% hedged for CNH, thus also biased toward appreciation, as 50% hedged is our neutral baseline.
If PBOC guides the appreciation toward the market's expected forward rate, then due to higher interest in the US, it's tricky for currency speculators to make money. Chinese equity holders will get the currency appreciation if this happens.
3/4 I also think this run-up is different from the 2015/16 situation. (这次和2015那次应该不太一样)
The bank interest rate is so low now (1-2%), housing still depressed, and capital control tight, there are quite some Chinese investors who will consider some risky allocation to stocks for yield.
China Ministry of Commerce: it will crack down on those who say you could buy cheap fake high quality brand name luxury goods that’s been popular on TikTok etc.
🧵I agree w. the poll and think that US & China are likely to reach a deal by year end.
By not yielding, China showed its leverage. US's original plan of everyone just shut up and pay is not feasible. Both sides now are feeling the pain. /1
🧵The Communique, the press conference, the Decision, "the Trinity" 😀 (決定裏有12個探索值得一看)
Overall just released "Decision" follows similar points, no big and bold initiatives, but 12 "explores" that's positive and explained below. 1/ politics.people.com.cn/n1/2024/0721/c…
First Explore: Explore setting up personal bankruptcy system. (探索建立个人破产制度)
Probably a surprise to outsiders that China actually didn't have an easy personal bankruptcy system. So if one has a mortgage underwater, no easy way out. 2/
Second explore: Gradually increase mandatory/free educ from 9 years and beyond. (探索逐步扩大免费教育范围)
Background: ~45% Chinese students don't get to go to high school by standardized test and ended up vocational school or becoming a low skill worker.
/3