Did Chinese reform just return with a vengeance?

Most of us were run down by China’s sudden swing to commodity-intensive growth in 2016. Are we about to see the reverse in 2017? From the WSJ:

China’s central bank has guided short-term lending rates higher in order to squeeze out borrowers who are using the cheap money to make risky bets and loans.

Last week, some bondholders, including asset managers and issuers of “wealth management products”—off-balance-sheet investment vehicles used by banks and other institutions to get around regulatory limits on lending—were likely squeezed too much. As a result, they began dumping government bonds—which are liquid and thus easy to sell—to raise cash, analysts say.

Some 40% of the assets in wealth management products—the biggest portion—was invested in bonds as of the first half of this year, up from 29% in 2015, according to Moody’s Investors Service.

The selloff sent China’s benchmark 10-year government bond yield to 3.33%, its highest level since September 2015. The 10-year bond yield had hit a 14-year low of 2.66% as recently as October. Yields move in the opposite direction of prices.

Last week’s sharp price drop has raised concerns that a larger bond rout may be in the offing. China’s stock markets crashed in 2015, wiping out $5 trillion of value, a fresh memory for many investors.

Many economists say China’s debt scale up may result in a crash similar to the 2008 mortgage crisis in the U.S., or a long slowdown such as Japan’s after its 1980s property bubble burst—or both.

The clearest sign that many Chinese are worried is the amount of money flowing out of China despite strict measures to stop it. China’s foreign reserves have dropped by 21% to $3.05 trillion in the past two years.

Chinese authorities are aware of the risks. On Friday, a senior Chinese government economic working group said for the first time that controlling financial risk and reducing asset bubbles had become a priority, according to a statement reported by Chinese state media. The country’s top decision-making body, the Politburo, issued a similar warning earlier this year.

Is the post-Communist National Conference swing back towards Chinese reform coming early? After the working group last week we see the following release on the Five Year Plan, from Ifeng:

In the guiding ideology of the document clearly pointed out that to further develop and expand a new generation of information technology, high-end equipment, new materials, biotechnology, new energy vehicles, new energy, energy saving and environmental protection, digital creative eight strategic emerging industries.

Target: By 2020, the value added of strategic emerging industries will account for 15% of GDP (2020 GDP target 90 trillion, 15% is 13 trillion, and behind the figures a bit contradictory …), the formation of new Generation of information technology, high-end manufacturing, biology, green low-carbon (new energy vehicles, new energy, energy saving and environmental protection), digital creative scale of 10 trillion yuan of new pillars.

Information technology industry: by 2020 the total output value of more than 12 trillion. Promote the integration of Internet of Things, cloud computing and artificial intelligence to various industries, expand the application of “Internet +” in the field of life and public services, implement the national data strategy, strengthen the information technology core industry, develop artificial intelligence, Economic management and so on. (Investment Opportunity: Promote the integration of triple play, further liberalize the competitive business in the basic telecommunication industry, relax the market access restriction of the integrated products and services, and promote the mixed ownership system of the state – owned telecom enterprises.

High-end manufacturing: strive to 2020, the output value of more than 12 trillion yuan. To create high-end brand of intelligent manufacturing, to achieve new breakthroughs in the aviation industry, bigger and stronger satellite and application industry, strengthen the leading position of rail transportation equipment, and enhance the international competitiveness of marine engineering equipment, improve the new material base support. (Special attention to the impact of high-speed rail technology on the regional economy: 500 kilometers per hour wheel and rail test trains, 600 km per hour maglev system and other new train research and development and industrialization, to promote 120-160 km per hour, seamless convergence with the urban rail transit ) Railway equipment)

Biological industry: By 2020, the scale of 8-10 trillion. The construction of new biomedical system to enhance the level of development of biomedical engineering to accelerate the development of bio-agricultural industrialization and promote the large-scale application of bio-manufacturing, biological services to cultivate new formats, innovative bio-energy development model.

Green low-carbon: the scale of output value in 2020 reached 10 trillion yuan. Scale application of new energy vehicles to promote the development of new energy industries, and vigorously develop efficient energy-saving industries, accelerate the development of advanced environmental protection industry, and further promote the recycling of resources. (Investment opportunities: to achieve the new energy vehicles in 2020 production and sales of more than 2 million, total sales of more than 5 million; nuclear power, wind power, solar energy, biomass and other energy consumption accounted for more than 8% of total industrial output value 1.5 trillion; wind power installed capacity of more than 210 million kilowatts; distributed photovoltaic power generation, photovoltaic power plants, solar thermal power installed capacity reached 60 million kilowatts, 45 million kilowatts, 500 million kilowatts)

Digital creative areas: by 2020 the output value of related industries reached 8 trillion. Innovative digital culture and creative technology and equipment, rich digital cultural creative content and form, enhance the level of innovation and design, and promote the development of related industries such as integration.

…Build in the eastern part of world-class strategic emerging industries Cities around Beijing, Tianjin and joint development, strengthening of Beijing, Tianjin economic and technological talents linkage, forming radiating Bohai Sea region and the northern hinterland of the development of strategic emerging industries Development Community; play leading role in the Yangtze River Delta economic belt of the Yangtze River to Shanghai, Nanjing, Hangzhou, Hefei, Suzhou, Wuxi and other metropolitan area as a fulcrum to build entire areas blend chain group pattern of industrial development; to Guangzhou, Shenzhen as the core , to enhance the international competitiveness of the Pearl River Delta city group of strategic emerging industries, extend the industrial chain and service chain layout, promote regional economic restructuring and development; promote the Shandong Peninsula city focus on the development of biological medicine, high-end equipment manufacturing, new generation of information technology, new materials and other industries and marine economy; around the major cities of Fuzhou, Xiamen , promote industrial development of the west side of the biological, marine, and other integrated circuits.

Relying on the industrial basis of the Midwest, and vigorously promote the Chengdu-Chongqing region, Wuhan metropolitan area, Xiangtan city group, urban agglomeration, the Guanzhong Plain City Group and other key areas of strategic development of new industries, and actively create conditions for industries to relocate to the eastern region; support Kunming, Guiyang and other urban development industries with comparative advantages, promote the economic belt of the Yangtze River region of industrial development.

Butt Silk Road economic belt construction, and promote the Tianshan Mountains, Lanzhou – Xining and other Northwest Urban Agglomeration development of special industries. Promote the northeastern region to develop robotics and intelligent equipment, optoelectronics, biomedicine and medical equipment, information services and other industries, Shenyang, Dalian, Harbin, Changchun, as a fulcrum to support the Northeast urban agglomerations create a leading strategic emerging industry clusters, drive Regional economic transformation and upgrading.

Not much in the way of commodity-intensity there.

The working group did also emphasise stability so I expect the infrastructure push to continue but it looks increasingly like authorities are done with the extremes of liquidity and the property market (though I do not expect any formal interest rate rises).

If so, iron ore is going to completely reverse next year and assuming the push back to reform accelerates past the National Congress later next year the shakeout will return in full:

ScreenHunter_16733 Dec. 14 15.39

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