Strategy Boffins

China’s rate cuts and banking stability

Strategy Journal

China’s Rate Cut Decision Sparks Pessimism Over Economic Growth Amid Banking Stability Concerns

– Citigroup downgrades annual growth forecast to 4.7% due to China’s actions.
– One-year loan prime rate cut by 0.10 percentage points to 3.45%.
– Five-year rate, which impacts mortgage lending, remains steady at 4.2%.
– Economists expected 0.15 percentage point cuts to both rates.
– China’s growth forecast failing to hit official target of “about 5%”.
– Dilemma for Beijing: stimulate economy while preserving banking stability.
– Concerns over liquidity crisis among property developers impacting trust industry.
– Weak property sector, declining exports, and youth unemployment hampering growth.
– Chinese banks report slowing profits in the first half of 2023.

German Economy Faces Gloom

Strategy Journal

German Economy Faces Gloom as Structural Challenges and Global Downturn Loom

– IMF and OECD predict Germany to be the worst-performing major economy in the world this year.
– Energy-intensive industrial sectors’ production down 17% since the start of last year.
– German carmaking industry losing market share to cheaper Chinese rivals in the electric vehicle sector.
– Analysts forecast German GDP to shrink 0.35% this year.
– Effective tax rate on company profits at 28.8%, well above EU average of 18.8%.

UPI in India

– About 350 million people use UPI for paying for goods, services, or money transfers.
– UPI recorded almost 10 billion transactions in July, over 50% higher than the same month last year.
– The Reserve Bank of India (RBI) announced a plan for “conversational” payments using AI-based speech recognition.

China’s Temporary Deflation: Limited Impact on Global Inflation and Economy

Strategy Journal

Chinese Deflation

– Chinese consumer prices fell 0.3% in the year to July.
– Chinese deflation might have limited impact on global inflation as most of the price of goods made in China and sold elsewhere is paid to workers and other costs in the destination country.
– Weaker Chinese economy could benefit Europe by placing less competition on natural gas supplies.

Foreign Investors Confidence Crisis in China

– Bondholdings of foreign institutional investors fell Rmb37bn in July to Rmb3.24tn, reflecting a lack of confidence in China’s economic measures.
– Challenges to Beijing’s narrative of a robust post-Covid recovery have mounted, with missed payments by companies like Country Garden highlighting Beijing’s reluctance to bail out struggling firms.
– The benchmark CSI 300 index of Shanghai and Shenzhen-listed stocks has almost completely reversed its 5.7% rise following the politburo meeting.

Global Bond Sell-Off Spurs Surge in Borrowing Costs

Strategy Journal

Surge in Borrowing Costs on Both Sides of the Atlantic:

– US 10-year Treasury yields near highest level since 2007.
– Equivalent gilt yields at highest since 2008; French government bonds at levels unseen since 2012.

Factors Driving  Bond Yield Increase:

– Global bond sell-off driving benchmark US 10-year Treasury yields and other bond yields higher.
– Strong economic data suggests US economy’s strength and inflation may take longer to moderate.
– Increased government bond supply contributing to yield surge.
– Demand from foreign investors, like Japan and China, may be waning.

UK economy vs Germany economy

– UK’s GDP per capita in 2007: Just over $44,000
– Germany’s GDP per capita in 2007: Just over $47,000
– UK’s GDP per capita in 2022: Under $47,000 (barely moved since 2007)
– Germany’s GDP per capita growth from 2007 to 2022: 14%
– France, Germany, and the US are around one-sixth more productive than the UK

Japan’s Economy Surges on Strong Car Exports

Strategy Journal

Japan’s economy in 2023

– Japan’s GDP growth rate (April-June 23): 6%
– Consensus estimate of economists for GDP growth: 2.9%
– Number of consecutive quarters of expansion: 3
– Quarter-on-quarter GDP growth: 1.5%
– Average forecast for quarter-on-quarter GDP growth: 0.8%
– Export growth rate (second quarter): 3.2%
– Quarter-on-quarter fall in private consumption: 0.5%
– Quarter-on-quarter fall in imports: 4.3%
– Proportion of Japanese economy represented by private consumption: more than half
– Percentage of pre-pandemic levels for inbound tourism: more than two-thirds

Private equity in China

  • Goldman Sachs, JPMorgan, Morgan Stanley, Bank of America, and Citigroup collectively saw an 87% drop in net revenue from advising Chinese companies on raising equity overseas last year. This trend continued in 2023, with only $98 million earned since January.

Tokens: The New Money for the New Economy

Idea Almanac

“Tokens are the building blocks of the new economy. They are the way we will coordinate our activities, share resources, and create value in the future.” – Rachel O’Dwyer

Here are some key takeaways from the book:

  • Tokens are more than just digital currencies; they are also a new form of social coordination.
  • Tokens can be used to create new forms of value and exchange.
  • Tokens have the potential to change the way we think about money.
  • The rise of tokens is a sign of the growing power of platform capitalism.

 

The China Challenge: How China Is Using Its Economic Power to Challenge the West

Idea Almanac

“China is weaponizing its economy to confront the world. It is using its economic power to coerce companies and governments to bend to its will. This is a new era of economic warfare, and we need to wake up to the threat.” – Bethany Allen-Ebrahimian

Beijing Rules is a book by Bethany Allen-Ebrahimian that examines China’s economic rise and how the Chinese Communist Party has leveraged its dominant role in the global economy to coerce companies and governments around the world to align with its political preferences.

World’s 2nd largest shale gas reserve

Strategy Journal
  • 573 km pipeline named Nestor Kirchner pipeline was completed from Patagonia to Buenos Aires. Vaca Muerta is the second largest shale gas reserve in the world. Companies are looking at feasibility of $ 10 bn LNG plant to export the gas  25 Jul’23
  • India is the world’s biggest rice exporter accounting for 40% of global exports
  • Rich Americans are now spending more on services than luxury goods. Europe is now full of American tourists.
  • Goldman reduced its forecast probability of a recession in the next year from 25 % to 20 %
  • Tightening of monetary policy – increasing interest rates to reduce economic activity and hence inflation
    • Quantitative tightening – reducing bond holdings, reducing size of their balance sheets by central banks
    • Bond buying in crises ( like COVID ) – selling in normal times preparing for next crises
    • Over tightening – may cause collapse of banks due to shortage of liquidity
  • Integration of businesses after acquisition – Processes, Corporate structure, IT, customer accounts ..
  • Inflation – Consumer demand or due to imported commodities
    • Dollar strengthens when investors expect higher rates
    • 10 year treasury yield is proportional to inflation
  • Heat causes low productivity, does that mean India has low productivity due to heat ?

How is Chinese economy doing ?

Strategy Journal
  • President Xi Jingping are maintaining strategic focus for the economy – pursue global leadership in advanced technology, transition to green energy and security. He doesnt define economic success in terms of GDP growth, but in terms of tech self sufficiency
  • Chinese economy grew 6.3 % y-y, but q-q it is falling due to falling exports, weak retails sales, and dying property sector. Inflation in western world is significantly impacting China’s manufacturing sector. China has relied on investment driven growth over the years, and it has slowed down transition to consumer based economy. Youth unemployment is at 20 %
  • Defence groups in Europe : SAAB, Sweden; Thales, UK; Renk, Germany; Rheinmetall, Germany; Diehl, Germany
  • Political deadlock in Thailand means no chance of reforms to raise the sluggish rate of economic growth
  • Loan to Deposit ratio – Ideal is 80 to 90 %

why is Euro looking attractive

Strategy Journal
  • “Product strategy, business strategy, people, operations: those things you can easily figure out, but you have to learn how to quickly get your mind in the right spot” – Ryan Roslansky
  • Eurozone is in technical recession, then why is Euro looking attractive ? Euro has risen 2.3 % against the dollar since July start
  • Credit and debit card spending can predict overall spending in the economy
  • Kitchen sink approach: stuffing in as many one off items as company can in a quarter

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