Highlights of the week of July 11, 2016

Dear PGM Capital Blog readers,

In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of July 11, 2016:

  • China Q2-2016 Economic Growth beats estimates.
  • Japan preparing for Helicopter Money.

CHINA Q2-2016 ECONOMIC GROWTH BEATS ESTIMATES:
On Friday, July 15, China world’s second largest economy grew with 6.7 percent in the second quarter of this year, from a year earlier, steady from the first quarter, analysts had expected it to dip to 6.6 percent.

Highlights:

  • More than 7 million new jobs were created in the first half of the year.
  • Average household income grew by 6.5 percent in both quarters, the data showed.
  • Industrial output edged up slightly to 6.2 percent in June, compared with 6 percent in May. But the figure was down from the 6.8 percent recorded last June, as several heavy industries attempt to trim overcapacity.
  • In the first half of 2016, the output of coal dropped 9.7 percent and production of raw steel was down 1.1 percent.
  • Fixed-asset investment grew 9 percent year on year in the first half of the year driven by an increase in infrastructure investment by state-owned enterprises.
  • Growth in property investment was also slightly down to 6.1 percent at the end of June from 6.2 percent in the first quarter.
  • Exports slipped 2.1 percent in the first half compared to the same period in the previous year. However, volume of goods sold to several countries that are part of the “One Belt, One Road” initiative increased. This includes sales to Pakistan that rose 22.5 percent, Russia up 16.6 percent, Bangladesh 9 percent, India 7.8, and Egypt 4.7. The major exported items were electronic devices and machines.
  • The consumer price index climbed by a moderate 2.1 percent over the first half.

JAPAN PREPARING FOR HELICOPTER MONEY:
In the past week, Japanese markets have seen hyped-up speculation that the government will resort to using what’s called “helicopter money”, where a central bank directly finances budget stimulus through programs such as perpetual bonds.

Former USA FED Chairman, Ben S. Bernanke, who met Japanese leaders in Tokyo in the past week, had floated the idea of perpetual bonds during earlier discussions in Washington with one of Prime Minister Shinzo Abe’s key advisers.

With Prime Minister Shinzo Abe preparing a big spending package to be announced as early as this month, the Bank of Japan will remain under pressure to expand monetary stimulus at its rate review on July 28-29, analysts say.

Bernanke’s version of a Helicopter drop could work two ways:

  1. The government would decide to spend a bunch of money (say on a massive tax cut, or on a new public works program), then the federal reserve would deposit the funds directly in a Treasury account.
  2. The Treasury would issue new bonds, which the Fed would buy and hold forever, while remitting all the interest back to the government.

The difference between the above and the QE programs the FED did during the Great Recession is, that with QE programs, the central bank buys government bonds on the open market and tries to push down yields.

With a helicopter drop, it’s coordinating with the rest of the government to finance immediate spending. And while it sounds a bit exotic, there are at least a few scattered examples of it in history.

PGM CAPITAL ANALYSIS AND COMMENTS:

China Q2-2016 GDP figures:
China’s economy narrowly beat estimates Friday with a 6.7 percent expansion on-year in the three months through June, as a string of stimulus measures from the government and the central bank helped shore up demand.

The Chinese government is aiming for growth of 6.5 to 7 percent this year, a slower pace than what the world’s second-largest economy had got accustomed to in the past two decades.

While growth was a shade better than expected in the second quarter, it is noted that activity was largely driven by government stimulus rather than the private sector.

China’s economy is gradually transitioning to a greater reliance on consumption compared with a previous emphasis on manufacturing but the transformation hasn’t been all smooth-sailing.

We believe that the country’s financial sector will profit the most form the transition of the Chinese Economy toward a more consumption one.

Based on the above combined with their strong balance-sheet, extremely low Price to earning ratio, we have a STRONG BUY rating on the four biggest Chinese banks.

Japan:
As can be seen from below 1-year chart, for the last 12 months the Japanese Yen has been rising against the USD and the Euro, which is hurting Japan’s export.

Secondly for the last 12-months, there was a positive correlation between the Japanese Yen and the price of Gold as can be seen from below chart.

This is why, for a brief, glorious moment this week, it seemed possible that Japan was about to embark on the weird monetary policy adventure of econ enthusiasts’ dreams.

Sadly, a government spokesman poured cold water on the idea on Wednesday, July 13, by clarifying that, no, Japan’s central bank was about try showering the country with “helicopter money.”

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

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