Letter From Shanghai No 1004 - It Is Not My Place To Say

Although US Retail Sales surged 1.3% MoM in October (previous 0%, expected 1%), it was the 50% plunge in Q3 profits from US retailer Target and its negative outlook for consumer consumption that caught investor attention as Christmas budgets diminish amid inflation and tighter financial conditions. Target shares fell 14%, leading other retailers down. I do note that the US Retail Sales numbers are not adjusted for inflation, therefore, perhaps the improvement in official US retail sales data is illusory. In a sense, we should count the number of goods, not just the prices paid for them. Of course, we cannot, but perhaps we can look elsewhere for insight.??

Trade reports suggest the combined container traffic through the ports of Los Angeles and Long Beach was just 0.84 million twenty-foot equivalent units (TEUs) in October, a 21% fall YoY in a month that traditionally sees the arrival of Christmas inventory. It is the lowest October volume since the recession of 2009. Admittedly, there are other factors in play on the West Coast, including contentious labour negotiations and pricing, but overall we might find the diminishing import volume numbers supportive of Target’s outlook, and tangentially dimming the prospects for Chinese export industries.

This morning Xinhua is urging regional and city authorities to “optimise and adjust” in their battle with Covid and that the recent rule changes are not an excuse to “relax and lie flat.” Some do wonder if the recent rule changes indicate a step-by-step approach to a fuller reopening, which is indeed possible, but maybe two steps forward and one step back as control measures are adjusted and optimised going forward.

Chinese broker reports are floating the idea of reducing the RRR, pointing to Chinese inflation as not high but the economy is below its growth potential. Certainly, we have seen Beijing deliver policies to support property developers. Data from the China Research Institute suggests the debt restructuring of some 40 developer companies has now reached RMB 150.5bn and that another 17 property companies will launch debt-restructuring plans soon. The brokers argue that Beijing needs to stimulate consumer confidence and therefore demand to buy the inventory of residential properties that overhang the market, which, for the moment, destabilises the outlook.

Looking abroad, Beijing watchers seem to agree that the Bali G20 did not introduce a step change in US-China relations, but perhaps the low point reached during the Pelosi Asian tour is now behind the two nations. The positions have not changed, but perhaps the stridency has softened.

Taken together, Covid policy changes, government policy support, and renewed stability in international relations - do they add up to a basis on which the markets can launch a bull run? It is not my place to say.

Have a good day,

John