Letter From Shanghai No 870 - A Ringside Seat

As the US inflation rate accelerated to 8.5% last night, the highest since December 1981, the US Treasury offered a limited tranche of USD 34 bn 10-year bonds, which attracted USD 83 bn in investor funds. The median yield for the winning bid was 2.62%, up sharply from 1.84% at a similar event a month ago. As the US inflation data did not surprise on the upside, the 10-year note has peeled back from yesterday's high of 2.83%, trading around 2.72% currently.

In Washington, the Fed has announced what every Fed watcher agrees is a long, multi-step tightening process, a path beset with destabilizing land mines. Some bank analysts consider last night's inflation print will be the highest in the current cycle. But with Russia digging deeper into its campaign and Chinese export industries teetering on the edge of closure, one might be forgiven for expecting further US CPI increases in the future.

However, here in the Middle Kingdom, China's inflation printed this week at 1.5%, and China watchers are predicting the PBOC will announce a cut in the banks' reserve requirement ratios for small and medium enterprises and reduce benchmark rates soon, but a credit pulse similar to the US is unlikely. Beijing policymakers may consider deep rate cuts to levels below corresponding rates in the US, which could create the environment for capital outflow from China which is to be avoided. Therefore, the monetary policy options offered to China are beginning to narrow.

China's benchmark CSI300 index fell 3.1% on Monday, the biggest drop in a month, and the market dipped further yesterday morning to bring this year's loss to a 17% low. However, the CSI300 recovered in the afternoon in a move that had the fingerprints of "national team" buying all over it.

Indeed, on Monday, a joint statement issued by the CSRC and the All-China Federation of Industry and Commerce stated that Beijing will encourage social security funds, pension funds, insurers, trust firms and wealth management firms to allocate more money to equity assets and invest in distressed quality listed companies. The government said it will also improve the financing mechanism for private companies and support corporate fundraising, acquisitions and restructurings in areas badly hit by Covid-19.

The municipal authorities in Shanghai report that from 00:00 to 24:00 on April 12, there were 1,189 new confirmed and 25,141 asymptomatic infections, which is a new high. As we enter our 27th day of quarantine, for my wife and I the measures have tightened. Previously we had access to the compound and its park-like garden, but for the next six or seven days, we are restricted to our apartment with all that that entails, the garbage will be collected from our door, etc. So, as I look down from my eyrie on the 38th floor, I suspect keeping the city fed, watered and clean is consuming huge municipal resources, as the city, well, my part of the city, can no longer do that for itself. There is nothing in official messaging that would deflect from the current zero-Covid policy, however, an adjusted template of additional boosters/vaccinations, daily testing, quarantine at home and oral drugs such as Paxlovid could emerge sometime in 2023. Or will the economic costs of zero-Covid overwhelm China before then? Whichever way it goes, I have a ringside seat.

Have a good day,

John