China Starts The Year Ridiculously Rich

&l;p&g;&l;img class=&q;dam-image getty size-large wp-image-900090924&q; src=&q;×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; People celebrate the New Year on December 31, 2017 in Beijing, China. This year is expected to be better than 2017 for the world economy. China will benefit from that, too. (Photo by Lintao Zhang/Getty Images)

China has started the year off right: filthy rich.

Its central bank, the People&s;s Bank of China (PBoC), has more cash in reserves than expected, at $3.139 trillion as of Dec 31. To put that into perspective, China has more money sitting in its cash reserve accounts at the PBoC than the economies of Russia and Brazil produced annually in 2016, based on World Bank figures.&a;nbsp; China&s;s gross domestic output is much larger than both, currently estimated at $11.2 trillion.

Emerging market countries like China tend to hoard cash in their central banks in order to ease investor concerns about debt. The more money an emerging country has in its central bank foreign currency account, the more confidence&a;nbsp;banks will have in lending to the government. They believe their interest payments can be covered by cash reserves. China&s;s debt load has ballooned over the last decade, causing some investors to avoid China, or underweight China in standard global portfolios, even though it is the world&s;s second-largest economy and accounts &l;a href=&q;; target=&q;_blank&q;&g;for nearly 14% &l;/a&g;of all global trade.

As an investment, the MSCI China continues to beat the S&a;amp;P 500 and the MSCI Emerging Markets Index over the last 12 months heading into the new year.&a;nbsp; The iShares MSCI China (MCHI) exchange-traded fund rose 52.15% in 2017, while niche China plays like the KraneShares China E-Commerce (KWEB) ETF rose 68%.

KraneShares CIO Brendan Ahern wasn&s;t shocked by the increased cash in China&s;s piggy bank.

&q;It&s;s not a surprise considering the dollar&a;rsquo;s weakness,&q; he says. &q;Declining reserves was a big story…but increasing forex reserves less so.&q;

&l;img class=&q;dam-image getty size-large wp-image-651044448&q; src=&q;×0.jpg?fit=scale&q; data-height=&q;698&q; data-width=&q;960&q;&g; Zhou Xiaochuan, governor of the People&s;s Bank of China. The Chinese central bank has enough money to make any short seller think twice. (Photo by Lintao Zhang/Getty Images)

Nevertheless, increased reserves is a sign that China has the cash to backstop domestic bank failures at the municipal level, and can control the ebb and flow of the renminbi, which gained 6.2% against the dollar over the last year, hurting short sellers yet again.


The central bank&s;s research bureau deputy chief Ji Min told the &l;em&g;China Daily&l;/em&g; on Monday that there was room for an increase in interest rates in the short term, citing stronger PMI and corporate profits up last year. Higher rates are often seen as a solution for China&s;s perennial overcapacity problem within some industries, like automotive. There is little evidence, however, to suggest that increased capital costs has reduced this problem for the Chinese economy.

In Hong Kong, real estate, tech, consumer staples and consumer discretionary stocks were all up.

Shanghai &a;amp; Shenzhen stock exchanges, home to the A-shares, started off red and ended up green. Like Hong Kong, real estate led the charge.

One of China&s;s hottest stocks, TAL Education Group (TAL), was up over 3% on the NYSE Monday morning thanks to a large share sale worth around $500 million to an undisclosed buyer. TAL is up over 160% in 12 months. China&a;rsquo;s three major airline stocks, China Southern (ZNH), China Eastern (CEA) and Air China (AIRYY), rallied in China on news that ticket pricing regulations were being loosened. The two ADRs were down today following gains of 107.9%, 65.7% and 99.31% in 2017.

Emerging market equity funds headed into 2018 strong with $1 billion-plus of fresh new money, according to EPFR Global in Cambridge, Mass. Global emerging market funds ended the week of Jan. 3 with the biggest inflow among the four major regional fund groups, beating pure-play China funds and Asia ex-Japan dedicated funds. Retail investors are now dabbling into emerging market mutual funds after a roughly two month hiatus, EPFR Global&s;s data showed last week.


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