Trade War 2020: China ‘Decouples’ As Central Bank Injects More Money Into System

The first sign that China hard liners will take a leave of absence from Western capital markets if the Communist Party is embarrassed came on Thursday. Sorry, London Stock Exchange. You just got unliked by the Chinese government.

The LSE is no longer connected to the Shanghai Stock Exchange. If London brokers want to put money to work in mainland China stocks, they have to do it through mainland partners or the old fashion way — via Hong Kong.

The move is the first sign of China’s willingness to cut off a major market from its securities system, or at the very least, make it harder for foreign investors to gain access to China ever expanding stock market.

The move, reported first by Reuters yesterday afternoon, came after the U.K. followed in Washington’s footsteps and called out China for civil unrest in Hong Kong.

As a result, China will also not list stocks on the LSE as planned. The stock connect between the No. 7 and No. 4 exchanges by market cap was launched last summer.

The U.S. has also chastised China for Hong Kong protests, even though China’s mainland law enforcement has not been part of the violent crackdowns of late. Last month, Washington lawmakers passed the Hong Kong Human Rights and Democracy Act. China complained, but did not retaliate. The U.S. exchanges are not linked to Shanghai or Shenzhen exchanges.

By kicking London to the curb this week, Beijing is sending a warning to Wall Street about what could come their way if Washington kept pressing them on Hong Kong, or the Muslim detention camps in the Xinjiang province in far western China.

Wall Street has been one of the largest lobbyists for an end to the trade war, now heading into its second year. Global investors are enamored with the prospects of investing in the Chinese market. While highly volatile, the financial industry has created new products and entire new departments designed to either sell China securities or game the system in quant models that look for everything from buzzwords on Chinese social media that can send stocks to the moon, to the launching of new research departments analyzing the hundreds of listed stocks in Shanghai and Shenzhen.

Investors that are well connected to China have easier, faster access to the market. Last year, when the new Star Board was launched for new tech companies on the Shanghai Stock Exchange, some company shares ballooned three fold in intraday trading.

Meanwhile, Chinese authorities at the People’s Bank of China (PBoC) are still bracing for an economic slowdown this year caused in large part by trade tensions.

This week, the PBoC today announced that it will cut the reserve ratio requirements for banks by another 50 basis points. That goes for almost all financial institutions, effective January 6. The rate cut means that banks have more money to lend, if they wish to do so.

According to the PBoC’s estimate, the opening of the liquidity valve should add around 800 billion yuan to China’s financial system. The timing and scale of the cuts were in line with market expectations, sending the mainland A-share market higher on Thursday. The market was in a minor sell mode as of early Friday morning.

China’s economy is slowing, but holding up despite last year’s escalation of trade tensions.

China’s official manufacturing PMI, which reflects sequential growth momentum, remained unchanged from November at 50.2 in December, slightly stronger than market consensus.

The 50.2 print takes its annual average to 49.7 in 2019 from 50.9 in 2018.

New orders and raw materials inventory subindices both eased, to 51.2 and 47.2, respectively from 51.3 and 47.8 in November. The new export order sub-index rose to 50.3 in December from 48.8 in November, due perhaps to the easing of U.S.-China trade tensions around mid-December, said Ting Lu, the chief China economist for Nomura in Hong Kong.

“The extended strength in the official manufacturing PMI certainly looks positive for markets,” says Lu. Like the LSE connection to the Shanghai exchange, nothing lasts forever. “This (growth spurt) may not be sustainable,” Lu says. “The Chinese economy has yet to hit bottom.”

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