Ed’s Daily Notes for March 21st   Leave a comment

New York Times: Bloomberg Hints at Curb on Articles About China

This is the problem with combining news organizations with other businesses:

The chairman of Bloomberg L.P. said in a speech here on Thursday that the company should have reconsidered articles that deviated from its core of coverage of business news, because they jeopardized the huge sales potential for its products in the Chinese market.

The comments by the chairman, Peter T. Grauer, represented the starkest acknowledgment yet by a senior Bloomberg executive that the ambitions of the news division should be assessed in the context of the business operation, which provides the bulk of the company’s revenue. They also signaled which of those considerations might get priority.

Acknowledging the vast size of the Chinese economy, the world’s second-biggest after that of the United States, Mr. Grauer, said, “We have to be there.”

“We have about 50 journalists in the market, primarily writing stories about the local business and economic environment,” Mr. Grauer said in response to questions after a speech at the Asia Society. “You’re all aware that every once in a while we wander a little bit away from that and write stories that we probably may have kind of rethought — should have rethought.”

Bloomberg, the financial data and news company, relies on sales of its terminals, which are ubiquitous on bankers’ desks around the world, for about 82 percent of its $8.5 billion in revenue. But sales of those terminals in China declined after the company published an article in June 2012 on the family wealth of Xi Jinping, at that time the incoming Communist Party chief. After its publication, officials ordered state enterprises not to subscribe to the service.

The problem is that financial news will inevitably cross over into politics, since politics has an impact on the financial world. Journalists should be concerned with what their readers need to know, and not whether it offends a politician. In fact, the great journalists will typically offend a lot of politicians if they are doing their job right.

Speaking of Bloomberg…

Bloomberg: China Beige Book Says Economy Slowing

It looks like somebody in the newsroom didn’t get the memo about China stories:

China’s economy slowed this quarter, with industries including retail and mining showing weaker revenue growth while loans through non-traditional channels became more expensive, according to a private survey.

Even with the moderation, the labor market and wage growth were little changed from the previous quarter, according to the China Beige Book survey, published by New York-based CBB International.

The report adds to signs that Premier Li Keqiang may face difficulties reaching an expansion target of 7.5 percent this year without stimulus. The State Council, or cabinet, said this week it will speed up construction projects and other measures to support the economy after data showed moderating growth in industrial production and investment.

“The pace of Chinese economic expansion has plainly slowed,” Leland Miller, president of survey publisher CBB International, said in a statement with Craig Charney, director of research and polling. “A weaker retail performance is the principal driver of the aggregate trend.”

Will more infrastructure help the Chinese economy? Hard to say. It will feed some money into the economy. But adding more infrastructure to a country which has a lot of unused infrastructure seems like a poor use of money. My guess is this is a bandaid for an economic broken leg. However…

Bloomberg: Global Funds Double China Bond Holdings as Default Starts

Foreign investors boosted purchases of China’s onshore bonds by 16 percent this year as some funds look at the yuan’s drop as a buying opportunity.

They increased their holdings to a record 384.1 billion yuan ($62 billion) as of Feb. 28 from 331.9 billion yuan at the end of 2013, according to data from China Central Depository & Clearing Co. and the Shanghai Clearing House. Schroder Investment Management Ltd. says renminbi debt is attractive after the currency’s 2.8 percent loss this year, Stratton Street Capital LLP is applying to enter the onshore market and Western Asset Management Co. doesn’t expect long-term depreciation.

…Policy makers in the world’s second-largest economy are seeking to discourage the accumulation of debt by allowing companies to default and by introducing more volatility in exchange rates and borrowing costs. JPMorgan Chase & Co. said in a note after the central bank doubled the yuan’s daily trading limit to 2 percent on March 17 that the currency will strengthen to 5.95 per dollar by the end of this year from 6.2275 yesterday. China’s 10-year sovereign bond yield is 4.52 percent, compared with 2.77 percent for similar U.S. Treasuries.

…The Chinese currency strengthened to a 20-year high of 6.0406 per dollar on Jan. 14, after appreciating 2.9 percent last year in the best performance in Asia. It has weakened since then as the People’s Bank of China encouraged more volatility to dissuade capital inflows driven by one-way appreciation bets on the yuan.

…“We’re slightly overweight on the yuan and most of our exposure had been hedged,” said Desmond Soon, a Singapore-based portfolio manager at Western Asset, which oversees $452 billion globally. “Long term, it’s not in the interest of Chinese authorities to create a depreciation trend for the yuan because they are trying to internationalize the currency and want to attract foreign capital into China.”

It is well-known the Chinese are looking to replace the dollar with the yuan as the world’s reserve currency, which means they will have to keep it reasonably strong. However, is buying Chinese bonds comparable to running into a burning building? Even though I am bearish on China in the short to mid-term, I suspect they will figure out a solution to their problems. For longer-term portfolios, this could be a good time to get into Chinese bonds.

That said, the best etf for Chinese bonds is probably PowerShares Chinese Yuan Dim Sum Bond (DSUM). However, it has dropped about 5% from it’s January high. From a technical perspective, the chart is pretty ugly:

DSUM

I am adding it to my watchlist, because it could fall some more. But this is definitely one for fixed income portfolios, if you are willing to wait to acquire it. Even then, I would not recommend a large position. China will eventually bounce back, but we aren’t finished with the damage yet.

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