In Brief: China, BRICS, Dividends & Beef

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Weekly Broker Wrap: China’s policy conundrum; brickbats for BRICS, global dividends bounce-back & diverging global beef pricing.

-A policy conundrum for China’s central bank
-Brickbats for the new look BRICS 
-Bank dividends bounce back globally
-Diverging global beef prices impact trade volumes

By Mark Woodruff

A policy conundrum for China’s central bank

Oxford Economics believes property-related debt accounts for at least 43% of China's GDP.

As the majority of this debt lays in China's banking sector, Oxford suggests pressure on bank margins is the core reason behind smaller-than-expected rate cuts by the central bank.

While the People’s Bank of China (PBOC) unexpectedly cut rates in June and then again in August, Oxford feels marginal interest rate changes are not enough to stimulate upward momentum for the property sector (and thus the Chinese economy).

Instead, an easy credit supply should be provided to larger property developers to support housing completions and stem a broader rout, in Oxford’s view.

It's felt a further housing correction and lower interest rates will squeeze banks' profitability and drive up non-performing loans, eroding the sector's ability to effectively bail out the economy when required.

In the event of a slow, multi-year property sector correction, with demand unlikely to stabilise quickly or spontaneously, further waves of developer defaults are likely, in Oxford’s view. Those without the firepower to withstand a protracted liquidity crunch are expected to be at the forefront.

Beyond recent negative data on retail sales, credit, and investment due to the ailing property sector, Oxford Economics sees potential for widening impacts upon China's highly opaque trust industry and local government debt.

Around 70% of property-related debt consists of mortgage loans, with the rest mainly the debt of property developers held by banks and trust companies.

The social risks around high-profile trust defaults suggest to Oxford authorities will try to ringfence the problems associated with recent non-payments, yet isolating risks could be undermined by the potential lengthy process of debt assessment and resolution.

A crisis in the Chinese property sector is likely to go hand-in-hand with further stresses in local government financing, suggests Oxford, with the risk rising of an unprecedented default by a local government financing vehicle (LGFV) bond.

As developers pulled back on their purchases, local governments have turned to LGFVs to boost transactions in the land market.

Thankfully, China's banking system has several structural strengths that will potentially mitigate the risks of widespread financial instability including the state backing given to large onshore banks and because mortgages in China are full recourse loans. Also, lending to property developers is still relatively low at just slightly over 5% of onshore banks' total loan books.

In the longer-term, Oxford Economics believes a more decisive clean-up of balance sheets of corporates, local governments and the banking system may be necessary rather than the more drawn-out correction process authorities have implicitly undertaken.

Brickbats for the new look BRICS 

In a thinkpiece by mining strategist Christopher Ecclestone at Hallgarten & Company, no stone is left unturned in lampooning recent developments for the BRICS collective.

The BRICS acronym was completed in 2010 when Brazil, Russia, India and China were joined by South Africa. The latter country’s president recently pronounced "We have decided to invite the Argentine Republic, the Arab Republic of Egypt, the Federal Democratic Republic of Ethiopia, the Islamic Republic of Iran, the Kingdom of Saudi Arabia and the United Arab Emirates”.

Ecclestone suggests the South African president had not previously consulted Argentina. 

In reaction to the invitation, candidates jockeying for position in the upcoming general election (scheduled for late-October) have served up a volley of negative commentary around incumbent BRICS countries and the other invitees.

In addition, both the Kingdom of Saudi Arabia and the United Arab Emirates would be “slumming it”, in the author’s view, by joining the other invited parties.

Russia is clearly persona non grata for obvious reasons on the global stage while Ecclestone suggests China looks a tad desperate in trying to revive the “bankrupt” BRICS concept.

In attempting to gain independence from the US by adopting the Yuan or something similar as a common currency for trade, President Xi is starting to look a bit desperate, in the author’s view.

The Chinese President recently arrived in South Africa to great fanfare and duly delegated his speech on such matters to a minor minister, which, in the opinion of Eccelstone, may be the result of some ambivalence.

Bank dividends bounce back globally

Despite moderating economic growth around the world, Janus Henderson expects dividend growth will continue after most regions and sectors delivered dividends in line with expectations in the second quarter of 2023.

While a weaker economic environment is typically negative for banks, margins have benefited from the end of years of ultra-low interest rates, explains the Head of Global Equity Income, Ben Lofthouse.

Bank dividends were strong all over the world with few exceptions, and they accounted for half the global growth in the second quarter, aided by both improving margins and a recovery from pandemic-related disruption to dividend payments.

Vehicle manufacturers also accounted for one seventh of the year-on-year increase in payouts, of which Germany contributed half.

Miners made the biggest negative contribution, owing to lower commodity prices, while oil payouts fell due to cuts from Latin American producers.

While Rio Tinto ((RIO)) substantially reduced its dividend, Janus Henderson notes an offset in Australia was provided by a significant dividend surge from Woodside Energy ((WDS)) and a solid increase from Westpac ((WBC)).

In a seasonally quiet quarter for Australian dividends, payouts increased by 23% to $13.1bn, while global dividends reached a record $844.7bn/US$568.1bn, up 4.9% on a headline basis measured in US dollars.

The Australian contribution translates to US$8.8bn in US dollars, which is the central currency used in Janus Henderson's research.

Underlying growth accelerated to a substantial 6.3% year-on-year, highlighting the resilience and vibrancy of the global economic recovery, in Janus Henderson’s view.

Ben Lofthouse notes “One of the reassuring features of dividend income is that it is typically much less volatile than earnings. Payouts lagged profit growth last year and so can therefore exceed it this year.”

Diverging global beef prices impact trade volumes

In the largest price spread of the last ten years, cattle prices in the US and Australia have diverged, increasing by 30% and falling by -30%, respectively, over the last 12 months, according to Radobank’s Global Beef Quarterly.

Senior animal protein analyst Angus Gidley-Baird suggests the disparity “will have consequences for beef exporters’ competitiveness, and we expect to see some shift in trade volumes as a result.”

Apart from the US, beef markets globally are experiencing softer consumer demand though weaker domestic beef supply has sustained high prices in both Canada and Europe.

The softer demand is making it harder to move volumes through the supply chain, according to Baird. In several regions, particularly some Asian countries, purchases made through 2022 and early-2023 in anticipation of recovery from covid have not been consumed.

Through May and June in Australia, Radobank notes prices eased on concerns due to additional cattle sent to market on seasonal outlook concerns, though prices levelled-out in mid-June.

Prices then fell to their lowest level in five years through July as producer buying activity dropped as cattle numbers were building, processing capacity remained constrained and consumer markets stayed soft, explains Radobank.

For August, the Eastern Young Cattle Indicator (EYCI) fell -45% year-on-year to average $5.40/kg.

The Global Beef Quarterly revealed Australian July beef export volumes increased by 30% year-on-year.

The previously mentioned supply chain blockages are limiting volumes to Asian markets such as Japan, explains Radobank, while export volumes to the US surged by 103% in July.

A slow rebuild of cattle numbers in northern Australia is limiting Australian live cattle exports, which were down -17% year-to-date in July.

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