The world turns on cheap China: Shein feels it

00:00:00: Hi and welcome to Swisscote's daily market talk.

00:00:03: It is Wednesday, the second of September.

00:00:05: rising oil prices continue fuel global inflation fears pushing bond yields higher and equities lower.

00:00:12: Meanwhile, global trade tensions are deepening as well.

00:00:16: At the G-twenty meeting this week China found itself increasingly isolated from the rest of countries over its industrial overcapacity and massive exports of cheap products.

00:00:28: so Xi's unimpressive Hong Kong debut yesterday was just part of that same story.

00:00:32: So I will try to stitch it all together.

00:00:35: but before i do please keep in mind that opinions on my own is not financial advice.

00:00:47: This show is brought to you by SwissQuote.

00:00:49: So let's start with the big picture.

00:01:11: So yes, we are there ladies and gentlemen at three percent.

00:01:33: The ten-year GGB is now around one hundred twenty five basis points higher than the levels of investors once considered would make sense for Japanese institutional investors to repatriate their funds back home, back to Japan potentially triggering a reverse carry trade.

00:01:51: Now the good news is that the Japanese investors haven't sold therefore an SS in a way that will trigger significant reversal of the carry trade.

00:01:58: perhaps the rise in US heels has also helped keep the U.S.-Japan yield gap wide enough to avoid notable sell-off in risk assets, but the bad news is that Japanese government sold US bonds to intervene and the FX markets stopped heavy bleeding by selling their US dollars.

00:02:16: And latter increased pressure on U.S.

00:02:19: heels.

00:02:20: And the latter brought US Treasury Secretary Mr Scott Besson to cooperate with the Japanese to slow Yen's depreciation.

00:02:29: so it all connected.

00:02:31: today of the day, what we see clearly today is that the dollar yen recovered half after retreat following the latest US-Japan co-intervention in the FX markets.

00:02:42: And the U.S.

00:02:43: Third Year Yield is now close to levels.

00:02:46: and that actually triggered the US Treasury's announcement that it would increase buyback off their bonds in order to tame upside pressure on the longer term end of the US yield curve.

00:02:57: So unsurprisingly this means one thing there are only so much you can do by intervening in the markets.

00:03:04: Interventions, buy time but they don't change fundamentals!

00:03:08: The reality of today is that wars and the Middle East and Ukraine escalate pushing oil and energy prices higher.

00:03:15: it's pushing also inflation higher.

00:03:17: Inflation is a part of weak growth numbers from around the world And global trade war is on its way of destroying decades-of international cooperation That helped global economies grow together.

00:03:28: And here make no mistake.

00:03:30: The US is very aggressive, obviously with Trump administration Yes but the other G-Twenty nations are also adding their two cents.

00:03:37: Yesterday the G-twenty summit showed an interesting split indeed between China and the rest of the G twenty nations.

00:03:45: This split was mainly about China's trade surplus model.

00:03:49: Unsurprisingly, the United States' European Union countries in Japan pointed at China's industrial subsidies as weak domestic consumption and its export-led growth as creating excess capacity that is then passed on to world markets through very cheap exports.

00:04:08: China rejected this diagnosis and argued it does not deliberately pursue a trade surplus but also disagreed with several other points to post, for example restrictions on critical mineral exports.

00:04:21: Posts for countries like China to consume more at home and rely less on exports And also language about keeping key shipping rows open and predictable.

00:04:30: Beijing by the way was also unhappy yesterday with parts of the discussion among the G-twenty members on sovereign debt where China is a major And most of it was mostly noise, but what's really interesting yesterday is that all the split between the developed markets including US, EU Japan Australia and China are nothing new.

00:04:52: But other emerging market nations alignment with the communique where the developed nation is G-twenty includes countries like Brazil India, Saudi Arabia, South Africa and Indonesia that aren't automatically aligned with Washington.

00:05:08: That ultimately means we have a bigger story than just US vs China unfolding.

00:05:13: Concerns about China's export heavy model and industrial overcapacity is now broadening

00:05:19: internationally.".

00:05:20: Even the IMF says excess global imbalances widen sharply in twenty-five and argues that surplus economies should boost their domestic demand while deficit economies need consultation.

00:05:32: Basically, no country is doing what it should do.

00:05:34: But guess what?

00:05:35: China was actually trying to boost domestic demand but because they have an aging population.

00:05:41: Do you see a terrible policy mistake of imposing that one-child policy for thirty five years?

00:05:48: the Chinese?

00:05:49: Because aggressive COVID policies from Xi government had a terrible impact as well on the consumer confidence in China.

00:05:56: and because we also how this deepening property crisis In china that hit households savings, the option to revive domestic demand.

00:06:04: Demand at home in China had to be taken off-the-table recently.

00:06:09: so Xi Jinping has go back to boosting his exports and keep the ball rolling!

00:06:14: That was an easy choice.

00:06:16: And it is working quite well.

00:06:17: So here we are today!

00:06:19: China grows by exporting cheap products.

00:06:21: They're not only exporting clothes but also technological products.

00:06:25: Others aren't happy because they can produce as cheap as China does.

00:06:29: The latter costs jobs and results in a wider trade deficit with China.

00:06:34: In simpler terms, money is flowing into China's pockets thanks to its cheap exports but on the other hand these cheap Chinese products help keeping inflation so low Elsewhere knowing that inflation is exploding everywhere in the world due to higher energy prices.

00:06:54: So it's worth, In my opinion, aggravate the cost of living crisis push yields further up and way on valuations.

00:07:00: So isn't this very much complicated global context that she went public yesterday?

00:07:05: And had a chaotic first day of trading in Hong Kong?

00:07:08: The surprise tanked up to ten percent shortly after its debut compared to his IPO price which was already reflecting nearly seventy five percent valuation lost compared to the two thousand twenty-two valuation levels.

00:07:21: That came in contrast with a few spectacular IPOs from Chinese companies like CXMT and Unitree that went public recently, rallying more than four hundred five hundred percent during their first day of trading.

00:07:34: Now.

00:07:35: the value loss at Xi'an was partly due to ethical issues, especially regarding this cotton that is sourced from Xinjiang where China's accused of forced labor on Uyghur minority.

00:07:45: It also was due to fierce competition and an aggressive price war with other Chinese players like Temu and AliExpress who actually compressed margins in their industry.

00:07:55: but more importantly than all of them we had the impact of the sharp change in global trade rules as the United States European Union moved to scrap exemptions for low-value parcels.

00:08:09: and impose tariffs, an additional fees on the cheap packages that Sheen ships directly to customers in these locations.

00:08:15: And Sheen as it appears will have a hard time absorbing this additional tariff cost due to its very low margin business model.

00:08:22: The company indeed sells very cheap clothes and accessories with very thin margins meaning That A good part of these additional costs Will Have To Be Passed On To Customers!

00:08:31: And the problem is that Sheens customer base Is Very Price Sensitive.

00:08:35: Even Small Increase In Prices Could Lead To Significant can drop in sales volumes and therefore profits.

00:08:41: In fact, she's less revenue fell by more than fourteen percent in the first quarter of this year.

00:08:46: to tell you what could be results.

00:08:57: So Sheen is down by more than two percent this morning on a second day of trading, Alibaba's down by one point eighty per cent in Hong Kong while PDD remains under pressure on Nasdaq as well.

00:09:07: the outlook remains bearish obviously for all these companies and their e-commerce fast fashion business.

00:09:13: unless these companies change direction find other lucrative markets or somehow adopt their business model to the new rules off the trade game internationally but then the short to medium run the outlook again remains very for all of these companies' businesses.

00:09:28: And the fact that SHIN trades at around fifteen times its forward earnings, which is roughly double Timmy's parent company.

00:09:34: PDD suggests there very much as you know, and we'll continue to stick with AI and robotics players that have bigger potential today than companies dealing with bigger and growing trade barriers.

00:09:54: So this is all for today.

00:09:56: I'm Yipega Skardeshkeya And thank you for joining me.

00:09:59: Thank you for your beautiful and supportive comments!

00:10:03: This episode of Market Talk has been helpful.

00:10:07: you do usually.

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00:10:32: So I will meet again tomorrow.

00:10:35: until then good day

00:10:38: trading.

00:10:41: See if these indigital assets are volatile and not suitable for everyone.

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