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LGT Navigator: New Chinese regulations cause unrest worldwide

July 28, 2021

Over the weekend, the Chinese government announced several new regulations, one of which targeted the education sector. The new regulations were much more severe than anyone had expected, going as far as requiring education companies to convert to non-profit organizations. This basically threatens to extinguish an entire business sector. Investor reaction was harsh, and the Hang Seng Index has since slumped by around 8%.

China

Chinese education stocks have seen more than USD 130bn of value being wiped out this year, according to Bloomberg, causing spill-over effects to other industries and sending shock waves through the Chinese equity market. The deeper purpose appears to be improving equality within its population by granting accessible education to everyone and reducing the financial burden on families, while at the same time fighting the demographic issues following the one-child policy. In other words, China seems willing to accept near-term value destruction in exchange for longer-term social benefits that serve the country as a whole: a key prerequisite for social harmony.

Chinese state media tried to soften the panic today, Wednesday. They said the recent losses were not rational and some of the new resolutions were misunderstood. Economic fundamentals are still stable and there is no systemic risk, they said. The success of these appeasement attempts has yet to be felt. What began Monday with a sell-off in equities had spread to the fixed income and foreign exchange markets by Tuesday afternoon, causing the yuan to break through psychologically significant levels and driving up Chinese government bond yields and the cost of insurance against a default on Chinese dollar debt.

Bank of Japan follows its own path

The policymakers of the Japanese national bank appeared unimpressed by the worsening global debate over tighter monetary policy, according to a summary of their July meeting debate. They said a premature tightening of monetary policy should be avoided. Stronger-than-expected inflation has become the focus of debate among major central banks, raising market expectations of a gradual but steady exit from ultra-loose monetary policy. But that is not an option for Japan, he said, as the economy is still suffering from the pandemic. This statement coincides with the lowered growth forecast for the current half-year. The general view is that the recent global commodity inflation is unlikely to lead to a broader increase in consumer inflation. The Bank of Japan made no change to monetary policy at its July meeting and extended the deadline for a corona loan program.

Bitcoin on the upswing again

After months of sideways movement, bitcoin shot up from 30,000 to 40,000 US dollars in the last few days to now linger at this threshold. Although the April record high of almost 65,000 US dollars is again a long way off, the momentum seems strong. Discussions around stronger regulation of cryptocurrencies around the globe and discussions around energy waste in mining have now died down a bit. The reason for the upswing could be positive statements from Tesla CEO and SpaceX founder Elon Musk and Ark Invest's founder and CEO Cathie Wood, but also signals from Amazon could have boosted the digital coins. The Internet giant has posted a job opening for a digital currency product lead, which subsequently led to wild speculation that cryptocurrencies might be accepted for transactions.

 

 

Economic Indicators July 28

MEZ Country Indicator Last period
08:00 D GfK consumer sentiment -0.3
10:00 CH ZEW economic expectations 51.3
20:00 USA FOMC rate decision 0.25%

 

Earnings Calender July 28

Country Company Period
FRA Capgemini H1
ES Banco Santander H1
GER Deutsche Bank Q2
GER BASF Q2
UK Barclays H1
UK British American Tobacco H1
UK Rio Tinto H1
US Pfizer Q2
UK GlaxoSmithKline H1
US Facebook Q2
US PayPal Q2

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: David Wolf, +41 44 250 83 48, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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