China should avoid tightening macro-economic policies prematurely

China should avoid a premature tightening of macro-economic policies as its economy is still not performing at its full potential despite rebounding from COVID-19, International Monetary Fund (IMF) officials said on Friday.

“Key structural reforms should be re-accelerated to lift China’s potential growth,” the officials told reporters at an online news conference accompanying the launch of its annual assessment of the Chinese economy on Friday.

In its report, the IMF commends China for its initial handling of the pandemic, but stresses that the factors that saw economic growth slow significantly in 2022 could hamper economic performance this year unless properly addressed.

China’s ailing real estate sector, shrinking population, slowing productivity growth, and uncertainty surrounding the possibility of new variants of COVID emerging are among the causes for concern listed in the report.

The world’s second-largest economy will expand by 5.2% this year, according to the fund’s latest projections published on Jan. 31, compared with 3% in 2022. That was the worst showing in nearly half a century, excluding the 2.2% expansion when COVID hit in 2020.

China’s economy is “still operating below potential,” according to Thomas Helbling, deputy director for the fund’s Asia and Pacific department, who cautioned that “the support provided in 2022 will expire,” and that the IMF recommends China adopt a “neutral fiscal stance with the composition of spending shifting towards households.”

The State Council, which functions as China’s cabinet, on Jan. 28 vowed to promote consumption recovery as a major driver of the economy.

IMF officials on the call pressed the need for Chinese policymakers to implement wide-ranging structural changes to the economy – such as ensuring a level playing field between private firms and state-owned enterprises – as “without reforms, we currently estimate growth to fall below 4% over the next five years.”

Speaking to the state of the global economy, Helbling told journalists that “the global impact (of China’s re-opening) on inflation should be limited,” adding that although supply chain bottlenecks involving China could persist into 2023 and affect global commodity prices, “on balance, the rebound in China will be a net positive”.

IMF officials are anticipating significant increases in outbound Chinese travel and tourism in 2023, as well as domestic consumption, particularly in catering and other contact-intensive industries that “are still operating well below capacity.”

(Reporting by Joe Cash. Editing by Gerry Doyle)

China’s latest IPO reform unlikely to flood markets with new issuance

SHANGHAI, Feb 3 (Reuters) – China’s move this week to streamline stock market listing rules is unlikely to result in a flood of initial public offerings, bankers say, citing the prospect of state intervention on national security and other grounds that would result in delays.

Beijing published draft rules on Wednesday to broaden its fledgling registration-based IPO system, expand the US-style mechanism to all corners of China’s stock market in a shift designed to speed up listings and corporate fundraising.

Under the new system, China’s stock exchanges will themselves vet IPOs with a focus on information disclosure. Currently, IPOs on China’s blue-chip boards need clearance from the China Securities Regulatory Commission (CSRC) under an approval-based system – one that means long delays and IPO prices capped by the regulators.

The reform was hailed by state media and analysts as a key milestone that would make China’s IPO market more inclusive, transparent, and efficient.

But in reality, bankers say, the IPO process will largely remain at the mercy of authorities, who view stock markets as a tool in a global power struggle and in national rejuvenation: under the new rules, the CRSC’s stated role will be to make sure listings are in line with Beijing’s broad industrial policy.

“Under China’s mechanism, the government dictates the direction of IPOs. Applicants are screened based on national policies,” said Terence Lin, partner of TRSD Capital, a boutique investment bank that helps Chinese companies list in the United States.

More than 30 IPO hopefuls have halted the CSRC registration process, according to public filings, while hundreds have aborted listing plans during the grueling vetting process by the exchanges in the pilot registration-based scheme.

A banker at a major Chinese brokerage, who declined to be named as he was not authorized to speak to the media, said China’s IPO system, though registration-based in form, still requires government approval in essence.

“If a company is neither big enough, nor innovative enough, listing domestically is quite impossible (to get approval),” he said. “Paternalism and politics continue to play a big role” in the new IPO system, he said.

STAR SYSTEM

The registration-based IPO system was first adopted by Shanghai’s STAR Market when the tech-focused board was launched in 2019. Endorsed by President Xi Jinping, STAR was designed to fund tech independence amid escalating tension with the United States.

The new IPO system was later rolled out to the start-up board ChiNext, and the Beijing Stock Exchange. On Wednesday, the CSRC said the reform will be expanded to the main boards in Shanghai and Shenzhen – home to multi-billion-dollar blue-chip China stocks like Kweichow Moutai 600519.SS and Bank of China.

On Thursday, the CSRC made its role explicit. It said that it would strengthen the Chinese Communist Party’s leadership in capital markets, vowing to combine market forces with government roles as it mobilizes the IPO reform.

“This means the CSRC still has the final power in deciding whether the listing hopeful is in the appropriate sector,” said Yi Jiansheng, capital markets lawyer at Jia Yuan Law Offices, writing in a research note on Thursday.

The most glaring example of state intervention even in the registration-based system is the scuppering of Ant Group’s planned USD 37 billion IPO dual-listing in Shanghai and Hong Kong just days before of its scheduled listing in late 2020, bankers say.

“We thought the registration-based IPO mechanism would allow more types of companies to list, and give the market more power,” said another banker at a Chinese brokerage, declining to be named as he was not authorized to speak to the media.

“But as IPO sponsors, we feel on the ground that companies face tighter and tighter regulatory scrutiny, which defies the original purpose of the reform.”

(Reporting by Shanghai newsroom; Editing by Sumeet Chatterjee and Kenneth Maxwell)

Dollar buoyant; markets jubilant as inflation risks unwind

SINGAPORE, Feb 3 (Reuters) – The euro and sterling slipped against the dollar on Friday as markets took a dovish cue from policymakers at the European Central Bank and the Bank of England, who said inflationary pressures in their economies have become more manageable.

Reversing its losses earlier in the week, the greenback strengthened against a basket of currencies, as the US dollar index rose 0.02% to 101.81, to move away from Wednesday’s nine-month low of 100.80.

The pound slid to a more than two-week trough of USD 1.2203 in Asia trade and was last 0.04% lower at USD 1.2219. It had fallen 1.2% in the previous session, its largest daily decline in a month.

The euro edged 0.12% down to USD 1.0897, after tumbling 0.7% on Thursday to move further away from its 10-month peak of USD 1.1034.

On Thursday, the ECB and BoE each raised interest rates by 50 basis points as expected, with the latter signaling the tide was turning in its battle against high inflation.

While the ECB explicitly alluded to at least one more hike of the same magnitude next month and reaffirmed its commitment in battling high inflation, President Christine Lagarde acknowledged the euro zone outlook had become less worrisome for growth and inflation.

“The ECB was a little bit more dovish than markets had previously expected … (while) the Bank of England has given a small hint that they might be close to finishing their tightening cycle,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

Remarks from the ECB and the BoE came a day after Federal Reserve Chair Jerome Powell had triggered a heavy sell-off of the dollar by telling a news conference after the Fed’s 25bp rate hike that the “disinflationary” process in the United States appeared to be underway.

Friday’s nonfarm payrolls report will be the next major test of the Fed’s fight against inflation. Signs are still pointing to a tight labor market, with the number of Americans filing new claims for unemployment benefits dropping to a nine-month low last week.

In other currencies, the Aussie fell 0.11% to USD 0.7068, having lost 0.86% on Thursday, while the kiwi gained 0.05% to USD 0.6479.

The comments from policymakers following a slew of central bank meetings this week have markets seizing on signs that interest rates could be close to peaking in most major economies.

“We’re starting to see central banks converging to a pattern now … the major central banks are definitely approaching the end of their tightening cycles,” said CBA’s Kong.

An imminent peak in US rates has provided some relief for the Japanese yen, which last year crumbled under pressure from rising interest rate differentials against Japan’s low interest rate environment.

The yen was last 0.1% higher at 128.54 per dollar and was headed for a weekly gain of 1%, reversing two straight weeks of decline.

Bank of Japan (BOJ) Governor Haruhiko Kuroda said on Friday he expected wages to rise “quite significantly”, but maintained his stance on sticking with the BOJ’s ultra-loose monetary policy to support the economy.

(Reporting by Rae Wee; Editing by Lincoln Feast and Simon Cameron-Moore)

Oil stable as market awaits signs of China demand recovery

SINGAPORE, Feb 3 (Reuters) – Oil prices were little changed on Friday, with major benchmarks headed for their second straight week of losses, as the market awaited further signs of fuel demand recovery in China to offset looming slumps in other major economies.

Brent crude futures dipped 16 cents, or 0.2%, to USD 82.01 a barrel by 0445 GMT, while US West Texas Intermediate (WTI) crude futures slid 17 cents, or 0.2%, to USD 75.71.

So far this week, Brent has dropped more than 5%, extending a 1% loss from the previous week. WTI has also fallen by nearly 5%, after sliding 2% in the prior week.

Mixed signals on fuel demand recovery in China, the world’s top oil importer, have kept a lid prices.

ANZ analysts pointed to a sharp jump in traffic in China’s 15 largest cities following the Lunar New Year holiday, but also noted that Chinese traders had been “relatively absent”.

The prospect of an economic rebound in China after COVID-19 curbs eased has buoyed the oil market so far this year, along with a weaker dollar that makes the commodity cheaper for those holding other currencies.

The dollar has fallen because aggressive interest rate hikes by the US Federal Reserve are no longer expected. Central banks for other major economies, though, are continuing with bigger rate increases even as inflation has eased.

While supported by a weaker greenback, oil’s gains have been limited by the prospect of slow growth in the United States, the world’s biggest oil consumer, and recessions in places including Britain, Europe, Japan and Canada.

“The crude demand outlook needs a clear sign that China’s reopening will be smooth, and that the US economic growth momentum does not deteriorate quickly,” OANDA analyst Edward Moya said in a note.

The US central bank scaled back to a milder rate increase after a year of larger hikes, but policymakers also projected that “ongoing increases” in borrowing costs would be needed.

Upcoming interest rate hikes in 2023 are likely to weigh on the US and European economies, boosting fears of an economic slowdown highly likely to dent global crude oil demand, said Priyanka Sachdeva, market analyst at Phillip Nova.

Investors are also eyeing developments on the Feb. 5 European Union ban on Russian refined products as the EU countries will seek a deal on Friday to set price caps for Russian oil products.

(Reporting by Sonali Paul in Melbourne and Jeslyn Lerh in Singapore; Editing by Jamie Freed and Tom Hogue)

Gold steady, but set for biggest weekly fall since Nov

Feb 3 (Reuters) – Gold prices steadied on Friday after a sharp sell-off in the previous session, as traders digested rate-hike remarks from global central banks, although a firmer dollar kept the metal on track for its first weekly drop in seven.

Spot gold rose 0.2% to USD 1,915.89 per ounce by 0652 GMT, after shedding 2% on Thursday dragged by a stronger dollar and profit-taking. The bullion was down 0.6% so far for the week.

US gold futures were little changed at USD 1,915.20.

“With gold prices delivering a stellar performance of more than 20% over the past three months, some positioning for softer rate-hike bets could already have been at play and having found the much-needed validation from the recent FOMC meeting,” said Yeap Jun Rong, a market analyst at IG.

Some near-term profit-taking is likely, “but for gold prices, a greater conviction for sellers could be a break below the USD 1,895 level, where dip-buyers were seen stepping in this week just before the meeting,” Yeap added.

Bullion has gained about USD 300 since November on expectations of softer rate hikes from the US central bank, as a lower interest rate environment reduces the opportunity cost of holding non-yielding bullion.

Following the Fed’s 25 basis-point rate increase, both the European Central Bank and the Bank of England raised their rates by 50 bps as expected on Thursday.

Global central banks are now laying the groundwork in unison for a pause that, while not yet promised, is coming into view for later this year.

The US dollar, meanwhile, was up 0.1%, keeping a leash on gold prices.

On the data front, investors are now awaiting the monthly US non-farm payrolls due later in the day.

Elsewhere, spot silver rose 0.2% to USD 23.502 per ounce, platinum added 0.5% to USD 1,026.17.

Palladium climbed 1.2% to USD 1,674.17.

(Reporting by Arundhati Sarkar in Bengaluru; editing by Uttaresh.V, Subhranshu Sahu and Eileen Soreng)

Tech earnings hit pause button on market rally

By Caroline Valetkevitch and Herbert Lash

Feb 3 (Reuters) – Big Tech led U.S. markets on a sharp rebound to kick off 2023. The message from their earnings on Thursday: not so fast.

Apple Inc AAPL.O, Google parent Alphabet GOOGL.O and Amazon.com AMZN.O all posted results for the end-of-year quarter that left a sour taste in investors’ mouths. The reports renewed questions about global economic demand, the effect of higher interest rates and whether the market’s January rally got ahead of itself.

Nascent signs that consumer spending was beginning to rebound in China were not enough to change that.

Apple, the world’s largest publicly traded company, fell short of expectations, hurt by lower iPhone sales and production disruptions in China. Amazon said operating profits could fall this quarter due to lower demand, and Alphabet’s online advertisers cut back their spend as well.

Shares of the three companies dropped after the results were released and were expected to drag the market lower Friday following a euphoric rally Thursday.

“Maybe the tech stocks rallied a little bit too much into these numbers, so the market will be taking a deep breath and saying, ‘OK, well these companies aren’t bulletproof,'” said Daniel Morgan, senior portfolio manager at Synovus Trust Company in Atlanta, Georgia.

These three firms and Microsoft MSFT.O, the four U.S. companies with trillion-dollar market values, have led the broad-market S&P 500 in 2023. The index is up nearly 9% year-to-date, with Amazon gaining 34%. Big Tech surged Thursday following a strong quarterly report from Facebook-owner Meta Platforms Inc META.O.

That’s after the group was battered throughout 2022, trailing the S&P, which dropped nearly 20%.

Some investors saw silver linings from Apple and other bellwethers, including Starbucks, that reported results on Thursday. They noted that lockdowns in China strangled sales for many companies in the world’s second-biggest economy, expecting a rebound in the coming year.

“When things started to reopen in December (in China), we did see an increase in traffic to our stores as compared to November and an increase in demand as December rolled around,” Apple Chief Executive Tim Cook told Reuters.

Cook said lockdowns in China hurt both production and demand, and the company faced headwinds from the strong U.S. dollar that pushed revenues lower.

“Currency was a headwind but will be a tailwind in Q1,” said Nancy Tengler, chief executive of Laffer Tengler Investments in Scottsdale, Arizona, referring to the dollar’s weakening trajectory.

“The supply chain was a problem more so than demand, and that seems to have been right-sized.”

Similarly, Starbucks said comparable sales fell 29% from the previous year in China, the company’s fastest-growing market, but that beginning in January, it saw “very encouraging” recovery momentum there.

Other U.S. consumer bellwethers painted a mixed picture. Consumer staples giant Clorox said product volumes fell in three of the company’s four business segments in the fourth quarter, while automaker Ford said the year ahead was going to be a difficult one.

They, and other companies, are still grappling with higher interest rates that are slowing demand. This year’s surge in stocks has been built on a rally in bonds, as lower yields make high-valuation shares more attractive. Cost-cutting by Alphabet and Meta led some investors to think that interest rates are affecting demand.

“In many respects we’re waiting for that other shoe to drop – the impact of higher rates on the economy, inflation, earnings and jobs,” said Jack Ablin, co-founder and chief investment officer at Cresset Capital, which manages $30 billion. “Profits tend to trough nine months after overnight rates peak and we haven’t even seen the peak in overnight rates yet.”

(Reporting By Herbert Lash, Caroline Valetkevitch and David Gaffen; writing by David Gaffen; Editing by Peter Henderson and Cynthia Osterman)

((david.gaffen@thomsonreuters.com; +1-646-223-6064; Reuters Messaging: david.gaffen.reuters.com@reuters.net))

Tech earnings hit pause button on market rally