Xi's China: What Dreams May Come

With the 19th Chinese Communist Party National Congress to be held sometime this autumn, Predata examines what certain economic and geopolitical components of Xi Jinping's hallmark ideology of the past five years — the “Chinese Dream” — have meant for political volatility and markets.

communist congress

After becoming Communist Party chief and leader of the People’s Republic in 2012, Xi Jinping began popularizing the slogan the “Chinese Dream” ( 中国梦). The Dream is the great rejuvenation of China, achieved materially through two centenaries: to become a “moderately well-off society” by 2021, the 100-year anniversary of the Communist Party, and to become a fully-developed nation by 2049, 100 years after the founding of the People’s Republic. The Chinese Dream has become an ideological underpinning of Xi’s administration and the Party. Indeed, attention to the subject spikes ahead of Party meetings, such as the annual summertime elders retreat at Beidaihe ( 北戴河区).

beid

Digital attention to the Chinese Dream spikes during the late-summer Beidaihe retreat.

As part of the pursuit of the Dream, Xi's administration has moved to increase China's regional influence and shore up economic strength and stability. Predata signals lend insight into aspects of these pursuits.

Economic Influence: Hong Kong

Our signals indicate mainland China is asserting ever greater influence on Hong Kong's financial markets. China's central bank has intervened directly — such as when in 2016 it made it more expensive to bet against the yuan, causing the Hong Kong Interbank Offered Rate, Hibor, to jump twice (January and September). But Predata indices also show that political volatility — related particularly to China's economy and government — precede turmoil in the Hang Seng Index, suggesting increasing integration.

alice hong kong

Predata's backtest engine shows a high correlation between our measures of economic and government volatility in China to fluctuations in the Hang Seng Index.

Forecasts that tighter U.S. monetary policy would lead to the end of Hong Kong's peg to the dollar have never born out. But growing integration with China — as shown in the sensitivity to volatility above and the growing importance of the renminbi in local transactions — will likely put pressure on the peg.

Military Influence: Taiwan

Taiwan is no stranger to pressure from Beijing, most recently in the form of military drills near the self-ruled island. Predata's security signals in Taiwan saw a huge uptick in activity before and after the drills. Beijing has never ruled out the use of force to bring Taiwan under its control, but patient military pressure draws less international opprobrium. Despite President Tsai Ing-wen's call with then president-elect Trump and attempts to gain an international audience via Twitter, most of the world continues to recognize the One China policy. Predata's index that measures volatility in Chinese-Taiwan relations has reacted to the recent military drills but remains relatively subdued, indicating a big shift in the relationship is likely not on the immediate horizon.

Taiwan

Predata's China-Taiwan relations volatility index spiked after Panama cut ties with Taiwan in June and in recent days after Chinese military drills.

Economic Influence: Commodities

China is exercising greater influence over global commodity markets. Copper, for instance, soared to its highest level in more than two years on rumors that China, the world's second-largest producer, was considering banning imports of scrap metal. Now, spikes in our Copper Futures signals, shown below, suggest big moves are in store for the metal. Additionally, our Aluminum signals suggest that apart from the Russians, digital engagement with Chinese sources is highly correlated to big moves in Aluminum prices.

copper

Predata's predictive signals for big moves in Copper HG1 Futures suggest big moves in the near-term.

Economic Stability: Capital Outflow Risk

In addition to the looming debt problem, Beijing recognizes the risk of capital flight as a threat to economic stability. The government imposed capital controls after a surge in outflows triggered alarm bells at the end of 2016. Beijing claims it has successfully stemmed the risk. Still, Chinese are finding increasingly innovative ways to move their money — such as foreign investment masked as tourism, UnionPay withdrawals in Hong Kong and Macau, and even fossil smuggling. Indeed, a Predata index of subjects a Chinese person may visit online if they were researching ways to skirt capital controls has surged in recent months.

debt and capital flight

Predata indices for online engagement with sources related to capital flight and Chinese debt.

Cryptocurrencies are an increasingly popular vehicle for moving capital. Bloomberg estimates 98% of all Bitcoin trading is in yuan. And our signal that tracks Chinese attention to cryptocurrencies has climbed steadily in 2017. This is due in part to the proliferation of digital currencies and news events, but it may also indicate more and more Chinese are researching cryptocurrencies as a means to move capital out of yuan.

cryptocurrency

Engagement with Chinese-language sources related to cryptocurrencies is rising.