For decades the US has relied on emerging markets, especially China, for cheap production, and OPEC and the Middle East for a steady supply of oil. In order to safeguard its interests the US has engaged the world’s energy producers and exporters and manufacturing countries politically and strategically. Where America’s economic and commercial interests are not served the US has been happy to pursue a policy of unilateralism which to some had come across as arrogant. America’s newfound independence in manufacturing led, by onshoring and greater automation, and in energy, led by shale and fracking, have driven foreign policy to be more insular. This has created a political and strategic vacuum which China has been happy and clever to exploit.

The US has always been pragmatic about its international relations. The fight against Communism may have been its last ideological battle. Most of its other strategic campaigns have revolved around protecting commercial interests, trade routes or energy supply. Meanwhile, the US, for reasons valid or not, have been less sociable and have either failed to sign or ratify a long list of international treaties such as Protocols I and II of the Geneva Convention, the International Criminal Court, even the Mine Ban Treaty, and indeed the UNCLOS.

While the US has been busy refocusing on domestic consumption, manufacturing and energy independence China has been building bridges and winning friends. It led the establishment of the Asian Infrastructure Investment Bank to which Europe and most of Asia have signed up. Only the US and Japan have not joined the effort. Taiwan and North Korea were turned down. China has become Africa’s leading trading partner and a growing and important source of investment capital. China’s demand for resources may slow but its growing hunger for agricultural goods and farmland will likely grow. In October of 2013, the government announced the One Road One Belt initiative to improve connectivity in Eurasia.

In recent months, the Chinese President Xi Jinping has been given a very warm welcome at Buckingham Palace, as deals worth some 30 million GBP were cut. Angela Merkel’s recent visit to Beijing yielded some 17 billion USD in aircraft orders for Airbus.

In a further move towards global norms of market economics, China has further liberalized its current account, announcing a new methodology for the currency fixing to include market pricing, demand and supply. Her ambitions for the RMB to be included in the IMF Special Drawing Rights will likely be successful further drawing China into the international fold.

Last week, Xi Jinping met with the outgoing Prime Minister of Taiwan, Ma Ying-jeou, marking the event with a carefully choreographed handshake. The last time China hardballed Taiwan, the people voted in the pro-independence DPP. China is not about to make the same mistake and has toned down the rhetoric in the hope that the KMT, who are in any case expected to lose, will prevail in the coming elections.

 

In the area of financial infrastructure, the China’s Cross-border International Payment System or CIPS is an important alternative payments system to challenge SWIFT. This is a significant step given the universal utility of SWIFT. When the US threatens any country with economic sanctions, denial of SWIFT is one of the most persuasive elements. CIPS is currently only used for RMB settlement and clearing, but its protocols are compatible with SWIFT and will with time erode SWIFT’s monopoly.

In all of this the US is perhaps feeling slightly left out. Hence perhaps the USS Lassen’s FONOPs (freedom of navigation operations) 12 nautical miles off the Spratly’s on October 28. The US Navy’s cruise tours through the international waters of the South China Sea are legal, but it is perhaps awkward to cite the UNCLOS when criticizing Chinese ambitions in the area since the Americans have not themselves ratified this treaty.

With the Americans playing the short game and being rather more mercenarily pragmatic, China has played a more nuanced and skillful hand. China is building or joining clubs and cliques as America has pulled out of regions where they have felt their business interests do not lie.

The positive to take away from all this is that China’s strategy of engagement appears peaceful and constructive. It asks that it is allowed to do unto its own people as it sees fit but will otherwise play internationally by international rules. Fair enough since this is the same argument that gives the US pause in ratifying Protocols I and II of the Geneva convention. If this interpretation is correct it means a lower risk of martial conflict, which can only be positive. The fear has always been an insecure, insular China, turning inwards and away from the rest of the world. The same risk is less likely to apply to the US.

 

 

 

Why would China do this? It is an efficient defence against the America’s China containment policy.

On Oct 30, the PBOC announced that it would study a trial scheme for QDII2 at the Shanghai Free Trade Zone, in a step towards capital account convertibility. The reaction of CNY and CNH was puzzling. CNY strengthened from 6.357 to 6.3175 with CNH in tow.

One would have expected CNY to weaken if the capital account was more open on account of increased capital flight. I can only theorize that the move to open the capital account is another measure towards satisfying SDR inclusion criteria and that the PBOC then moved to support CNY to signal to domestic investors that although the door was open, they should not be too keen to use it.

The Nov 2 CNY fixing has more or less confirmed this view. Despite the sharpest rise in the daily fixing, the CNY has weakened back to 6.337 this afternoon.

These moves are disconcerting as they illustrate that while China moves towards a market driven economy and financial system, the government is still intervening and will likely keep intervening in markets in unpredictable ways.

This is not to single out China as an unpredictable market manipulator among the world’s governments. Western democracies have had more practice interfering with market mechanisms than China who is relatively new at this game. China used to rule by decree. It is freeing up important bits of its markets and economy to market forces and will have to learn new skills to influence pricing under euphemistically free markets.

 

Raising interest rates is difficult when everyone is watching you. Its much easier to take the punchbowl away when people are not watching. Walking in on the party when it is in full swing and expropriating the punch bowl is likely to trigger all kinds of protest. And the withdrawal can be painful when you don’t know what kind of additives have gone into the mix when you weren’t watching.

The Fed had telegraphed its intentions to raise rates much too early and as a result got itself into a bind. The thinking then, 2 years ago, was that a rate hike would be less disruptive if telegraphed to the market early enough. Come September 2015, and conditions had changed so that a rate hike was not entirely feasible. Reasons put forward included the slowing Chinese economy, stock market volatility, falling emerging market currencies, and the risk of deflation. What was not explicitly put forward was the risk of a slowing US economy. Rising LIBOR, widening credit spreads, some 50 basis points in IG this year, some 200 basis points in HY, and a strong USD, have achieved some de facto tightening of financial conditions. Mortgage rates remain stable and have not reacted, but on average, across the economy, for consumers, retailers and producers, the impact is easily more than a 25 basis points Fed rate hike. With the starting point of such low interest rates, the percentage impact on debt service is significant and will likely slow the economy.

Another problem which can be illustrated by the punchbowl analogy is that you have a hundred guests, three drunks and everyone else is teetotal and on a diet and all you have to offer is punch and steak. Low interest rates and serial QE have not revived the economy much. The marginal returns to policy have been less than a roaring success. Asset prices are up but output and wage growth have been weak. The credit creation has not spurred growth because demand is simply deficient. Unfortunately, the antidote is fiscal stimulus, which is difficult to justify politically and ideologically. There are also risks to financing further spending after the first round went into expensive bailouts of expensive private investors.

The Real Economy:

2000-2005:

Low borrowing costs lead consumers to spend whether it was on houses, cars or stuff. The savings rate fell from 6% to 2% and households incurred increasing levels of debt particularly in mortgages, fueling a housing boom. House prices grew at between 10-15% per annum. Retail sales accelerated from an annual growth rate of 1.5-2% to 9% per annum in 2005. Auto sales ranged between 16-18 million cars annualized, from 14-16m in the late 1990s. Supply of credit surged as the securitization markets churned out bonds which required the creation of more collateral in the form of consumer loans and mortgages. The consumer binged on consumption financed by securitizations on which investors binged keeping borrowing costs low.

2005-2009:

Interest rates began to rise increasing debt service burdens and squeezing disposable income. Retail sales began to slip from 9% per annum growth to zero growth in early 2008 before the financial crisis led to a yearlong contraction in retail sales with rates of as much as -11.3%. In reaction, consumers retrench and savings rates surge to 8%. Unemployment surged from 4.4% to 10%. Assets from stocks to bonds to real estate selloff sharply as investors panic. Financial conditions are tight and funding markets are shut. Central banks the world over cooperate to maintain the global payments system despite a near failure of the credit system. There is a sharp retrenchment in GDP growth from 2.3% p.a. in 2007 to -4% in 2009.

2009 – present:

Despite fast and powerful recoveries in equity and credit markets, the real economy was slow to recover, taking till 2010 to recover to 3.1% and then averaging a meagre 2% till 2015. The current reading is 2.7% for Q2 2015. Employment and wages have been slow to recover, so too manufacturing.

In the aftermath of the financial crisis, banks have been tightly regulated, sometimes stifling so. Banks were blamed for the scale of the financial crisis as well as for being greedy in a time of plenty and abandoning main street in a time of need. The shadow banking industry, a close accomplice has similarly had its wings clipped. Only the corporate bond market has been conspicuously open and raising capital from investors. Unfortunately, most of the new credit has been to refinance old debt or to finance dividends, share buybacks and M&A. Weak corporate investment is a sign of weak business outlook.

Consumers on the other hand have been less willing to borrow or to consume. The memories of 2008 are fresh in the minds of the people. The sluggishness of the labour market to recover even as financial markets recovered their peaks have also dampened sentiment. The recent oil dividend, from a sharply falling oil price, was saved rather than spent.

Outlook:

There are reasons to expect a cyclical slowdown in economic growth. US trend growth is estimated to be circa 2%. This number is not observable but if true, it means that realized growth has run above trend for two years now. Core PPI has been rising for 2 years as well and may be peaking. While the ISM manufacturing PMI peaked in late 2014, the non-manufacturing ISM has been robust, peaking at 60.3 in August before retreating to 56.9. August may have been a cyclical peak.

The Fed has halted QE. While the USD curve has yet to steepen, and may more likely flatten, liquidity conditions are no longer as accommodative. Credit spreads have widened and effective borrowing costs have risen. Baa yields are at 5.33%, which are mid 2013 levels. The gains from reshoring have taken hold and are in fact fading as the rest of the world adjusts to a less trade conducive environment. Exports are falling faster than imports.

The risk of a US recession is still remote but a mid-cycle slowdown much like the mid 1990s is certainly possible and in the context of a rising rate environment, probable. The victims of a rate hike will, if 1994 was a guide, lie elsewhere. This begs the question of whether or when there will be a rate hike.

Financial Markets

2000-2005:

The Fed’s efforts to support sagging markets was accelerated by the need to maintain liquidity and open markets in the aftermath of 9/11 and saw the Fed Funds Target Rate fall from 6.5% to 1%. The thirst for yield accelerated innovation in financial products, in particular, fixed income and credit products including mortgage securities. The popularity of such securitizations led to excess demand translating into excess supply of end user credit. Low rates and weak credit standards led to securities which were not robust against economic downturns.

2005-2009:

As inflation breached 4% the Fed began to raise interest rates. The pace of rate hikes was aggressive, more so than the rate hikes of 1994 which had precipitated an emerging market crisis. Debt service costs rise, leveraged asset prices fall, real estate being topical, equities and bonds begin to fall. Collective investment vehicles like CLOs, CDOs and hedge funds begin selling assets as structured credit covenants are triggered and investors make redemptions. Bank proprietary desks and prime brokerage departments sell assets in unison. The S&P500 index falls my more than half and the iBoxx HY index falls by a third. Less liquid and more opaque markets like ABS and CDS markets seize up. Counterparties begin to fail. Bear Stearns requires a bailout by JP Morgan and by October,
Lehman Brothers is no more and AIG is under government control. The Fed and Treasury draw up large scale bail out plans to buy assets and to finance the purchase of assets.

2009 – present:

Since the crisis the Fed has been the central driver of financial markets, engaging in multiple rounds of quantitative easing through the direct purchase or funding of the purchase, of US treasuries and agency mortgage backed securities among other securities. Interest rates are cut quickly to 0.25% in 2008 and there they have remained. Financial markets have reacted positively to these measures, with S&P500 rising 17.5% p.a. from the lows in 2009 to date (Oct 2015), high yield 12.5% p.a. By comparison the Case Shiller Composite 20 has risen a mere 4.3% p.a. in the same period. Nevertheless, asset prices evidently have received the policies well. The impact on the real economy has been less remarkable.

The Fed and Treasury have been simultaneously doing the following:

• Buy distressed assets from private balance sheets, mostly private commercial and investment banks. Recapitalize the banks to allow them to continue to hold troubled assets.

• Issue treasuries in a very targeted way to finance these purchases.

• Suppress and control the entire yield curve through rate policy and buying treasuries.

• Engage in austerity (the budget deficit fell from -10% to -2.4% in the period), while mitigating its painful effects with epic liquidity provision and low interest rates.

The results have been encouraging compared to the conditions in China, Japan or Europe. However, government debt has surged. Corporate debt issuance has also surged as businesses take advantage of low interest rates. Corporate balance sheet leverage has increased and credit quality fallen as a result.

The main investors in corporate debt have been institutions with mutual funds and structured credit vehicles also significant. Retail participation has certainly increased relative to the pre-crisis era when investors were mostly institutional, hedge funds or structured credit vehicles. In the past, instability came from leveraged prop desks, hedge funds, prime brokers and levered and rules based structured credit vehicles. Currently, potential instability can come from panicky retail investors but leveraged holders of corporate debt are few and far between. Structures are now designed with a lot less implied leverage, banks have already been sellers or hold significantly more capital against existing positions, and institutions tend to be unlevered and long term holders.

The main investors in treasuries, to the extent of 13 trillion USD, are foreign investors including their central banks (47%), the Fed (19%), state and local government (6.4%), private pensions (4.0%), banks (3.2%), insurance companies (2.1%), and mutual funds (8%). There is another pot of some 5 trillion USD of
government debt which is held by government agencies, the main agencies being Social Security (55%), government retirement fund (18%), military pension fund (9%), Medicare (5%) and the federal operating account (9%). The potential weak holders who might impact the treasury market include foreign central banks who may have to spend dollars to defend their currencies or lack current account surpluses to invest, or simply seek to diversify reserves away from dollars. A stronger USD may trigger a defense of local currencies leading to a sell off of treasuries or it may encourage more investment in USD assets, the response is difficult to forecast. Banks may be weak holders if their balance sheets are shrunk, say by an outflow of deposits, but what could cause an outflow of deposits? A competing avenue for savings would have to present itself, perhaps in the form of higher returns in money market funds, or a healthy and trending stock or bond market. Mutual funds could face redemptions, but again, what could trigger redemptions? The types of funds holding treasuries are conservative, low risk funds designed to balance against riskier investments. Some mutual funds hold treasuries as collateral for total return swaps referencing risky underlying assets. If these funds perform poorly, they may face redemptions which could trigger a selloff in treasuries. These funds almost exclusively hold short dated treasuries of maturities less than a year. The fact is that of the US government holds about 50% of the total national debt, between intergovernmental holdings and debt held by the public.

Outlook:

While the world’s central banks continue to be accommodative, the US Fed has signaled its intentions to raise rates, by some accounts, notably the Fed Chair herself, in 2015. Time is running out and the economy is beginning to show signs of weakness which may make a rate hike impractical.

The market has tightened financial conditions to the extent of a de facto rate hike of 25 – 50 bps. A strong USD is contributing to tightening as are credit spreads; IG spreads have widened over 50 basis points in the last 6 months. 3 month LIBOR is up from 25 basis points in 2014 to 33 basis points in September.

If the Fed raises rates it will most probably flatten the curve as the long end responds to the counterbalance of weaker inflation. The pace of rate hikes will likely be glacial, unlike the monthly hikes of 2004-2006.

The Fed has signaled that it would seek to normalize its balance sheet a year after the first rate hike. This may also be impractical. Debt levels are high. Total debt to GDP stands at close to 300% including government, financial, corporate and household debt. Since 2008, household and financial debt has moderated but government debt has nearly doubled. To maintain manageable debt service levels, the US treasury would not appreciate the term structure any much higher than it is today, particularly at longer maturities. Aggressive rate hikes would lift the yield curve from short to intermediate maturities. If the Fed was to sell assets, or simply not reinvest runoffs, the risk of a steeper yield curve is significant.

If there is no rate hike till say March 2016, it is likely that market rates would fall back with LIBOR tracking back towards 25 bps. A softer economy would see a flatter curve as well so a rally in the long end should be expected.

The path of spreads is another matter. Slower growth will weaken credit quality and deter investors resulting in wider spreads. However, a benign interest rate environment will mitigate the deterioration in credit quality to a certain extent.

If the Fed
hikes rates, the curve is likely to flatten with short rates rising faster than the long end. The 2-5 year sector will be particularly vulnerable whereas the 30 year will likely outperform. As for spreads, higher funding costs would exacerbate the credit quality deterioration leading to wider spreads. To a significant extent this has already happened in anticipation and if anything has overshot fair value.

As for equity markets, a slowing economy will impact corporate earnings which are already stagnating. If the Fed hikes rates it is unlikely to make a single move and will in any case put a temporary end to potential reratings and could in fact lead to a mean reversion in multiples. The risk is to the downside. If the Fed doesn’t move, then de-rating risk is lower but then reliance on earnings growth will not drive equities far either. If 1994 was a guide where the US economy slowed from 4.4% to 2.4%, avoiding a recession, the S&P500 traded in a tight range from 450 – 480.

For more volatility and potential returns, investors will have to look elsewhere.

To understand the Chinese economy it is necessary to understand the collective Chinese psyche. it is one of great insecurity, feeling hard done by from all quarters, still harbouring an inferiority complex, and thinking that the world sees it as weak, backward and belligerent. As a result, it comes across precisely as insecure and belligerent. Even as China engages more openly in the international arena, China’s neuroses require it to behave more aggressively than it has to, for a local domestic audience, to address and belie perceived weaknesses. Most of China’s external behavior becomes more explainable in this context.

At home, China’s people have grown comfortable and confident in their economic success. Economic policy, however, is no surer, no more confident, certainly no more confident than the US Fed for example. China’s reform efforts to instill rule of law, market discipline and strength of institutions, have introduced more uncertainty into policy. It is this uncertainty that complicates much of China’s policymaking in recent times. In a centrally planned economy, policy was decree and there was a clear separation between target and measure, between state variable and control variable. As markets become more open and price driven, the effects Goodhart’s Law assert themselves. Policy cannot be made without considering the reaction of the economic agents and without risk of triggering unintended consequences. Legacy cultural tendencies to report success and suppress failure lead to noisy macroeconomic data exacerbating the problem of effective policymaking.

 

China’s ministry of finance, central bank and market and banking regulators are intelligent but are also inexperienced in operating under such conditions where policy is no longer simple or linear. Policy under open markets with all the feedback loops introduced by expectations mean a lot more than policy but include skillful communications and management of expectations. Recent policy missteps by the regulators have not so much been a failure of policy than a failure to manage expectations and communication.

 

In China, the state has interfered extensively and directly in allocating resources through administrative and price controls, guarantees, credit guidelines, pervasive ownership of financial institutions and regulatory policies, and it has done this with the SOE as principal accomplice. Recognizing the inefficiency of SOEs, China is in the midst of reforming the sector. Foreign investment will be introduced into state-owned firms via restructurings and joint ventures, as well as overseas mergers and acquisitions, the State Council said in new guidelines on SOE reforms. While welcome, the statement was deemed insufficient and vague. Notwithstanding the size and influence of SOEs, some believe that the driver of growth in China has been private businesses. According to the Economist: “Average growth in output for industrial private firms since 2008 has been 18%, twice as much as for industrial SOEs.” Private enterprise is heavily disadvantaged in particular in terms of access to credit. SOE’s still consume more credit and at lower cost than private enterprise and therefore represent unfair competition to the private sector.

 

China has a history of enterprise and innovation. The current centrally planned economy is in many ways the last ripples from the anomaly that was Communism which gripped China in 1949. China’s rehabilitation began with Deng XiaoPing who a reformer and rolled back some of the less sensible Maoist policies and principles. After him, Jiang ZeMin was the pragmatist, slowing reform where it threatened to rupture the economy or society but maintaining the general principle of Socialism with Chinese characteristics, Jiang’s own slogan was “socialist market economy”. Jiang’s leadership saw the demise of many SOEs as market reform exposed their un-competitiveness. It also coincided with a increase in corruption and cronyism and in the emergence of an oligarchy with penetrating interests in government and business. The next 10 years under Hu JinTao saw a maturing of the Chinese economy with all the associated social frictions that come from a growing middle class. In many ways, the Hu leadership set the stage for the current leadership under Xi as it sought to address some of the inequality and excesses of wealth and influence in China. Notably Hu’s government began to address corruption and lack of transparency in government and sought to narrow the gap between rich and poor as well as development between coastal areas and the interior. It was also a period where China began to more actively integrate itself into the global community beyond a purely commercial context and to assume more of the social and political norms of developed nations. Navigating this evolving political landscape was a vibrant private sector full of innovation and enterprise, saddled with the burden or task of working around market distorting policy, but profiting from the surge in investment in infrastructure both physical and institutional.

 

The image of China as a backward, reverse-engineering, IP stealing, technological laggard is persistent but mistaken. In 2014, the top and third most prolific patent filers were Huawei and ZTE, both Chinese companies. China’s annual R&D spend as a percentage of GDP, at 2%, has now exceeded Europe’s and is catching up with the US’s 2.8%. The numbers belie another trend, which is that private sector innovation is driving growth. Total factor productivity is growing 3X faster at private firms than at SOEs, according to the World Bank. A report by the McKinsey Global Institute finds that Chinese firms are particularly adept at innovation in a number of industries, in consumer facing indu
stries such as e-commerce, in efficiency driven ones, such as manufacturing but lag in science and technology. Over regulation in developed countries may also provide China’s pragmatic model with an advantage. The same heavy hand of the state that meddles may also turn a blind eye to less ecologically or ethically ambiguous pursuits where more conservative western regulators would have acted.

 

China under Xi JinPing is facing the continuing issues of a growing middle class and a slowing economy, slowing naturally under the weight of its own size, the consequence of prior growth. Slowing growth is to be expected; economist sometimes forget that constant growth is exponential growth and unsustainable. The burden of central planning sitting alongside private enterprise is that price signals are attenuated leading to misallocation of capital and in China’s case, over investment and over capacity. Other areas such as consumer credit and mortgage credit are undersupplied. Recognizing these imbalances, the Chinese government has engaged macro prudential policies to redirect the flow of credit and lower the cost of credit for particular segments. Specifically, they intend to prevent excess credit in speculative markets, local government white elephants and SOEs while improving the access to credit for SMEs, private enterprise, consumer loans and mortgages.

 

At a more fundamental level, the Communist Party is trying to reform itself. This may appear mainly cosmetic but there are good reasons why the reform may be in earnest. A growing middle class, a better educated people, the proliferation of social media, have created an environment of de facto transparency which the government cannot reverse. To stave off an existential threat, the Communist Party has to embrace greater transparency, the rule of law, reliance on institutions, and other international norms as its new pillars. If you cannot hide, you should not try, is the principle. Transparency also places a greater responsibility back upon the people to play their part and to respond appropriately to policy. The new ideal is, however, in its own way, difficult to manage, especially for a government unused to intransigence and criticism. The rapid development of China, the size of her economy and the massive forces at play can be intimidating to the government and can and has led to policy miscalculations and hesitations. The handling of the sharp downturn in the domestic A share markets are an example.

 

From 2010, the PBOC the central bank has kept monetary conditions fairly tight with interest rates rising from 5.31% to 6.56% and the RRR rising from 15.50% to 21.50% as inflation accelerated from 2009 through 2011. Despite cheap valuations and decent earnings growth Chinese equities performed dismally, locked in a bear trend from late 2009 to mid-2014. It was only when the PBOC embarked on expansionary policy as US QE was tapered off and inflation receded that Chinese equity markets were ignited. From mid 2014 to mid 2015, the Shanghai Composite Index rose 148% in a liquidity accelerated ascent that defied reasonable valuations. Latecomers to the equity rally used leverage and margin accounts to boost returns and drove valuations further out of line with fundamentals.

 

Note that the motivation for the PBOC’s expansion was falling inflation and slowing growth, both incompatible with accelerating earnings growth. The market was driven by liquidity and sentiment alone. This is not to say that the astute investor recognizing the dynamics of the market could not participate profitably but it did mean that at the end the exit cost would be high. Ultimately the rally was ended by the confluence of an accelerated IPO pipeline, weakening company fundamentals, and the regulators themselves removing the punchbowl by regulating the growth of margin trading accounts.

 

Having burst the equity bubble the PBOC, alarmed by the pace and extent of the correction acted to slow the descent and limit the downside with a series of clumsy regulations including short sale bans, selling bans, market support funds and moral suasion. For all of September, the Shanghai Composite Index traded in a narrow band between 3000 and 3300. A 148% bull market had ended in a -44% bear market and although the market remains some 50% higher than when the stock frenzy began, sentiment has been damaged and the China market has become both the centre of attention for global investors and the alleged culprit for every market disappointment from the US to emerging markets.

 

In June 2015 the Shanghai Composite traded at a PE of 21X, still shy of the 27X seen in 2008; it currently trades at 13X, closer to levels seen in 2011. While growth is slowing, earnings growth rates remain high at over 20%. H shares in HK currently trade at a PE of 7 albeit with lower earnings growth potential, well below the recent peak of 11X in June 2015. These are aggregates of course and hide a rich detail. But even so, Chinese stocks which were acutely over-valued in the summer are now cheap.