In Brief: China dodges trade bullet? IRS Bitcoin baffler & HK interest rates new focus

inbrief_RGB-01.jpg

China GDP shrugs off trade war – or does it?

Policymakers in Beijing patted themselves on the back after gross domestic product grew 6.8 percent in the first quarter, broadly in line with market expectations. A rebound in private investment helped offset a 20 percent decline in China’s trade surplus, while real estate investment also accelerated.

However, the stable growth might not be able to dissipate broader concerns about the economy. In fact, a slew of financial and markets indicators suggest that investors are taking a cautious view for now. 

“China’s growth outlook is still challenging due to the threat of a trade war,” said Hao Zhou, senior emerging markets economist at Commerzbank in Singapore. “Strong trade growth significantly bolstered China’s economy last year, which indicates any big headwind on the trade front will generate a negative shock.” 

And to be sure, while the balance remained in the black for the quarter, the March number made a rare foray into the red.

Both equity and bond markets indicate that the market has turned skeptical on China’s outlook, while sentiment indicators, such as the Caixin purchasing managers’ index, suggest the market has started to lower its expectations.

One obvious cause behind the cautious mood is the threat of a trade war, which Hao describes as “a remarkable downside risk.” 

In another sign of caution, the People’s Bank of China on April 17 lowered the amount of cash that commercial banks must hold on reserve at the central bank. The required reserve ratio was reduced by a percentage point, bringing the ratio for the country’s six largest lenders down to 16.5 percent. The move followed weak lending volumes last month and signs that the economy is slowing.

Bitcoin makes tax a bit harder

Cryptocurrencies were designed to make finances easier – at least until the Internal Revenue Service cottoned on to them. “Navigating the legal gray areas left by today’s rules can be a bit like wandering through a minefield,” writes Mike Orcott in an MIT Technology Review article last week. 

The IRS issued a guidance note in 2014 classifying cryptocurrencies as property, which makes them subject to capital gains and income taxes. Although you can’t be taxed when buying and holding cryptocurrencies, using them to buy anything after your holdings have increased in value is – because that counts as a capital gain. 

Under IRS rules, taxpayers must report each transaction – even, as Orcott says, a cup of coffee – and the difference between the currency’s value when you obtained it and when you spent it. Gain means pain. Not least because of the forensic accounting skills you’ll need to comply with IRS reporting, especially if you’ve bought and sold cryptocurrencies across several exchanges.

None of this would matter much if the virtual currency craze had remained limited to a few pointy headed graduate students and denizens of the Dark Web. But both the spreading popularity of initial coin offerings and the roller-coaster volatility of the biggest cryptocurrencies, there’s now much more at stake.

Hong Kong currency currents

Third time was a charm for the Hong Kong Monetary Authority's interventionism as the local currency touched the HK$7.85 per US$1 barrier this week. The first two times the limit was hit on April 12, the HKMA did nothing. 

Ronald Man and his colleagues at Bank of America Merrill Lynch suspect the reason was some market participants were willing to buy Hong Kong dollars at HK$7.85. Why? “The motivation is unknown to us,” Man responded, adding that it might have something to do with the credibility of the currency board. 

As of April 17, the HKMA stepped in six times in less than a week as the Hong Kong dollar continued to test the lower end of its permitted trading band.

As the rate is likely to stay close to HK$7.85 for the foreseeable future, analysts’ attention has turned to interest rates. HKMA expects rates to increase incrementally, while BAML sees the prime rate – the cost of lending money to the banks’ best customers – rising as soon as the fourth quarter of 2018. It would be the first rise in the prime rate since the Global Financial Crisis, Man noted.