If you want something done right, do it yourself
- The People’s Bank of China, recently… (probably).
With that in mind, here’s Michael Pettis’s on the PBoC’s renewed distrust in the banking system’s ability to allocate credit — which spawned the flawed comparisons to ECB LTROs made as China tried to help out local governments yearning for a debt swap:
Because it cannot ease credit conditions without encouraging a continuation of the worst kind of lending, the PBoC is trying to direct lending by targeting the types of lending it will support. To the extent that this lending flows into small and medium enterprises, agriculture, services, or other parts of the Chinese economy that are using capital efficiently, this is a good thing, but if capital continues to flow into large infrastructure projects, especially into the poorer provinces, it seems to me that this only leaves the country with a worse debt burden.
Since it’s that time of the year again, here’s the state of play so far, courtesy of Deutsche (do click to enlarge):
On the standout star performer — Chinese equities — we’d recommend checking in on Matt’s recent piece on the potential upsides of China’s bull run — the question being, can it strengthen the real economy? And we’d add to Matt’s thoughts, quickly, that allowing broke companies to change out their unpayable debt into equity shouldn’t be underestimated as a reason for this rally, rather than as a byproduct. Read more
The current economic woes, brought on by the collapse of the so-called “housing bubble,” are considered the worst to hit investors since the equally untenable dot-com bubble burst in 2001. According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent.
[...] Read more
On the back of news “that several Chinese provincial governments have been forced to postpone bond auctions as banks balk at the low yields on offer” — really scuppering the plans of those local governments to restructure their massive debts — some rumours of “Chinese QE” began floating about over the past few days.
But that seems to have passed…. and now it’s chatter of an ECB style LTRO that’s being heard in the wind.
Either way though, we think it would be a better idea to forget the QE or LTRO comparisons this time around — it muddies the water — and instead concentrate on what China is trying to achieve. Read more
The thing about market-based financing is that market-based financing isn’t always available the way you want it.
Which is why it’s big news in China on Friday, as the FT reports, that several Chinese provincial governments have been forced to postpone bond auctions as banks balk at the low yields on offer. The news comes by way of state media.
Now, the reason this is interesting is because last month when China’s finance ministry revealed its plan for provincial governments to refinance RMB1tn in debt, analysts were super cheery about its chances of lowering debt-servicing costs and extending maturities for provincial authorities. Read more
Credit pricing, yeah?
From a rather good Bloomberg piece:
Having found themselves shut out of local bond and loan markets seven years ago, a band of developers began looking elsewhere for funds. First an initial public offering, and then a dollar bond sale. It became a well-trodden path. By 2010, a core group of four — Kaisa Group Holdings Ltd., Fantasia Holdings Group Co., Renhe Commercial Holdings Co., Glorious Property Holdings Ltd. — raised a total of $5.6 billion. On Monday, Kaisa buckled under $10.5 billion of debt and defaulted.
China’s home builders became the single biggest source of dollar junk debt in Asia amid government measures to prevent a property bubble. Developers already funneled $78.8 billion from international equity and bond markets into an industry that’s grown to account for one third of the world’s second-biggest economy. Most of the first rush of dollar offerings, in 2010, falls due in the next two years.
Alternatively: SOE, do we have credit pricing in China?
Click for the (Mandarin) notice sent by Baoding Tianwei on Tuesday, informing bondholders that it would be missing a $14m interest payment and thus making it a rare Chinese corporate default. Like Kaisa. But not like Kaisa. Because Baoding’s also part of a state-owned company, China South Industries. Read more
Some more sentences about China, this time from BNP Paribas’ Richard Iley:
It has been a near unshakeable axiom that China’s economy is on a pre-determined flight path to overtake the US and quite quickly become the world’s biggest economy. But China’s rapid nominal compression combined with the end of RMB appreciation vs. the USD and the solid c.4% nominal GDP growth in the US economy mean that, for the first time in a decade, China’s catch up with the US has stalled. Q1 GDP data is not yet available for the US economy but, assuming a cautious 2.5% annualised increase, helpful base effects would still leave nominal GDP at c.4.5% y/y. The US has therefore almost certainly grown faster than China’s in USD terms over the last year for the first time in well over a decade (Chart 5 & 6).
The FT’s Martin Wolf led a stellar panel on the global economy and the outlook for commodities featuring China expert Michael Pettis, BP’s group chief economist, Spencer Dale (formerly chief economist at the Bank of England), and Goldman’s chairman of global natural resources Brett Olsher.
As one might expect there was a difference of opinion on the panel about China’s future growth path. Goldman’s Olsher said he was confident that China would be able to maintain 6.5 per cent to 7 per cent growth in the near term, whereas Pettis suggested that even 3-4 per cent should be considered a successful adjustment. Read more
Most of us know it as shadow banking. Others refer to it as non-bank lending. But a whole new nomenclature — “market-based financing” — is growing in popularity, making the whole thing sound a lot less shadowy, rightly or wrongly.
Nathan Sheets, Under Secretary for International Affairs at the Treasury, in any case urged us to call it that when he spoke about the phenomenon in a speech earlier this year, a sentiment that has also been echoed by the Financial Stability Board.
We refer to this because a similar rebranding effort is currently going on in the world of P2P lenders, many of whom now prefer to be described as operating in the sphere of “marketplace lending“. Furthermore, some analysts we’ve spoken to don’t consider P2P lenders to be shadow banking institutions at all. Some simply call this new source of financing “internet funds”. Read more
Today in sentences about China you might want to pay attention to, from Macquarie:
In our view, the real level of margin finance leverage in China’s markets is actually already much higher than all the historical examples that we can find (ie, for which the data is available to us).
Not an unhelpful way of looking at this weekend’s moves in China — the largest RRR cut since 2008 on Sunday following ropey growth data and a move to rein in the stock market, via more room for shorting and less room for leverage, on Friday — from Citi with our emphasis:
We reiterate H [shares of mainland Chinese companies traded on the Hong Kong stock exchange and denominated in Hong Kong dollars] preference over A [shares of Chinese companies listed on either the Shanghai or Shenzhen stock exchanges], following the 100-bp RRR cut and CSRC’s margin trading rule enhancement over the weekend. The “economic policy put option”, i.e., easing bias if economy weakens, is in line with our views post 1Q15 GDP. The RRR cut, more significant than expected, suggests urgency to ease and provides Rmb1.3tn liquidity. Our economists now expect two more rates cuts and two more RRR cuts ahead in 2015. MXCN gained 1% on average following 50-bp RRR cuts historically. For the gov’t A-share equity policy stance, however, we think an “equity policy call option”, i.e., tightening bias if equity surges, seems emerging given the high leverage and reasonable valuation
We assume we’ve made our position on this pretty clear… but apparently Citi remain unconvinced.
To wit: “If the Chinese market were to double from here it would indeed be in bubble. The same is true for Asia, a doubling would put us back at 3x book which over the last 40 years has been the peak – four times. When we get close to those levels we will be in a bubble, till then it’s a bull market.”
From their GEMs team, which has been preaching China equities for quite a while (with our emphasis): Read more
The China stock bubble is getting more and more bonkers. This from Deutsche Bank:
Bubble watchers point out median earnings multiples for Chinese technology stocks are twice US peer valuations at their dot.com peak. More worrying perhaps is a health-goods-from-deer-antlers producer on 70 times, the seamless underwear manufacturer on 90 times or those school uniform and ketchup makers on 330 times!
It seems everyone in the country is racing to open a brokerage account – 1.67m new accounts in the latest week, according to the China Securities Depository and Clearing Co. That sounds a lot, although it is growth of only about 1 per cent a week in the total of new accounts: China, remember is big.
But a quick bit of Excel work shows just how silly the bubble in Chinese domestic stocks, known as A shares, has become. Read more
Yes, dot-com comparisons are flung about all too easily. But it’s quite hard to argue with the fairness of this one from Bloomberg:
The world-beating surge in Chinese technology stocks is making the heady days of the dot-com bubble look tame by comparison.
The industry is leading gains in China’s $6.9 trillion stock market, sending valuations to an average 220 times reported profits, the most expensive level among global peers. When the Nasdaq Composite Index peaked in March 2000, technology companies in the U.S. had a mean price-to-earnings ratio of 156…
Valuations in China are now higher than those in the U.S. at the height of the dot-com bubble just about any way you slice them.
… By the notorious PBoC?
To be clear, the issue here is falling M0 in China.
SocGen’s China watcher in chief Wei Yao suggests that this is perhaps more important to real growth than the normally fixated-upon M2. Read more
Just going to leave these few charts here for a second…
That’s from BNP Paribas, this is via Tom Orlik and a few others: Read more
A Chinese rendering of jusqu’ici tout va bien courtesy of Bloomberg:
The chief China strategist at Bocom International Holdings Co. points to soaring price-to-earnings ratios, the shrinking yield advantage that stocks offer over bonds and the fact that mainland-listed equities now trade at a 34 percent premium over nearly identical shares in Hong Kong.
So what’s Hong’s advice to investors?
Keep buying, of course.
Sentences to remind us of the nuttiness of Chinese equities over the past few months from BNP Paribas’ Richard Iley (and yeah, the Shanghai Comp fell 0.8 per cent today we have to admit, but that just broke “a 10-session winning streak — the longest in 23 years, according to Bloomberg data — that had taken the index to its highest since May 2008″):
Against all odds, the best performing asset class on the planet over the last nine months or so has been Chinese equities. After languishing for the first seven months of 2014, Chinese stocks have since been on an incredible tear, ending 2014 up a remarkable 49% in USD terms, even outstripping the c.28% annual return posted by Bunds (Chart1). And the strong gains have continued so far in early 2015. Up almost 12% in USD year-to-date at time of writing, Chinese equities continue to sit atop the heap of global asset returns. All told, the Shanghai and Shenzhen markets have surged almost 80% in local currency terms since mid-2014 (Chart 2).
Yes, yes… “必有牛市” – “There must be a (dynastic) bull market”. Read more
From RBS’s Alberto Gallo and team:
Gallo is, selectively, very bearish (not on India though, natch) for the obvious reasons: Read more
We don’t have too much to add to the Shambaugh-generated “is the Chinese Communist Party cracking up” debate. Apart from suggesting that…
1. It seems that the debate itself is noteworthy and wouldn’t have happened even one year ago. As JCap’s Anne Stevenson-Yang said, this “may represent the first time in three decades that a prominent foreign expert on China has been willing to so thoroughly blow his entrée in Beijing by publishing an incendiary piece, and only two months after the China Foreign Affairs University had ranked Shambaugh No. 2 among the top 20 international scholars who are best informed about China! That will not be happening anymore. Shambaugh’s boldness, or recklessness, in itself may be the most potent sign yet that China’s soft power has waned.”
2. The trouble the CCP is apparently finding itself in seems an almost inevitable reaction to the economic pressures China is facing. Read more
“Chinese lenders were overzealous in funding domestic boondoggles since 2008″ has almost become a mainstream opinion, thanks in part to charts like this:
A rumour started floating around last week that a CNPC-Sinopec merger might, just might, be on the cards with the FT suggesting China’s national planners were “openly discussing the idea of mergers in a number of state-dominated industries, following the $26bn marriage of high-speed rail companies China CNR and CSR Corp at the end of last year to create a more formidable competitor in international tenders.”
Fair enough and we’re not saying this definitely won’t happen, stranger things etc, but there’s something really very funny about the idea. Read more
The invention of modern accounting in Renaissance Venice was arguably one of the prerequisites to the development of capitalism, so it’s interesting to discover that Chinese merchants developed methods distinct from those employed by their European counterparts that nevertheless made it possible to run successful and growing businesses.
That knowledge comes to us from scholars at the Chinese Academy of Social Sciences and the London School of Economics, who recently found and dug into a remarkably complete archive of business records going back to the late 1700s. This is far from the first study of Chinese accounting but it is the first comprehensive look at a firm that was run by people who probably never encountered European bookkeeping techniques. Read more
China’s richest man has been loading up on high interest shadow banking loans — and selling off a private jet — to fuel the rapid growth of the most valuable solar company in the world.
A Financial Times investigation has found that Hanergy Group, run by founder Li Hejun, has borrowed billions of renminbi from high-interest Chinese “trust products” marketed to wealthy individuals, and loans secured through pledging shares in its Hong Kong-listed subsidiary.
Yup, you’re never short of a lede when your subject is China. A little more, still courtesy of the FT: Read more
Charts from Nomura showing, on the left, China’s largest cumulative two-month decline in FX purchase positions on record occurring despite a record trade surplus over the same period and, on the right, the probable hoarding of foreign currency as reflected in a sharp monthly rise in foreign-currency deposits in January.
Or to paraphrase a bit further: more signs of capital flight and depreciation pressure in China. Read more
A guest post by Simon Cox, Asia-Pacific Investment Strategist, BNY Mellon Investment Management
China’s weak inflation numbers, updated on February 10, underscore why the People’s Bank of China (PBOC) is now easing policy wholesale, after a long sequence of targeted tweaks. (It cut reserve requirements on February 5 less than three months after cutting benchmark interest rates in November.) But does monetary easing work in China the way it works elsewhere? Does it, indeed, work at all? Read more
With an unspoken currency war supposedly upon us and a cry for China to join in — according to BofAML the market is pricing about a 30 per cent probability of a 10 per cent devaluation of the CNY this year while insistent market forces push the yuan down anyway — we thought a lopsided CNY depreciation pro and con list from Nomura might be helpful:
1. Makes exports more competitive, helping to boost growth.
2. Raises the cost of imports, helping to reduce the risk of CPI deflation.
There have been enough pixels spilt over yesterday’s required reserve ratio cut from China so we’ll keep this short (ish).
First, go read your 2012 Mark Dow explaining why a “Chinese RRR cut is NOT like a rate cut in the developed world. And it does not necessarily signify an easing of the monetary policy stance.”
Which is basically true here again Read more