When is reform of a Chinese state-owned enterprise not reform at all?
When it’s not going to create value.
Arguably, for example — when it’s really a reverse merger that allows a parent to tap international capital markets and bail out a struggling subsidiary that lost heavy in Australian iron ore mines. Arguably, we said.
Or — an oil major selling a third of its enormous marketing segment to state-backed pension funds, in order to access private capital and boost its already dominant position. Again, arguably. Read more
We take an unseemly level of interest in Peruvian copper mine projects on FT Alphaville. It’s a side-effect of writing for Lex.
But then so too has a consortium of highly strategic Chinese resources investors (Minmetals, Guoxin International Investment, Citic)…
They’ve bought Glencore Xstrata’s stake in Las Bambas, a very big Peruvian copper asset, for $5.8bn cash, according to a release from Baar, Switzerland on Sunday: Read more
UK chancellor George Osborne announced on Monday that the Bank of England will initiate a scheme to help support export finance for UK exporters.
This, as the BoE explains on its website, will see the Bank accept UK Export Finance-guaranteed debt capital market notes as collateral for liquidity operations, encouraging (it is hoped) banks to make export-finance related loans to industry. So, similar to funding for lending, but on this occasion specifically lending to export businesses. Read more
We all know the role played by the vendor financing feedback loop of hell in dotcom bubble mark 1.
Quickly summarised, tech equipment suppliers became overly dependent on sales to internet startups funded through vendor financing, a situation which saw them lending money to companies with dubious track-records for the purpose of buying equipment directly back from them. It didn’t end well.
Nevertheless, it’s still a model replicated on a consumer level in the west, whether it’s through car company lending money to customers so that they can buy their cars or sofa company loans for purchases of sofas. Read more
This week in circularity, from China:
Chinese property companies are buying stakes in banks and raising fears that the country’s already stretched developers are trying to cosy up to their lenders.
Ten Chinese property companies have invested Rmb18.4bn ($3bn) in banks, according to the Financial News, an official newspaper published under the aegis of China’s central bank.
By Anne Stevenson-Yang of Beijing based J Capital Research and author of “China Alone” who argues against any misguided faith in the magical powers of China’s leadership.
Between mid January and late March, China’s renminbi depreciated by 2.8 per cent, before settling into a few days of small and shifting up-and-down movements. The official line painted the fall as an intentional move by regulators trying to reduce speculation in the currency. Belief in such intent, however, relies on a dangerous conviction that China’s policymakers want to stop that inbound flow of capital and are in complete control of the system.
Within China’s banks, the view is quite different: “No one will take our calls or meet with us,” said one investment banker about the regulators. Government officials are too afraid of political reprisals to take responsibility for policy moves which could expose them to reprisals and prefer to stay as inconspicuous as possible. Read more
Your anti-corruption, anti-vice driven growth in Chinese government deposits from BofAML:
SOE reform in China is apparently not like porn.
Thursday’s case — Citic Group. From the FT: Read more
One way to avoid a bank run…
Decision time approaches for Mongolia, Rio Tinto and Turquoise Hill on Oyu Tolgoi, the enormous copper mining project that could one day represent about a third of the landlocked nation’s economy.
Since we reported that Mongolia’s yet to be created sovereign wealth fund could take an equity stake in Turquoise (which releases earnings after the close in Toronto on Tuesday), one deadline has been extended, the mining minister has done his best to wind up investors, China has reasserted itself and Tony Blair has popped up.
All of which means that a deal to start work on the underground part of the mine (phase II), funded by $4bn of loans by commercial banks and multilateral lenders, is very close. But it remains caught up in Mongolian politics, and may not hit the March 31 deadline on which the funding hangs. Read more
As we wrote before, the one thing we can say with certainty after the default of Chaori, China’s first onshore corporate bond default, is that China has become far less tolerant of Chaori.
Most probably, the government’s also less kind to other small private companies with little clout in struggling industries. What it really doesn’t tell us though is whether that tolerance extends any further. Read more
From the FT:
China’s central bank and one of its largest state lenders are holding emergency talks over whether or not to bail out a defaulting real estate developer…
In a case which offers a microcosm of the cracks emerging in China’s shadow banking system, Zhejiang Xingrun Real Estate, the provincial developer, had been offering usurious rates of interest to individuals after being shut out by conventional banks.
Officials from the government of Fenghua, a town in eastern china with a population of about 500,000, the People’s Bank of China and China Construction Bank, which was the main lender to the developer, were on Tuesday thrashing out ways to repay the company’s Rmb3.5bn ($566m) of debt.
Local government officials were keen to downplay the fate of the troubled developer, Zhejiang Xingrun Real Estate, which quickly added fuel to markets already jittery after Chaori, the solar cell maker, this month became China’s first bond default.
Who on earth could have seen trouble in the property market coming… Read more
China’s central bank engineered an abrupt end to the carry trade in the renminbi last month. Could it also be helping to drive up the ever-appreciating euro?
Very likely, is the conclusion of currency strategists. Chinese officials have long been determined to lessen a reliance on the dollar as the world’s dominant reserve currency. But they can only act on this resolve at times when foreign exchange reserves are accumulating – giving reserve managers the opportunity to diversify. Read more
Deutsche: yes, copper financing in China is big.
How big? Try a tenth of all short-term FX loans — and 750,000 or so tonnes of metal in Shanghai bonded warehouses alone — big.
But then, they think it will mostly stay profitable… Read more
So. Alibaba’s Yu’e Bao and its internet Money Market Fund ilk are good, particularly if you are in favour of deposit liberalisation in China, say, in 1-2 years. As Lex said, Yu’e Bao is sneaking market-priced bank capital into a closed system.
But. Yu’e Bao and its ilk are bad, particularly if you focus on pesky things like liquidity risk. This is nuts. When’s the 危机? after all, and it’s worth remembering the risk that comes with receiving higher returns than capped bank deposits.
Meanwhile. Yu’e Bao and its ilk are a threat, particularly if you are a Chinese bank… Read more
I mean take Chaori 11 again, China’s first onshore bond default.
Far from being China’s Bear Stearns it might simply be a sign that China has arched its eyebrow at the solar industry (and other private, vulnerable industries that lack political clout) and decided to stroll away… with its arm still draped around the shoulder of privileged enterprise. Read more
If you take the blue pill, the story ends. You wake up in your bed and believe exactly what the statistics tell you to believe. You take the red pill — you stay in Wonderland and I show you what the statistics just can’t see.
What we’re talking about is hidden debt. The debt that’s out there but which we can’t currently see or assess. That is, dark debt which as yet hasn’t been factored in or priced into asset prices that influence our financially abstracted version of reality.
We have of course been here before. During the subprime crisis unexpected sums of dark debt emerged from off-balance sheet bank liabilities, SIVs and such the like. The impact, as we all now know, was immense.
But there’s a very good reason to suspect that “dark debt” hasn’t gone away entirely. It may, as it turns out, still be lurking out there somewhere. Still skewing our perception of reality as it always did. Read more
Things you don’t expect on the night before a dovish National People’s Congress announces a 7.5 per cent growth target include… the announcement of the probable default of tiny corporate “11 Chaori Bond” which, if it comes to pass, would be China’s first onshore corporate bond default.
From the FT:
Shanghai Chaori Solar Energy Science & Technology, a Chinese maker of solar cells, announced on Tuesday that it would not be able to pay the Rmb89.8m ($14.6m) annual interest on a Rmb1bn bond that it issued two years ago.
Nine days in and it’s still falling…
Some analysts had thought Beijing was ready to let the renminbi stabilise, but a sharp sell-off on Friday – at one point it declined 0.9 per cent, its biggest daily fall since the new currency system was introduced in 2005 – showed that the central bank was still determined to push it further.
“We’re still seeing PBoC intervention”, said a trader with a bank in Beijing. “This is beyond our expectations.”
Argue about more sweeping policy changes as you will (the bet is still basically on a PBoC attempt to deter speculative inflows) but maybe keep an eye on the 6.20 level as you do. Read more
Something’s afoot in the world of RMB.
The renminbi fell on Tuesday by the most in a single day since 2012, dropping 0.35 per cent against the dollar in the onshore market by midday in Shanghai, and 0.7 per cent since Wednesday, as the FT reported.
The market has put this down to an imminent change in China’s foreign exchange regime. The narrative is that the PBOC is preparing to widen the trading band ahead of flotation and is spooking the market intentionally, so that it realises that the RMB goes down as well as up, and that carry-trades are no free lunch.
Not everyone is as convinced. Read more
Right, so if we’re not blaming the squid we may as well spend a bit more time on China. Whack-a-mole finance can have a long reach after all and may very well be skewing LME copper price levels which, instead of reflecting the LME stock position, are maybe reflecting all of that copper sitting somewhere in China, often tied up in tricky financing deals in the shadowy sectors of the economy.
What remains interesting is the implicit and very sensible worry that all of that supply won’t stay under wraps forever. Read more
Earlier on Tuesday we proposed that one of the reasons gold was rising was because the market, despite the taper, was still being overloaded with liquidity relative to the number of safe US assets in circulation.
But we’ve also speculated in the past that if and when China begins to unwind its US Treasury stock, as it may be forced to if it needs to defend the RMB from devaluation, then the Treasury stock it releases could end up injecting a fair number of dollar assets — at least on a temporary basis — into the global dollar system.
The sequence of events might consequently look something like this: Read more
Following Matt Taibbi’s “Vampire Squid operates in commodities” exposé, here’s an apropos update on recent LME inventory declines from the evil one itself. As analysts at Goldman Sachs noted on Friday, it looks increasingly like copper inventory is heading off market into completely opaque stores in China as a result of renewed financing deals (CCFDs), rather than being depleted due to true market deficits:
We continue to believe LME inventory declines reflect stocks shifting off market rather than a deficit market, due to CCFDs and the impact of the new LME rules. Spread tightness in our view owes to the fact that CCFDs change copper from a negative carry asset (storage costs, financing costs) to a positive carry asset (where interest rate arbitrate > storage, financing, and hedging costs). Since we do not expect these deals to end anytime soon, LME spread tightness is very likely to persist, with risks that spreads tighten further during the seasonally strong period of demand in 2Q.
Which is a neat way of saying “don’t blame us for tight spreads, blame China”. And … “by the way, new LME rules aren’t working just as we predicted”. Read more
It’s not an easy concept for some gold lovers to grasp, but… a nation importing huge amounts of gold into its economy doesn’t necessarily reflect prosperity on its part. In fact, it can imply economic weakness around the corner.
Prosperous countries, after all, don’t need gold (or huge amounts of foreign reserves for that matter either) to back their fiat currency. They don’t need them because they are so mighty, productive, knowledgable, powerful and desirable to live in that they have seigniorage power all of their own accord. You know. Like Bitcoin. But not because they are artificially scarce, but because they are managed well.
Also, even if you go with the goldbug logic that fiat ‘money printing’ equals debasement, it must then also imply that mass gold importation equals the opposite: purposeful rebasement. Someone is trying to bolster what would otherwise be a naturally weak currency. Read more
Or as the FT’s Martin Wolf says on Wednesday, regarding the increasing automation of the economy …
[W]e must reconsider leisure. For a long time the wealthiest lived a life of leisure at the expense of the toiling masses. The rise of intelligent machines makes it possible for many more people to live such lives without exploiting others. Today’s triumphant puritanism finds such idleness abhorrent. Well, then, let people enjoy themselves busily. What else is the true goal of the vast increases in prosperity we have created?
If the above is true then the future depends on us being able to successfully redefine labour and purpose — and with it value itself. A new meritocracy based on progress, talent, creativity and doing the previously considered impossible (irrespective of monetary value) must in other words be nurtured. Read more
We’re coming to the end of a… multidirectional week for EM rates and currencies. BNP Paribas’ strategist here also pokes the media in the eye for “vying to produce the most bearish story on emerging markets…”
So we should note this dose of bullishness from the French bank: Read more
Lombard Street’s Charles Dumas charts the overvaluation of the Chinese currency:
There is a nice chengyu in the latest note from Bin Gao, BofAML’s China rates strategist: 居安思危, ‘be prepared’.
Oh yes, and the note also compares this week’s rescue of Credit Equals Gold No.1 to a Bear Stearns moment for China. Read more
It’s not just princelings.
Corporate Hero [hmm]
Those are the six British Virgin Islands holding companies attached to the three nightclubs being listed in Hong Kong this week. Read more