What is a hard landing? Can you re-land hard if you’ve already landed hard? What about just landing harder? Or what about a long hard landing?
The phrasing here is getting awkward, as is the real point, which is the concern that the hardest Chinese landing is yet to come.
You can see why it’s on people’s minds: Chinese reforms have been less than impressive, there’s a general consensus that its record breaking debt load is bad (for a given definition of bad that normally doesn’t include an immediate crisis), and credit growth is still heading up. Take this from Bernstein’s metals and mining team on Monday for example:
The response to the crisis of 2014/2015 appears to be greater than the response to the financial crisis of 2008/9. Between November 2008 and November 2009 total domestic credit expanded from 36.3Trn RMB to 48.4Trn RMB, a change of 12.1Trn or ~34.4% of 2009 GDP. Between February 2015 and February 2016 domestic credit has grown from 111.2Trn RMB to 139.2Trn, a swing of 27.9Trn, or ~40.4% of GDP.
Right, so we’re going to… grudgingly… allow this Game of Thrones reference from David Cui at BofAML.
We will not be this forgiving again.
In the Game of Thrones, before someone declares interest of entering the game, he or she needs to think carefully because the consequences of losing can be extreme. The same could be said about the latest “game” of trading commodity futures on China’s three commodity exchanges, in our view. We believe that loose monetary/credit policies and moral hazards are the main drivers behind the latest sharp rally, rather than improving fundamentals.
Well, maybe some of you can. More than that and it could get tricky for China.
Here’s BofAML’s David Cui:
Since 2015, eight SOE bond issuers have run into repayment problems; four since February.
This is what you get when you try to sidle up to some market pricing alongside a giant ball of money.
It’s to be read while keeping an eye on the property market — What’s that? Property prices for Tier 1 and 2 cities are still rocketing and mortgages are up 75 per cent year on year in q1, you say? — and the rise of defaults in the corporate bond market.
China is growing at 6.7 per cent and broadly stabilising, “down slightly from the end of last year but comfortably within the government’s targeted range, as housing and infrastructure cushioned a slowdown from financial services.”
Well (and this is taking the GDP figure at face value) not if it’s just being propped up by the same old tools which led everyone to worry about its growth model in the first place.
Which it looks like is what’s happening… Read more
In that Empire, the Art of Cartography attained such Perfection that the map of a single Province occupied the entirety of a City, and the map of the Empire, the entirety of a Province. In time, those Unconscionable Maps no longer satisfied, and the Cartographers Guilds struck a Map of the Empire whose size was that of the Empire, and which coincided point for point with it.
And from David Cui, China equity strategist at BofAML, on the creeping direct ownership of shares by government bodies in China:
Shanghai Securities News reported today that SAFE (under PBoC), through its three investment arms, became a top 10 shareholder in at least 10 A-share companies in 4Q15. On March 29, Securities Times reported that Huijin (a subsidiary of CIC, which is under the State Council and has a close tie to the MoF) was among the top 10 shareholders in five ETFs at the end of 2015. We also know that CSFC (under CSRC) bought heavily in the market last year… the three main government bodies that run the economy, the financial system or regulate the market all have a direct stake in the market, literally.
Bloomberg went to town this week on news that hedge funds may be piling into USTs to the total tune of $1.27tn in lieu of foreign central banks and finance ministries who for the first time since 2000 have — on an annual basis — been holding off from making further investments.
On March 15, US Treasury International Capital system data confirmed that foreigners sold $50.4bn in Treasuries on a net basis in January. But! foreign central bank holdings of US Treasuries actually grew to $6.183tn in January.
But there are discrepancies to consider. Read more
Ip Man 3 looks pretty good, right?
Well, maybe not. Each to their own, after all.
A sentence which goes double for Chinese data. Read more
In short, for a given amount of capital controls, China is doing just fine on the reserve front:
China has become, to a large extent, a tale of two property markets. There’s Tier-1 — which is nutty — and, as flagged in the headline above, the rest.
From Bank of America Merrill Lynch’s China team, with our emphasis:
Little over a week before Christmas last year, a small UK technology company, now in administration, issued a blockbuster press release.
Powa Technologies, founded by serial entrepreneur Dan Wagner, had apparently “formed a 10-year strategic alliance with ‘limitless’ potential” to integrate its ecommerce app into China’s state-owned payments infrastructure, according to the December 17th release.
The media lapped it up. Read more
The BIS’s latest Quarterly Review is chock full of useful observations about the counterintuitive effects of negative interest rates, electronic trading on fixed income markets and wealth inequality on monetary policy. Do read the whole thing.
If you don’t have time… cast your eyes directly to Robert McCauley and Chang Shu’s contribution on dollars and renminbi flows out of China.
McCauley (in particular) has been tracking the story of international dollar liabilities and their monetary effects for some time. He was also one of the first to draw attention to the Chinese dollar debt load. As a rule any research with his byline is a must read. Read more
Let us paint you two pictures…
The first involves an Agricultural Bank of China strongbox full of newspapers. Which would be fine — some people might really value their newspapers — if it wasn’t supposed to be full of bank acceptance bills. Investigations are ongoing into that alleged fraud “by two junior employees at China’s third-largest bank” who may have “embezzled more than Rmb3.8bn ($578m) to invest in the once-booming stock market.”
The second is… this from Creditsights:
You’re a rich Party official go-getter on the Chinese mainland, with an eye on how much the renminbi might fall over the next year.
You know there’s a very decent chance that capital controls are going to be tightened up soon.
You know that at the moment you can still get your capital out of China — even if it’s a bit more than the annually permitted $50,000 per person — and that it’s probably going to cost you to do so.
But you don’t want to pay over the odds. After all, you didn’t get wealthy paying more for services than you had to.
Well… Good news. Bernstein’s Michael Parker and team have your back: Read more
An update on China’s big ball of money which we have seen pouring into stock, bonds etc before…
Right now it’s still rolling hard into Tier 1 property — first Shenzhen, now Shanghai.
From HSBC with our emphasis:
Following Shenzhen’s lead from last year, Shanghai’s residential property prices rose 24% during the first two months of the year.
China aims to lay off 5-6 million state workers over the next two to three years as part of efforts to curb industrial overcapacity and pollution, two reliable sources said, Beijing’s boldest retrenchment program in almost two decades.
- Reuters on Tuesday
Rising unemployment that leads to social instability in China = scary and anathema to China’s leaders.
SO, also from Reuters with our emphasis:
China’s leadership, obsessed with maintaining stability and making sure redundancies do not lead to unrest, will spend nearly 150 billion yuan ($23 billion) to cover layoffs in just the coal and steel sectors in the next 2-3 years.
The overall figure is likely to rise as closures spread to other industries and even more funding will be required to handle the debt left behind by “zombie” state firms.
Hmmm. A longer timeline and funding? That almost sounds like… good news? Read more
Just something to think about when you consider Monday’s RRR cut in China, in the context of the capital outflow (and not capital flight stresses PBoC governor Zhou quickly, while upping the comms capability of the central bank) and credit growth.
From SocGen’s Wei Yao:
A 50bp RRR cut could free up close to RMB700bn in liquidity, which would offset the liquidity impact of roughly $100bn in declines in official FX reserves. The FX reserves fell by $100bn in both December and January. Instead of timely RRR cuts, the PBoC was diligently conducting large-scale liquidity injections via open market operations and standing facilities. The PBoC admitted in January that RRR cuts were not preferred then because they could add to depreciation pressure on the RMB. So the subtext of today’s cut is, first and foremost, that the PBoC is less worried about the currency and capital outflows now than just a month ago.
While, sometimes, moments of unique creativity from those trying to get money out of China come out from behind the curtain to take a bow — losing a lawsuit on purpose and ants moving house, for example — the really large flows outwards have remained pretty opaque.
Less opaque now though. Both Christopher Balding and Deutsche’s chief China economist Zhiwei Zhang have taken a long hard look at how capital is flying out of China, despite capital controls which shouldn’t be sniffed at… but clearly are to a large extent.
tl;dr: It’s the over-reporting imports that we should blame. Read more
For years the Chinese government accumulated claims on the rest of the world, with foreign reserves soaring almost continuously to a peak level of just under $4 trillion in 2014. Then things went into reverse:
Are shrinking Chinese government FX reserves a sign of capital flight or are they just a public-to-private asset swap?
Here’s a chart from Nomura’s Asia Insights team to mull over whilst considering that question. Pay attention to the net foreign asset entry line in particular:
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REUPDATING because this seems good from HSBC:
On Friday afternoon, Bloomberg News reported that the People’s Bank of China (PBoC) is raising some banks’ reserve requirement ratio (RRR) to curb their lending behaviour. This report rattled investors’ nerves, given that it was inconsistent with China’s weak macro-economic outlook. In an effort to pursue better communication with the market, the central bank issued a statement on Friday evening stating that it has reviewed banks’ lending behaviour in 2015 and decided that a small number of banks no longer qualified for the lower differentiated RRR. However, it also added that some banks, which previously did not enjoy the differentiated RRR, have pursued prudent lending and are now qualified for the lower RRR. The effective date of the latest adjustment is 25 February 2016 (Thursday). Clearly, the initial media report was “lopsided”. We are of the view that the impact of the adjustment is likely to be insignificant for the money market. More importantly, the central bank’s proactive clarification of the media report, along with the recent decision to permanently hold open market operations (OMOs) on a daily basis, underscores its strong desire to anchor money market rates…
Updating at top because apparently PBoC governor Zhou Xiaochuan hasn’t heard about this selective RRR increase. That’s the same Zhou who is keen to up the comms capacity at the central bank. We’ll update again when we/ the PBoC get some clarity.
Just now, via Bloomberg: Read more
This one escalated rather quickly.
From the FT, with our emphasis:
The latest victim to emerge is Bank of Liuzhou where $4.9bn (Rmb32.8bn) in fraudulent loans were discovered by the bank late last year, according to state-backed China Business Journal. That represents more than 40 per cent of the bank’s total assets of Rmb80bn at the end of 2014 — a dent so large on the bank’s balance sheets that it would likely require government intervention.
… a new chairman at the bank in 2014 discovered the massive pile of debt accrued by one borrower during the tenure of the previous bank head.
Upon that revelation, the borrower, a businessman named Wu Dong, allegedly ordered the murder of the chairman, China Business Journal reported.
Which is sad, but at least he’s talking and talking at length.
Before we get to that though, it’s worth having a read of George Magnus and Eric Burroughs on Chinese capital outflows, reserves and the country’s ongoing FX trilemma — China cannot “pursue more than two of an independent monetary policy, a fixed exchange rate, and free capital movements simultaneously”. They’re good catch ups on where China is now and the prospects of a float, devaluation or increasing capital controls.
It’s also broadly what PBoC governor Zhou discussed, among other things, in a lengthy interview to Caixin over the last few days — after a long period silence — and a transcript of that interview is now pixelated and ready for your eyeballs.
We thought we’d aid that eyeballing and pick out some sections of the interview and put a summary of sorts near the bottom. It’s best to skip down to there if you’ve already read the full thing. The extracts are chunky, as was the interview — which you could maybe read as some 10,000 words of PBoC versus the speculators. Read more
A guest post by Peter Doyle, economist and former IMF staffer
An election with only one candidate? Doesn’t sound competitive. But with nominations just closed for Managing Director of the IMF, the one candidate, Madame Lagarde, will be reelected regardless. Read more
By George Magnus, an associate at Oxford University’s China Centre and senior economic adviser to UBS
Ok you guessed: we are not talking about Beijing. Read more
Chinese FX reserves are down to a three-year low according to figures released this weekend.
But, if like us, you trace the current drawdowns to dynamics which first emerged at the end of December 2011… then you might find the following chart from Macquarie Bank’s global equities team of interest:
From the FT’s Tom Mitchell:
Chinese police have arrested more than 20 people associated with “a complete Ponzi scheme” that took in more than Rmb50bn ($7.6bn) from investors, according to the official Xinhua news agency.
It is the biggest scam yet to emerge from China’s unruly and largely unregulated peer-to-peer lending sector, part of the country’s shadow banking sector. Police had to use two excavators to uncover some 1,200 account books that had been buried deep below ground, according to Xinhua.
What’s “Only when the tide goes out do you discover who’s been swimming naked” in Chinese?
That’s the Shanghai Comp, and this is from Bloomberg:
China Citic Bank Corp., a unit of the nation’s largest investment conglomerate, uncovered a fraud case at its bill-financing business involving about 1 billion yuan ($152 million) late last year, people familiar with the matter said.
Which leads us, naturally, to a partial Fed transcript from August 1985: Read more