By Jennifer Hughes in Hong Kong
Last time China’s companies held this much money to hand, it presaged an investment boom and better growth. But no-one is predicting that this time round.
China’s M1, or its narrow money supply, jumped 24.6 per cent in June while M2, the broader measure, rose 11.8 per cent. The gap between the two is now at its highest since January 2010 – and it is rising sharply. Read more
Upsides for whom, you ask?
For Chinese policymakers, we respond.
As do Deutsche Bank:
More subtly, Brexit indirectly helped reduce concerns of a ‘risk off’ shock from China thanks to the stealthy RMB devaluation around the UK vote. This has confirmed a new-found market tolerance of China currency slippage, at least when it looks controlled by policymakers.
Here’s a chart explaining why MSCI just, once again, said no to China entering its emerging market indices club:
In short, you’ll need to be a little freer letting capital out as well as in. Also, some other stuff since this is a rules based system, which we’ll let Citi tell you more about: Read more
Let’s all pause for a moment and remember the Great Fall of China’s stock market, one year ago this month, and remember that this evening is when MSCI tells China’s A-shares if they are to be allowed into its club after all.
Right, let’s all pause for a longer moment and consider the plight of the small Chinese investor who doesn’t quite have the same government support as some of the larger forces around him. Read more
The whack-a-mole game that is China’s shadow loans market has just gotten some new rules. Or, as UBS put it, regulators are closing the shadow loan loophole.
A whole new Document is out that could see China’s banks having to raise over Rmb1tn in new capital. Read more
It’s a problem that has been talked about before — inside China it’s what the yuan does against the dollar that seems to matter. Which is awkward because China is quite keen on people concentrating on what it does versus a basket of currencies.
The potential consequence of that USD fixation is that if the $/CNY rate goes higher then there is a risk that capital flight picks back up again in tandem with expectations of further depreciation, no matter what the RMB is doing against that currency basket.
In the words of Goldman’s Robin Brooks and team:
China is pursuing a shift in its currency management, towards a trade-weighted exchange rate and away from the bilateral exchange rate versus the Dollar. That shift makes sense conceptually, given that monetary policy normalization in the US is likely to push the Dollar up, so that some weakening of the RMB versus the greenback can certainly be justified given China’s cyclical position. But the shift to a trade-weighted exchange rate has a weak link, which is that the main signal for households and businesses within China remains the bilateral exchange rate versus the Dollar.
From Nomura, with our emphasis:
According to today’s official People’s Daily [link here and Bloomberg writeup here], an “authoritative” person who was not identified indicated that China should not support growth by adding leverage. “High leverage will lead to high risk; if not well controlled, it will lead to systemic financial crisis and negative growth”. Considering China’s severe structural problems, this “authoritative” person believes that “China’s economic growth trend in future should be ‘L-shaped’, rather than ‘U-shaped’, not to mention ‘V-shaped’”, which suggests that growth will trend lower. This individual believes China should avoid using strong stimulus to raise investment growth in the short term, as it would create larger problems later. For now, the most important thing, in this person’s view, is to push forward supply-side reforms (i.e., cutting over-capacity, reducing property inventory etc.) and actively but steadily reduce leverage.
By Deutsche’s Zhiwei Zhang — you can link these charts to asset bubbles and booming egg futures pretty easily btw:
As he says:
Bank credit growth and M2 growth used to track each other quite well in China. It is intuitive. In a simple world where banks’ main business is to channel deposits into loans, the two should correlate well. But this is no longer the case.
If you look closely at this chart you may be able to spot the moment that MSCI realised how lucky they were that they hadn’t yet included China’s A-shares in their EM pot…
Obviously it’s now time to try adding them again. Read more
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:
This evening’s show is brought to you by…