First things first, and to repeat ourselves, China’s recent devaluation was pathetic.
We mean, really, what is this?
“Hold on, did we mean to create all of these quasi central banks?”
“Errr, I suppose? We certainly decided to lay out that moral hazard blanket, remember? And we must have kn…”
“Yeah. Yeah. You’re right. We planned this. Must have done”
- China’s policy makers, probably never.
And from Michael Pettis’s latest note, with our emphasis:
Almost all credit was being treated, it seemed, as if it were sovereign credit. This mattered for a lot of obvious reasons, but Rodney Jones, who runs Wigram Capital and helped organize the seminars, made what I thought was a very interesting point. At the extreme, he pointed out, much of the short-term paper issued in China was, in the eyes of investors, a lot like PBoC bills. They were liquid, short-term money substitutes with little to no credit risk. Did it make sense, he wondered, to think of China as an economy with potentially thousands of mini-central banks, all issuing nearmoney instruments, and if so, how might we model the monetary and economic impact?
So maybe China doesn’t need to hire a battery of statisticians to ironically count its unemployed?
You know, as a ward against a sudden spike sneaking up on the Chinese government, a government that prizes stability and its own continued rule above much else?
We’d suggested previously that China’s powers-that-be might have just as useless an insight into the true nature of China’s employment as the rest of us. Or at least, that was the fear. It wasn’t that anybody thought there was an immediate problem in the Chinese labour market — it was the not knowing, and the potential for a surprise, that got people ruffled.
That and China’s preternaturally still unemployment rate, of course, which (say those who just want to lash out at the world) has the dubious distinction of being considered the least informative among all key Chinese stats. Read more
Goldman’s on to the seismic shift occurring in Chinese metal markets. Specifically copper markets.
Of note: Read more
As has been well reported, the IMF has recommended that China’s renminbi should join the basket of currencies used to value its own de facto currency.
There’s been lots of talk, as a consequence, of China now being in a position to properly disrupt the US dollar’s global reserve currency status.
Except, SDR inclusion doesn’t imply anything of the sort.
Furthermore, we’ve very much been here before*. Read more
Stabilise the A-shares? Benefit the people?
We dunno but we DO have another estimate of how much RMB the Chinese government spent propping up its stock market in Q3 AND the good news is the CCP is back in the black. Or the red, depending on where you are. Either way: up on its investment (from the most limited of perspectives).
From BoFAML’s David Cui, with our emphasis.
Largely based on top-10 shareholder information disclosed by A-share companies, we estimate that the government likely spent at least Rmb1.5tr in Q3 to support the market (Table 1). Given the potential damage to the PBoC’s and RMB’s reputation, economic growth and long-term financial system stability, we think it unlikely that the government has the resolve to keep buying if heavy selling pressure in the A-share market resumes at certain point.
We should know by now that trying to anticipate results on margin flows is truly a mug’s game. However, we’re still playing.
Credit Suisse on Monday running with a very similar theme, even if they don’t quite say so explicitly:
The resumption of IPOs [which were suspended in July amidst a crashing market] has come a bit earlier than market’s expectations, and has got some investors worried about the market being caught in a cross-correction as the stock supply would increase. However, we believe the upcoming IPOs will be positive for a market rebound because it will introduce more funds from individual investors to the market. These individual investors believe the upcoming IPOs will bring them ‘risk-free’ returns as usual—they will move their money from the money market and WMPs (wealth management products) to the equity market to chase better opportunities.
Err… Read more
Observe their glorious return.
Of course, margin debt in China is still massively off the peaks we saw earlier in the year when it was at world beating nutty highs, particularly vs free float, which came crashing predictably down to earth. But this latest tick back up is all the more notable considering that crash, no? Here’s the five-year view of the Shanghai Comp as a reminder. Read more
We’ve been harping on about the risk of a bubble building in China’s corporate bond market for a while now. The point being that the waves of cash which slosh around inside China’s borders looking for an investment to call home have flowed/ crashed into the corp bond market with increasing speed over the past few months — helped, rather obviously, by easing measures being taken to arrest China’s slowdown.
That corp debt ramp-up might start to slow now that the stock market, and margin debt, is staging a comeback but the question of whether a bubble might be about to pop still remains.
The short answer appears to be “no” if you assume that defaults are still a no-no in China. Read more
You don’t even know what the thing is yet. How big it can get, how far it can go. This is no time to take your chips down. A million dollars isn’t cool, you know what’s cool?
A billion dollars.
And you know what’s even cooler than that? A trillion dollars via MMM, the Chinese Social Financial Network:
Or, a catch-up on China’s debt-deflation risk with UBS’s Wang Tao, with our emphasis:
The risk of the debt-deflation trap. Elevated leverage levels, falling prices, weaker real activity and heightened real interest rates all mean that China’s debt servicing burden is rising sharply (Figure 12). As sales revenue and cash flows shrink alongside declining prices, the corporate sector (and local governments) will increasingly lack sufficient cash flow to service their debt. As a result, they will have to increase their reliance on new credit to pay the interest on their existing debt and finance ongoing operations. This means that leverage will continue to rise even as corporate demand for investment and credit stays weak, aggravating China’s already high debt burden (Figure 13). The resulting debt overhang will further weigh on the real economy as enterprises slim down investment and production plans in an attempt to cope with financial pressures, creating a negative feedback loop. In this scenario, banks’ asset quality will continue to deteriorate, pushing up the system NPL ratio (currently at 1.5%). As a result, more credit risk events, e.g., postponing or defaulting on debt repayment, are likely to emerge in the next few years.
This isn’t an estimate about Chinese NPL levels. We and others have gone through that before a few times and, so far, the best guess is basically that they are much higher than the official figures would have you believe.*
And as Pettis notes in his most recent report, “There simply is no way of knowing the extent of unreported losses because there are too many moving parts, not the least of which is the potential viciousness of what George Soros referred to as “reflexivity””. The big point of that being that Chinese entities are most probably not nearly as wealthy as they think they are, a fact they will (also very probably) have to reckon with soon — as failed hopes for future productivity growth run up against NPL-stunted realities.
Or to put it another way, rising bad debt today reduces growth in future economic activity. And, er, slower growth in the future increases bad debt today which is both awkward and probably why estimates of bad debt always seem to rise very sharply over time.
So, this is not about levels. It’s more about doing what Pettis does best — looking at balance sheet structures, incentives in the system and historical examples to give some sort of guide to where China’s banking system and its NPLs are headed. Read more
Lots of uninformed people got excited this morning when they read the Chinese government will remove the last vestiges of its “one-child policy”.
David already explained why a higher Chinese birth rate could be helpful — the number of young people has been shrinking for more than 15 years — as well as the limited significance of what actually happened given the massive exceptions and loopholes introduced over the past few decades. (The bigger reform was two years ago, when the government chose to allow people without siblings to have multiple kids of their own without paying a fine.)
We thought we’d add a little context by putting China’s fertility rate in perspective. If you didn’t know about China’s legacy of population suppression, including horrific forced abortions, sterilisation, and infanticide, you wouldn’t be able to guess by looking at the numbers. Read more
*CHINA ALLOWS TWO CHILDREN FOR ALL COUPLES: XINHUA
About time too. China’s one child policy has been basically unnecessary (taking the CCP’s logic as your base) for quite a while. The NBS has, for example, said it expects China’s working age population to decrease “steadily and gradually over or at least before 2030″. And that graphed looks like this: Read more
From Bloomberg, our emphasis:
Premier Li Keqiang highlighted a minimum growth estimate for China in the coming five years that could indicate the leadership’s readiness to accept the weakest period of expansion since the economy was opened up three decades ago.
The nation needs annual growth of at least 6.53 per cent in the next five years to meet the government’s goal of establishing a “moderately prosperous society”, Li said in an October 23 speech to Communist Party members, according to people familiar with the matter who asked not to be named as the remarks were not public.
By Christopher Balding, Professor of Economics at Peking University, HSBC Business School, and blogger at Balding’s World.
One of the major questions facing investors and analysts of the Chinese economy is how to size up credit… or more specifically the non-performing loan risk lurking in the system.
This is for those of you interested in ancient Chinese business cycles. So, everyone, right?
From Yaguang Zhang, Guo Fan and John Whalley’s new paper:
Where do you think we are now, mid-plenum and all? “Arrogant dragon will have cause to repent”, perhaps? Or “Dragon wavering over the depths”? Certainly not
around 7 per cent “Hidden Dragon. Do not act” or “Flying dragon in the heavens”? Read more
Stop me if you’ve heard this one before…
China’s bond markets are nuts — particularly at the moment — and are doing a poor job of pricing risk. Over a future unspecified timeframe the government will have to normalise their operations or risk everything getting out of control and messy. In the shorter term we can only gawp and remember that said government has the firepower to keep things going for quite a while… assuming, which we do, that it wants to.
On the more general nuttiness, here’s BofAML’s China equity strat guy David Cui (with our emphasis): Read more
ICYMI, China’s corporate bond market has gotten a little weird.
But as China re-leverages to offset slower growth, the co-existence of tighter credit spreads, rising corporate debt, and falling profits is creating highly visible abnormalities, including:
Total debt as percentage of GDP has reached an unprecedented level of around 250% – 160% from corporates… 60% from government and 30% from households.
The producer price index (PPI) has been negative for 43 months.
Commercial banks are obliged to buy local government bonds at low yields
China Vanke, a leading property developer, priced a corporate bond at 3.5%, 4bp lower than the yield of China Development Bank (CDB) bonds, which enjoy sovereign support.
We’re not quite sure what actually passes for “tail risk” these days. Yes, in an ideal world the phrase would be used purely to describe those unforeseen, immeasurable risks that are, err, unforeseen and immeasurable. As Felix wrote before, “if something has a 25 per cent chance of happening, it’s not a tail risk any more, it’s just a risk. ”
But this isn’t an ideal world and “tail risk” is now basically used to describe really dangerous but acknowledged things — like a Chinese hard landing — and it seems kinda annoying to be too pedantic about it.
So, with that in mind, what does this count as? Read more
From BofAML’s monthly questioning of fund managers* thing:
We admit this is getting confusing.
And we admit that we are just very sceptical of anyone trumpeting SOE reform in China unless it’s being done on a massive stage made entirely of caveats.
But… this is definitely food for thought. Read more
Go up, down, or stay flat. Dunno
What we do know is that China’s markets opened again today. Which is nice.
As FastFT said: “Trading for the first time in a week, China’s Shanghai Composite closed 3 per cent higher, while the Shenzhen Composite gained 4 per cent —the best one-day performance for both indices since September 16 …”
And it may be that there is a legitimate reason to suspect that a real floor of sorts is now in place under China’s A-shares. Or at least, that’s the tale is Goldman is telling. Read more
Noted China bear Zhiwei Zhang, once of Nomura and now at Deutsche, is talking up China’s near-term economic prospects.
The reason? He thinks its fiscal slide — predicated on falling land sales which accounted for 22 per cent of general government revenues in 2014 — has come to an end.
You may remember this, from Zhang, in January:
This year, China will likely face the worst fiscal challenge since 1981. We believe this is the most important risk to the economy and one that is not well recognized in the market…