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.
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.
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
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:
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.
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
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.
This by Michael Pettis — on Beijing’s belated realisation that it needs to change its definition and reality of reform because the attempts of the last few years look to have failed — is very worth your time this morning.
We still consider Pettis’ framework to be the best way of looking at the Chinese economy and the challenges it faces. Here he runs through the recent shifts in the RMB, the fear that other countries might see that shift as a spur to their own devaluations, the failure of rebalancing so far, what a successful rebalancing must entail and, most importantly, the hope that China’s latest push for “supply-side reforms” will be in the right direction.
It’s pretty thorough. Read more
Earlier this month at the annual meetings of the American Economic Association in San Francisco, Justin Yifu Lin argued that China’s growth slowdown has been mainly the result of external and cyclical factors rather than structural transformation.
His case rests on the idea that other East Asian and emerging-market economies had also decelerated in recent years, some of which — Hong Kong, Singapore, Taiwan — do not have the same structural problems that are thought to plague China’s economy. Furthermore, Brazil’s decline has been much sharper than China’s, while India in 2012 also slowed dramatically before rebounding; China can rebound too. Read more
There seemed to be an inevitability to news broken by Reuters earlier on Monday that Xiao Gang, the embattled head of the China Securities Regulatory Commission, had offered to resign and would shortly be moving jobs.
He, after all, was responsible for the bungled introduction of stock market circuit breakers this month, which cost many Chinese investors their shirts. This supposed market safety valve had to be withdrawn in something of a hurry, leaving higher-ups in the Chinese leadership extremely unhappy, according to Reuters.
But no! Read more
From Societe Generale’s analysts over the weekend, with our emphasis, on the fallout from the weakening yuan on the European Central Bank, and why that might circle back (and back again):
Global currency markets have taken their cue from China and commodities, and the resulting shifts are causing something of a headache for the major central banks. Since the low of last spring, the euro has bounced back by just over 9% trade-weighted. Similar moves have been observed for the JPY and USD, with the bulk of depreciation coming from EM commodity currencies. Their status as funding currencies has even seen the euro and yen gain against the dollar in recent weeks
Some bullet points from JP Morgan’s Flows & Liquidity team to start the week.
Retail investors were heavy sellers of equity funds for two consecutive weeks on extreme pessimism.
We don’t think of China as an oil producer. And yet, it very much is.
China’s oil production in 2014 amounted to about 4.2 mbpd in 2014, according to BP statistics — equal to that of Canada’s production at 4.2 mbpd in 2014 and nearly double that of Nigeria’s at 2.4 mbpd.
Then, of course, there’s the mark-to-market value of China’s strategic petroleum reserve, which the country has been building up for years. We don’t know the actual size of the SPR because the numbers are not public, but oil experts say it stands close to 100m barrels, with a sizeable portion of the reserve built up during the $80-$100 per barrel price era. Read more
Yup, amidst all the CNY/CNH spread stuff, this is what really counts.
From UBS, with our emphasis:
And here’s the thing – the factors that we believe have motivated the shift in currency regime [to a broader trade-weighted basket] are unlikely to change anytime soon. Weak international demand will likely keep a lid on export growth. Most importantly, lest we miss the woods for the trees, let’s remind ourselves that China’s key issue is that it is levering up almost at the same pace as it was 5 years back, when investors first started worrying about credit misallocation (Figure 8). The more levered the economy, the less effective countercyclical monetary will be. Clearly, then, all growth enhancing options need to be on the table. From a 2-3 year perspective, we do believe that the CNY can be considerably weaker than what forwards are implying.
Deutsche’s Oleg Melentyev is mad as hell…
Sorry… we meant this:
So why should US investors care, if, as some market pundits preach to us, exports to China are less than 1% of the US GDP? This reminds us of people saying “Greece is irrelevant because its GDP is only 2% of the EU’s”. Aside from it sounding plain ignorant, to say that the health of second-largest economy is irrelevant to the first-largest, this view also turns a blind eye to how the modern economy works.
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