Right, so today the Shanghai Composite is up 5.6 per cent, Shenzhen is up 4.8 per cent and ChiNext has gained 6.3 per cent. And we have no idea what’s going to happen tomorrow
Over the past few days we got a clear government push to keep this thing up — including pushing something like an extra RMB1tn into the system via RRR and benchmark rate cuts over the weekend and, today, fund managers being told to help out — but it’s unclear how long that can keep things contained following near 20 per cent falls in these markets since their (admittedly v impressive) peaks in early June.
As of yesterday it was: not much at all as markets tumbled. As of today it’s: a bit more than that as they don’t.
To help clear things up, here’s Anne Stevenson-Yang of JCap Research with her most recent note: Read more
We’ll tear ourselves away from Greece to point out that Chinese markets are totally normal.
Title wise, That was nuts. Is this the crash? was already taken. In this exact context. Last week.
So… this time the Shanghai Comp has just closed down 7.4 per cent (with some 70 per cent of stocks hitting downward limits), Shenzhen fell 7.9 per cent while ChiNext dropped 8.9 per cent. Read more
Want to avoid market whiplash being driven by a whiplash president and crack the price-to-whatever ratio?
Come join our China panel at Camp Alphaville to find out how to make money up Shibor Creek! Read more
Still rising until September based on broker capital, if you believe Macquarie.
And here is the bank, with our emphasis, after last week’s Chinese equity dive amid stories of broker crackdowns:
Last week’s sharp A-Share correction creates an opportunity for us to update our margin database and charts. It seems that hardly a day has gone by in recent weeks without some discussion of media reports about broker “crackdowns” on Chinese margin lending. But it may be more instructive to observe what brokers and their customers actually do rather than simply observing what the media reports they are doing. This is because the aggregate data on margin lending tells a very different tale from the “tightening” narrative.
Margin positions have continued to spike, climbing 16% MoM and 123% YTD to reach a new high of RMB2.3 trillion as of 18 June. This is 4.6x higher than a year ago. It brings the ratio of margin positions to market cap up to 3.4%, which is still below peak levels achieved in Taiwan in the 1990s. However, as noted previously, margin positions to free float – our preferred metric for considering the possible share overhang – is now 8.5%. Admittedly these numbers become less shocking with time, and cross-country comparisons are fraught with apples to-oranges risks, but we’ll say it one more time – this level of margins to free float is higher than any historical example that we can find.
Quite obviously, not many people take China’s own statistics at face value.
Also quite obviously, China is a hard economy to accurately measure anyway. It’s really quite big and its pace of change has made grasping any bit of it for very long more than difficult. Read more
From Morgan Stanley’s China Pulse survey first (via @jjeswani):
In June, more than half of the investors believed Shanghai A-shares were already in a bubble vs. only 12% holding this view in January.
Seriously, it’s foolproof and definitely not something we’ve seen before in other bouts of market mania.
From the WSJ:
Chinese companies are turning to an unlikely source for profits in the soft economy: the country’s red-hot stock markets.
From Bocom’s Hao Hong, he of the “price to whatever ratio”, we get today’s China nuttiness fact du jour*:
When calculated on a free-float adjusted basis, Chinese market’s average holding period is about one week – a hallmark of intense speculative trades in the market. Everyone is busy looking for the greater fool. Note that at the height of the Taiwanese bubble in 1989, every available share on the exchange changed hands close to twenty times per annum. That is, the free-float shares on Taiwanese exchange changed hands every 15 days on average.
The chart to the right is the China A-share index in US$ terms, from BCA Research. (Why the presentation in a different currency to that it trades in, we’re not sure).
The aspect to appreciate, for those who only started paying attention to China’s recent stock market mania, is A-shares have behaved like rockets before, in 2007.
There was a lot to pay attention to in 2008, but the A-share crash was a severe one, a drop of 70 per cent. Lest you think this is some sort of warning, BCA point out valuations were much crazier eight years ago. In their words “the red-hot bull market has further to go.” Read more
Standard Chartered released a big note this week on the evolution of global supply chains, looking at the effects of new information technologies as well as the changing cost structures of established manufacturing zones.
One of the key themes is that manufacturing is moving westwards, away from China and over to India and Africa. China still has lower-wage areas inland and a fast-growing productivity advantage due to the rapid adoption of automation and robotics; nevertheless the centre of gravity is moving, they say.
Furthermore, the westward transition is also being facilitated by technology, especially things like the falling cost of radio-frequency identification technology and inventory tagging and monitoring. We presume it’s much easier to trust new supply networks if and when you can monitor their output and productivity real-time. As Standard Chartered’s analyst team of Madhur Jha, Samantha Amerasinghe and John Calverley note (our emphasis): Read more
It was Climate Finance Day in Paris last week, a conference convened under the auspices of UNEP and the UNPRI to address the specific challenges and issues of redirecting capital towards a resilient low-carbon global economy ahead of the United Nations Climate Change Conference also to be held in Paris, in December.
The big takeaway was consensus is shifting, especially among asset managers and real money investors who no longer view environmental sustainability as a fringe theme. Climate is a bona fide risk for beneficiaries which professional investors must guard against to fulfil their fiduciary duties. To do nothing, essentially, is to encourage a disorderly capital transition and, potentially, a financial panic.
As example, Axa’s chief executive pledged the insurer would divest €500m of coal assets between now and the end of the year. Read more
From SocGen’s Wei Yao, a chart we’re very tempted to plonk beside one of China’s equity markets:
Actually… Read more
A Macquarie update, on their previous free floats and nutty Chinese markets work, has landed. With our emphasis:
Margin positions in the Chinese equities market have continued to rise in the past month, since we wrote our first Twilight Zone note on April 20. Since then, margin positions have risen by 9.2% MoM to RMB1.9 trillion, or an unprecedented 8.9% of the market capitalization of the combined free float of Shanghai-Shenzhen stock markets. This could already be the highest level of margins vs free float in market history…
I mean, if this is right…
From BNP Paribas’ Richard Iley (with our emphasis):
The release of preliminary data on China’s Q1 balance of payments, while incomplete, nonetheless furnishes us with the hardest evidence yet of the alarming scale of hot money outflows from the mainland.
Consider this from Gavekal’s Chen Long. If nothing else, it puts China’s local government debt restructuring in context:
Of course, that context also involves noting the restructuring’s potential to get a whole load bigger. Which then demands we put that in its own context of China’s general plan to deal with its debt load and, eventually, note that what China means by capital account liberalisation mightn’t be quite what everyone else means by capital account liberalisation. Read more
Take your clicks elsewhere if you know everything about China’s reserve requirement ratio already.
For those who don’t (and have asked for something like this) here’s some good Capital Economics on why the RRR is still an effective tool in China — even if you ignore context at your peril. Read more
If you want something done right, do it yourself
- The People’s Bank of China, recently… (probably).
With that in mind, here’s Michael Pettis’s on the PBoC’s renewed distrust in the banking system’s ability to allocate credit — which spawned the flawed comparisons to ECB LTROs made as China tried to help out local governments yearning for a debt swap:
Because it cannot ease credit conditions without encouraging a continuation of the worst kind of lending, the PBoC is trying to direct lending by targeting the types of lending it will support. To the extent that this lending flows into small and medium enterprises, agriculture, services, or other parts of the Chinese economy that are using capital efficiently, this is a good thing, but if capital continues to flow into large infrastructure projects, especially into the poorer provinces, it seems to me that this only leaves the country with a worse debt burden.
Since it’s that time of the year again, here’s the state of play so far, courtesy of Deutsche (do click to enlarge):
On the standout star performer — Chinese equities — we’d recommend checking in on Matt’s recent piece on the potential upsides of China’s bull run — the question being, can it strengthen the real economy? And we’d add to Matt’s thoughts, quickly, that allowing broke companies to change out their unpayable debt into equity shouldn’t be underestimated as a reason for this rally, rather than as a byproduct. Read more
The current economic woes, brought on by the collapse of the so-called “housing bubble,” are considered the worst to hit investors since the equally untenable dot-com bubble burst in 2001. According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent.
[...] Read more
On the back of news “that several Chinese provincial governments have been forced to postpone bond auctions as banks balk at the low yields on offer” — really scuppering the plans of those local governments to restructure their massive debts — some rumours of “Chinese QE” began floating about over the past few days.
But that seems to have passed…. and now it’s chatter of an ECB style LTRO that’s being heard in the wind.
Either way though, we think it would be a better idea to forget the QE or LTRO comparisons this time around — it muddies the water — and instead concentrate on what China is trying to achieve. Read more
The thing about market-based financing is that market-based financing isn’t always available the way you want it.
Which is why it’s big news in China on Friday, as the FT reports, that several Chinese provincial governments have been forced to postpone bond auctions as banks balk at the low yields on offer. The news comes by way of state media.
Now, the reason this is interesting is because last month when China’s finance ministry revealed its plan for provincial governments to refinance RMB1tn in debt, analysts were super cheery about its chances of lowering debt-servicing costs and extending maturities for provincial authorities. Read more
Credit pricing, yeah?
From a rather good Bloomberg piece:
Having found themselves shut out of local bond and loan markets seven years ago, a band of developers began looking elsewhere for funds. First an initial public offering, and then a dollar bond sale. It became a well-trodden path. By 2010, a core group of four — Kaisa Group Holdings Ltd., Fantasia Holdings Group Co., Renhe Commercial Holdings Co., Glorious Property Holdings Ltd. — raised a total of $5.6 billion. On Monday, Kaisa buckled under $10.5 billion of debt and defaulted.
China’s home builders became the single biggest source of dollar junk debt in Asia amid government measures to prevent a property bubble. Developers already funneled $78.8 billion from international equity and bond markets into an industry that’s grown to account for one third of the world’s second-biggest economy. Most of the first rush of dollar offerings, in 2010, falls due in the next two years.
Alternatively: SOE, do we have credit pricing in China?
Click for the (Mandarin) notice sent by Baoding Tianwei on Tuesday, informing bondholders that it would be missing a $14m interest payment and thus making it a rare Chinese corporate default. Like Kaisa. But not like Kaisa. Because Baoding’s also part of a state-owned company, China South Industries. Read more
Some more sentences about China, this time from BNP Paribas’ Richard Iley:
It has been a near unshakeable axiom that China’s economy is on a pre-determined flight path to overtake the US and quite quickly become the world’s biggest economy. But China’s rapid nominal compression combined with the end of RMB appreciation vs. the USD and the solid c.4% nominal GDP growth in the US economy mean that, for the first time in a decade, China’s catch up with the US has stalled. Q1 GDP data is not yet available for the US economy but, assuming a cautious 2.5% annualised increase, helpful base effects would still leave nominal GDP at c.4.5% y/y. The US has therefore almost certainly grown faster than China’s in USD terms over the last year for the first time in well over a decade (Chart 5 & 6).
The FT’s Martin Wolf led a stellar panel on the global economy and the outlook for commodities featuring China expert Michael Pettis, BP’s group chief economist, Spencer Dale (formerly chief economist at the Bank of England), and Goldman’s chairman of global natural resources Brett Olsher.
As one might expect there was a difference of opinion on the panel about China’s future growth path. Goldman’s Olsher said he was confident that China would be able to maintain 6.5 per cent to 7 per cent growth in the near term, whereas Pettis suggested that even 3-4 per cent should be considered a successful adjustment. Read more
Most of us know it as shadow banking. Others refer to it as non-bank lending. But a whole new nomenclature — “market-based financing” — is growing in popularity, making the whole thing sound a lot less shadowy, rightly or wrongly.
Nathan Sheets, Under Secretary for International Affairs at the Treasury, in any case urged us to call it that when he spoke about the phenomenon in a speech earlier this year, a sentiment that has also been echoed by the Financial Stability Board.
We refer to this because a similar rebranding effort is currently going on in the world of P2P lenders, many of whom now prefer to be described as operating in the sphere of “marketplace lending“. Furthermore, some analysts we’ve spoken to don’t consider P2P lenders to be shadow banking institutions at all. Some simply call this new source of financing “internet funds”. Read more
Today in sentences about China you might want to pay attention to, from Macquarie:
In our view, the real level of margin finance leverage in China’s markets is actually already much higher than all the historical examples that we can find (ie, for which the data is available to us).
Not an unhelpful way of looking at this weekend’s moves in China — the largest RRR cut since 2008 on Sunday following ropey growth data and a move to rein in the stock market, via more room for shorting and less room for leverage, on Friday — from Citi with our emphasis:
We reiterate H [shares of mainland Chinese companies traded on the Hong Kong stock exchange and denominated in Hong Kong dollars] preference over A [shares of Chinese companies listed on either the Shanghai or Shenzhen stock exchanges], following the 100-bp RRR cut and CSRC’s margin trading rule enhancement over the weekend. The “economic policy put option”, i.e., easing bias if economy weakens, is in line with our views post 1Q15 GDP. The RRR cut, more significant than expected, suggests urgency to ease and provides Rmb1.3tn liquidity. Our economists now expect two more rates cuts and two more RRR cuts ahead in 2015. MXCN gained 1% on average following 50-bp RRR cuts historically. For the gov’t A-share equity policy stance, however, we think an “equity policy call option”, i.e., tightening bias if equity surges, seems emerging given the high leverage and reasonable valuation