From the FT:
China’s central bank and one of its largest state lenders are holding emergency talks over whether or not to bail out a defaulting real estate developer…
In a case which offers a microcosm of the cracks emerging in China’s shadow banking system, Zhejiang Xingrun Real Estate, the provincial developer, had been offering usurious rates of interest to individuals after being shut out by conventional banks.
Officials from the government of Fenghua, a town in eastern china with a population of about 500,000, the People’s Bank of China and China Construction Bank, which was the main lender to the developer, were on Tuesday thrashing out ways to repay the company’s Rmb3.5bn ($566m) of debt.
Local government officials were keen to downplay the fate of the troubled developer, Zhejiang Xingrun Real Estate, which quickly added fuel to markets already jittery after Chaori, the solar cell maker, this month became China’s first bond default.
Who on earth could have seen trouble in the property market coming… Read more
China’s central bank engineered an abrupt end to the carry trade in the renminbi last month. Could it also be helping to drive up the ever-appreciating euro?
Very likely, is the conclusion of currency strategists. Chinese officials have long been determined to lessen a reliance on the dollar as the world’s dominant reserve currency. But they can only act on this resolve at times when foreign exchange reserves are accumulating – giving reserve managers the opportunity to diversify. Read more
Deutsche: yes, copper financing in China is big.
How big? Try a tenth of all short-term FX loans — and 750,000 or so tonnes of metal in Shanghai bonded warehouses alone — big.
But then, they think it will mostly stay profitable… Read more
So. Alibaba’s Yu’e Bao and its internet Money Market Fund ilk are good, particularly if you are in favour of deposit liberalisation in China, say, in 1-2 years. As Lex said, Yu’e Bao is sneaking market-priced bank capital into a closed system.
But. Yu’e Bao and its ilk are bad, particularly if you focus on pesky things like liquidity risk. This is nuts. When’s the 危机? after all, and it’s worth remembering the risk that comes with receiving higher returns than capped bank deposits.
Meanwhile. Yu’e Bao and its ilk are a threat, particularly if you are a Chinese bank… Read more
I mean take Chaori 11 again, China’s first onshore bond default.
Far from being China’s Bear Stearns it might simply be a sign that China has arched its eyebrow at the solar industry (and other private, vulnerable industries that lack political clout) and decided to stroll away… with its arm still draped around the shoulder of privileged enterprise. Read more
If you take the blue pill, the story ends. You wake up in your bed and believe exactly what the statistics tell you to believe. You take the red pill — you stay in Wonderland and I show you what the statistics just can’t see.
What we’re talking about is hidden debt. The debt that’s out there but which we can’t currently see or assess. That is, dark debt which as yet hasn’t been factored in or priced into asset prices that influence our financially abstracted version of reality.
We have of course been here before. During the subprime crisis unexpected sums of dark debt emerged from off-balance sheet bank liabilities, SIVs and such the like. The impact, as we all now know, was immense.
But there’s a very good reason to suspect that “dark debt” hasn’t gone away entirely. It may, as it turns out, still be lurking out there somewhere. Still skewing our perception of reality as it always did. Read more
Things you don’t expect on the night before a dovish National People’s Congress announces a 7.5 per cent growth target include… the announcement of the probable default of tiny corporate “11 Chaori Bond” which, if it comes to pass, would be China’s first onshore corporate bond default.
From the FT:
Shanghai Chaori Solar Energy Science & Technology, a Chinese maker of solar cells, announced on Tuesday that it would not be able to pay the Rmb89.8m ($14.6m) annual interest on a Rmb1bn bond that it issued two years ago.
Nine days in and it’s still falling…
Some analysts had thought Beijing was ready to let the renminbi stabilise, but a sharp sell-off on Friday – at one point it declined 0.9 per cent, its biggest daily fall since the new currency system was introduced in 2005 – showed that the central bank was still determined to push it further.
“We’re still seeing PBoC intervention”, said a trader with a bank in Beijing. “This is beyond our expectations.”
Argue about more sweeping policy changes as you will (the bet is still basically on a PBoC attempt to deter speculative inflows) but maybe keep an eye on the 6.20 level as you do. Read more
Something’s afoot in the world of RMB.
The renminbi fell on Tuesday by the most in a single day since 2012, dropping 0.35 per cent against the dollar in the onshore market by midday in Shanghai, and 0.7 per cent since Wednesday, as the FT reported.
The market has put this down to an imminent change in China’s foreign exchange regime. The narrative is that the PBOC is preparing to widen the trading band ahead of flotation and is spooking the market intentionally, so that it realises that the RMB goes down as well as up, and that carry-trades are no free lunch.
Not everyone is as convinced. Read more
Right, so if we’re not blaming the squid we may as well spend a bit more time on China. Whack-a-mole finance can have a long reach after all and may very well be skewing LME copper price levels which, instead of reflecting the LME stock position, are maybe reflecting all of that copper sitting somewhere in China, often tied up in tricky financing deals in the shadowy sectors of the economy.
What remains interesting is the implicit and very sensible worry that all of that supply won’t stay under wraps forever. Read more
Earlier on Tuesday we proposed that one of the reasons gold was rising was because the market, despite the taper, was still being overloaded with liquidity relative to the number of safe US assets in circulation.
But we’ve also speculated in the past that if and when China begins to unwind its US Treasury stock, as it may be forced to if it needs to defend the RMB from devaluation, then the Treasury stock it releases could end up injecting a fair number of dollar assets — at least on a temporary basis — into the global dollar system.
The sequence of events might consequently look something like this: Read more
Following Matt Taibbi’s “Vampire Squid operates in commodities” exposé, here’s an apropos update on recent LME inventory declines from the evil one itself. As analysts at Goldman Sachs noted on Friday, it looks increasingly like copper inventory is heading off market into completely opaque stores in China as a result of renewed financing deals (CCFDs), rather than being depleted due to true market deficits:
We continue to believe LME inventory declines reflect stocks shifting off market rather than a deficit market, due to CCFDs and the impact of the new LME rules. Spread tightness in our view owes to the fact that CCFDs change copper from a negative carry asset (storage costs, financing costs) to a positive carry asset (where interest rate arbitrate > storage, financing, and hedging costs). Since we do not expect these deals to end anytime soon, LME spread tightness is very likely to persist, with risks that spreads tighten further during the seasonally strong period of demand in 2Q.
Which is a neat way of saying “don’t blame us for tight spreads, blame China”. And … “by the way, new LME rules aren’t working just as we predicted”. Read more
It’s not an easy concept for some gold lovers to grasp, but… a nation importing huge amounts of gold into its economy doesn’t necessarily reflect prosperity on its part. In fact, it can imply economic weakness around the corner.
Prosperous countries, after all, don’t need gold (or huge amounts of foreign reserves for that matter either) to back their fiat currency. They don’t need them because they are so mighty, productive, knowledgable, powerful and desirable to live in that they have seigniorage power all of their own accord. You know. Like Bitcoin. But not because they are artificially scarce, but because they are managed well.
Also, even if you go with the goldbug logic that fiat ‘money printing’ equals debasement, it must then also imply that mass gold importation equals the opposite: purposeful rebasement. Someone is trying to bolster what would otherwise be a naturally weak currency. Read more
Or as the FT’s Martin Wolf says on Wednesday, regarding the increasing automation of the economy …
[W]e must reconsider leisure. For a long time the wealthiest lived a life of leisure at the expense of the toiling masses. The rise of intelligent machines makes it possible for many more people to live such lives without exploiting others. Today’s triumphant puritanism finds such idleness abhorrent. Well, then, let people enjoy themselves busily. What else is the true goal of the vast increases in prosperity we have created?
If the above is true then the future depends on us being able to successfully redefine labour and purpose — and with it value itself. A new meritocracy based on progress, talent, creativity and doing the previously considered impossible (irrespective of monetary value) must in other words be nurtured. Read more
We’re coming to the end of a… multidirectional week for EM rates and currencies. BNP Paribas’ strategist here also pokes the media in the eye for “vying to produce the most bearish story on emerging markets…”
So we should note this dose of bullishness from the French bank: Read more
Lombard Street’s Charles Dumas charts the overvaluation of the Chinese currency:
There is a nice chengyu in the latest note from Bin Gao, BofAML’s China rates strategist: 居安思危, ‘be prepared’.
Oh yes, and the note also compares this week’s rescue of Credit Equals Gold No.1 to a Bear Stearns moment for China. Read more
It’s not just princelings.
Corporate Hero [hmm]
Those are the six British Virgin Islands holding companies attached to the three nightclubs being listed in Hong Kong this week. Read more
There aren’t many people out there who agree with us that China has a yuan overvaluation problem, and that floating the currency will result in the opposite of the expected effect. But there are some.
Diana Choyleva at Lombard Street research is one such economist.
In a note on Tuesday, she sums up the problem beautifully.
As she notes, the key issue is that China’s export-driven growth model, which depended on long-term currency devaluation, created excessive savings which encouraged unproductive investments at the expense of consumer spending. Accordingly, attempts to restructure the economy and make it more consumer-focused depended on an explicit currency appreciation path.
And yet, overturning a decade’s worth of competitive devaluation was never going to be easy. For one, it was bound to stifle China’s export advantage and simultaneously increase Chinese purchasing power abroad much more significantly than at home. Read more
From where this blogger is sitting WMPs do a pretty good job of summing up the different ways of looking at what is going in China at the moment. On the one hand you have those who see WMPs more as “off-balance-sheet deposit rate liberalisation, with a twist of risk” which are a useful tool on the liberalisation path, and on the other hand you have the Weapons of Mass Ponzi-focused brigade. Read more
Just when you think there’s nothing left to say about China’s debt dilemma up pop some more pieces to greet the new year. Two of the most recent saw Soros on the self-contradiction in Chinese policy boat saying that “restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years” and Patrick Chovanec providing a touch more detail about what all that messy debt actually means:
To those who wrote off China’s first banking seizure in June as a fluke, this latest episode [interbank lending market spiked to near 10 percent again last week] appeared to come out of nowhere. They cast about for explanations: Perhaps some seasonal surge in cash withdrawals was to blame, or the U.S. Federal Reserve’s decision to taper its bond-buying policy. Optimists assumed the PBOC was tightening credit on purpose, as a warning to banks to rein in unsafe lending practices. With inflation at manageable levels, they reasoned, the People’s Bank of China had plenty of room to loosen monetary policy again and ease the cash crunch.
China says rollover. From the FT’s Simon Rabinovitch:
Faced with a mountain of maturing loans this year, China has given local governments the go-ahead to issue bonds as a way of rolling over their debt to avoid defaults.
The announcement by the National Development and Reform Commission, a top central planning authority, is the most explicit official endorsement of a massive debt refinancing operation that has become unavoidable and is already under way, analysts said.
From Credit Suisse, do breathe in the romance:
The impact of the easing of the one child policy on birth rates may be overstated based on the experience of easing restrictions on parents who are both single children in their families (as shown in Exhibit 3). Guangzhou, a southern China city, had more than 14,000 couples, who were both single children in their families, hence eligible to have the second child, but only 360 couples had the second child in 2009.
Starting today we get what is basically the first formal step to a fully fledged market based deposit rate system from China (honourable mention of course to those more informal weapons of mass ponzi). It’s been coming and the move doesn’t effect corporates or individuals, but in the context of the Shibor spike, deposit pressure and the post-plenum reform blush it’s very worth noting.
From UBS’s Wang Tao:
[The PBOC] took the long-expected step toward liberalizing deposit rate on December 8, announcing that effective from December 9, depository financial institutions (banks) are allowed to issue large-denomination negotiable certificates of deposit, i.e., the so-called interbank CDs.
Some are betting that Beijing will eventually endorse Bitcoin. This week Lightspeed Venture Partners of San Francisco and a China-based sister fund announced a $5m investment in BTCChina…
– Financial Times, November 22
The People’s Bank of China even did a Q&A on Thursday to explain why it’s more or less forbidden the Chinese financial system from dabbling in Bitcoin… Read more
A couple of things worth noting, for those interested in the virtual pump-and-dump campaign that is Bitcoin.
1) The Chinese Bitcoin premium has seemingly abated. Read more
China, caught somewhere between futility and necessity, is attempting to once again regulate the whack-a-mole game that is its interbank market. From the FT on Tuesday:
The China Banking Regulatory Commission is looking to establish three new hard caps on the interbank market, according to the draft of what is known as “document no. 9”. First, lending to any single financial institution should not exceed 100 per cent of a bank’s net capital. Second, lending to non-bank financial institutions should not exceed 25 per cent of a bank’s net capital. Third, lending to all financial institutions should not exceed 50 per cent of a bank’s total deposits.
We’ve argued before that the 2005-2007 commodity bull-run could have been the product of an unwitting self-manufactured squeeze, as the industry rushed to monetise as much inventory as possible to benefit from higher than usual interest rates and as inventory levels dropped. (All pretty much unwittingly, of course.)
As prices increased, the economy choked. Read more