Following on from our post on Monday comparing China’s relatively low GDP growth and its relatively high levels of new credit…
Here are some updated charts from Michael Werner of Bernstein Research, which show that the total stock of non-government and non-financial debt to nominal GDP continued to climb to new levels in Q1 (it was 193 per cent at the end of 2012): Read more
Friday’s announcement of new daily liquidity operations by the Peoples’ Bank of China has prompted a lot of speculation about what it means for monetary policy in China. The PBoC has historically set rates via tools such as reserve requirement ratios, and prescribing loan and deposit interest rates.*
Societe Generale’s economists believe this is a step towards interest rate liberalisation, and that the PBoC will increasingly use its liquidity operations and repo rates to guide policy rates, rather than prescribed RRR and deposit and lending rates. Read more
An important conference attended by China’s new leadership indicates 2013 will be more of the same: no massive stimulus but no reforms, either. Instead, they will continue to oversee growth hinged on expansionary monetary policy, shadow banking, property price rises, and infrastructure investments. Read more
A somewhat familiar tale of investors who thought their money was safe as a deposit in a state-backed bank… and a curious regulatory response. Read more
There’s some interesting detail in the September loan data published over the weekend by the People’s Bank of China.
As we wrote yesterday, Michael Werner from Bernstein noted the role of big changes in the amount of ‘discounted bills’, a type of short term financing product, on total lending numbers. In short, the growth in these bills has been responsible for much of the growth in year-to-date lending. If you look at the far right column, the amount of medium- and long-term lending is quite meagre once the bills are removed: Read more
Such a lot of data has come out since Friday that we’ll wrap it all here. The short version is, it’s not great but not terrible either.
Trade (all figures are year-on-year): Exports were up 9.9 per cent and imports were up 2.4 per cent in September. Nomura’s Zhiwei Zhang points out this was mostly a surprise on the upside; consensus was for 5.5 per cent growth in exports, and the growth in imports was also healthy compared to the August figure of -2.6 per cent. Read more
China’s data for August did seem to have some good indicators that stimulus was beginning to wind its way into the economy via the traditional channel of bank lending. Loan figures were much higher than expected and a big jump on July’s lending, even if they were well below that of June.
Plus the proportion of medium and long-term loans — that are more likely to help growth, rather than just providing short-term financing — rose. It was only by a percentage point or so, but a positive nonetheless. Read more
We wrote last week that China’s shadow banking system was reflecting and, to an extent, contributing to a growing liquidity risk which in turn is being exacerbated by net capital outflows. Since then, there have been some interesting revelations on the domestic liquidity management, especially in shadow banking, and especially especially in wealth management products.
To recap, wealth management products or WMPs are a little like a term deposit, only they offer Chinese investors a more appealing rate of return than a normal bank deposit (which will deliver a negative real return) and it can be backed by assets — effectively, an informal securitisation. Read more
… a Chinese sovereign wealth fund, its bank-investing subsidiary, and China’s largest bank by assets (which is ICBC).
Click image for the full Fed approval doc: Read more
Shandong Helon! We told you to remember the name.
Either this indebted fibre company would default on a RMB400m ($63m) bond coming due on April 15 – thus becoming the first domestic corporate default in Chinese history, and so maybe a sign of a maturing bond market – or it wouldn’t. Shandong Helon could simply get a local government bailout or a bank loan refinancing instead, under the ‘old’ rules of the game in China. Read more
On Saturday, China’s central bank cut its reserve requirement ratio (RRR) for the second time in less than three months, a move which was expected — though just not now.
Societe Generale’s Wei Yao earlier this month said a cut was unlikely before March, given the fuzzy picture painted by data affected by the lunar new year. Wei believes Saturday’s move was unlikely to have much of an effect, because of the leverage limits applying to smaller banks: Read more
China has instructed its banks to embark on a mammoth roll-over of loans to local governments reports the FT, citing bankers and analysts familiar with the matter. China’s stimulus response to the global financial crisis saddled its provinces and cities with Rmb10.7tn ($1.7tn) in debts – about a quarter of the country’s output – and more than half those loans are scheduled to come due over the next three years. Since the principal on many of the loans is not repayable, banks have started extending maturities for local governments to avoid a wave of defaults. One person briefed on the plan said in some cases the maturities would be extended by as much as four years. While some analysts have warned that many loans will still go bad and that a roll-over only postpones the problem, government advisers believe that it will give Beijing time to find a more permanent solution to its debt troubles. Read more
The China Banking Regulatory Commission is weighing a plan to relax capital requirements for lenders, Bloomberg reports, citing four people with knowledge of the matter said. The CBRC is delaying implementing the most stringent capital adequacy ratios and may lower risk weightings for loans to small businessmen and companies, the news agency says, and the watchdog may also allow banks to increase the excess bad-loan reserves used in calculating risk buffers. The central bank in December cut the reserve requirement for banks for the first time since 2008. Relaxing the capital rules may allow banks to provide more loans without having to raise funds from equity or bond sales. However the regulator is yet to decide on how to set capital requirements, the report says. Read more
Did you wonder what was behind this?
Via Xinhua: Read more
Asian stocks rose for the fourth consecutive session on hopes for a solution to Europe’s debt crisis, while Chinese banks surged after a unit of the country’s sovereign wealth fund increased its stake in the lenders, the FT reports. The MSCI Asia Pacific index advanced 1.1 per cent with Hong Kong’s Hang Seng index up 3.6 per cent and China’s Shanghai Composite index 2.1 per cent higher. Earlier, the renminbi staged its biggest one-day jump in six years. Overall sentiment was boosted by pledges made by German and French leaders over the weekend to recapitalise Europe’s banks. They plan to unveil a comprehensive package of measures to tackle the eurozone debt crisis by the end of this month. Meanwhile talk grew of bigger haircuts for Greek bondholders. The Telegraph says unnamed officials told the newspaper it is “more likely than not” that investors will suffer bigger losses on Greek debt than the 21 per cent haircut agreed in July, with the exact level to be determined by the Troika. Read more
The Chinese government will boost its stakes in the country’s largest banks, the FT reports, as it attempts to shore up slumping financial stocks and to restore investor confidence. Central Huijin, the domestic arm of China’s sovereign wealth fund, will purchase shares in Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China, the official Xinhua news agency announced on Monday. Xinhua added that the purchases by Huijin – its first such public intervention since a similar decision at the onset of the financial crisis three years ago – would “support the healthy operations and development of key state-owned financial institutions and stabilise the share prices of state-owned commercial banks”. The announcement led to a stronge surge in the bank’s shares in Hong Kong on Tuesday, with Agricultural Bank of China rising as much as 11 per cent, says the WSJ. Chinese bank shares have fallen 30 per cent during recent months. Read more
The Chinese government will boost its stakes in the country’s largest banks, as it attempts to shore up slumping financial stocks and to restore investor confidence, reports the FT. Central Huijin, the domestic arm of China’s sovereign wealth fund, will purchase shares in Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China, the official Xinhua news agency announced on Monday. Xinhua added that the purchases by Huijin – its first such public intervention since a similar decision at the onset of the financial crisis three years ago – would “support the healthy operations and development of key state-owned financial institutions and stabilise the share prices of state-owned commercial banks”. Huiji has a track record in buying up bank shares at the government’s urging, writes the WSJ.
… into a hole, that is.
So, China’s Golden Week was not as great for property sales as it usually is. Sales were down 32 per cent on the previous year in 20 major cities, Bloomberg tells us. Which has prompted a big fall for some property developers and financials, dragging down the Shanghai Composite and Hang Seng. Read more
A major Chinese bank has halted trades with European banks including French lenders in the country’s fledgeling onshore FX market, Reuters reports. Bank of China’s move partly follows the recent Moody’s ratings downgrade of French banks, sources said, with another Chinese bank no longer trading renminbi interest rate swaps with some European banks. Bank of China has specifically halted onshore FX swap trades with BNP Paribas and UBS and acted after exceeding credit line limits with some European banks, the WSJ reports. China’s onshore FX market remains relatively small and opaque but the suspension reflects rising unease in Asian financial markets over Europe’s debt crisis. Read more
Shibor, shibor everywhere and not a drop of cash to spare.
Bank of America Merrill Lynch rate strategist Bin Gao has a short note out on Tuesday entitled “A possible funding crisis in China?” Read more
Temasek has emerged as a key player in the consortium that bought up half of Bank of America’s stake in China Construction Bank for $3.3bn, reports the WSJ. Singapore’s sovereign wealth fund had pared back its CCB shares earlier in the month in line with sales of holdings in Bank of China, although Temasek also later bought back BOC at an 18 per cent discount to its selling price. The trade was an ‘eagle swoop’, selling in advance of further credit tightening at Chinese banks, only to buy back later as the market may have bottomed, The Standard says. The moves were surprisingly swift for a long-term investor, the Taipei Times adds. BofA’s sale will at least remove a cloud over CCB’s share price, reports Bloomberg. Read more
Here’s an on-the-ground update of a Chinese practice with some Japanese origins.
It’s what China expert Michael Pettis compared to the zaiteku undertaken by Japanese companies in the 1980s. Put simply, it involved the firms going on speculative corporate investment binges. Today in China, it’s more to do with intercompany lending — firms stepping in, where the banks cannot. Read more
Chinese regulators have told banks to tighten lending for real estate on concern credit risks will increase as the impact of government curbs deepens in the next three to five months, a person familiar with the matter told Bloomberg. The China Banking Regulatory Commission told lenders in July not to extend the maturity of loans to developers, not to grant new credit to help developers repay maturing debt and to set significantly higher standards on loans for commercial properties than residential, the person said. Meanwhile Xinhua says that Chinese property developers saw their inventories surge in the first half of the year. Wind Information, a a Shanghai-based financial data provider, said inventories of 20 listed real estate developers rose 46.3 per cent, year-on-year, to Rmb317.76bn. Read more
By any account, last month was not a good time to sell a Chinese bond backed by its railways.
A local cash crunch had already limited the pool of available buyers, while concerns about the country’s local government debt problems persist. And that was before Saturday’s fatal train crash in Zhejiang province, which killed at least 40 people and is now being censored by the government. Read more
It is well known that international bond investors have loaned tens of billions of dollars to Chinese companies in recent years and that some of those companies, notably Sino Forest and China Forestry, are now in distress. Less well known, however, is the fact that almost every Chinese borrower that has tapped the international markets for funds has done so through a circuitous route that exposes investors to considerable risk, says the FT. “Even if the bondholders get their money back in five years, they are not being paid an appropriate rate of return,” says Tom Jones, co-head of Asia for Alvarez & Marsal, the restructuring firm. Read more
The big holes in Chinese local government balance sheets are back — and bigger than first thought, according to Moody’s.
As widely reported this morning, the rating agency reviewed the National Audit Office’s report on local government debt and concluded that it underestimates banks’ NPL exposure. Read more
China’s banks are exposed to a third more local government debt, or $540bn, than state auditors have accounted for, Moody’s has warned, according to Bloomberg. The lack of documentation for the debt may indicate a greater risk of default, with non-performing loans rising to almost ten per cent of the exposure, the rating agency said. Moody’s added that the government lacked a ‘clear master plan’ to deal with banks’ losses on the loans. China quietly rolled out $463bn of policies back in early June to ease local government debt burdens, combining central government paying off some loans, but the problem lies in the lack of cashflow from the debt for banks, FT Alphaville says. Read more
The People’s Bank of China said it won’t sterilise its biweekly open market operation on Thursday, after money market rates more than doubled in the past six days alone.
Can this really be true? From Anthony Bolton’s account of why his China Special Situations fund has tanked recently, contained in its first annual report. Not so much China, or Chinese fraudcaps, as…
One other risk in the region that has particularly concerned me is the political situation between North and South Korea. We have seen several hostile acts from the North on the South and my concern is that, if this continues, next time the reaction of the South may be to retaliate. Such an event I believe would, at least in the short term, be very worrying for investors in the region. I think Chinese equities would be affected by this. Because of my concern I have purchased out of the money put options on the Korean index to protect about 25% of the fund’s gross assets. Like any form of insurance it is something that I hope will not be needed. The cost of these options has been the largest negative contributor to the fund’s performance during the period. I have recently renewed these options for a further six month period… Read more
Credit Suisse on Monday joined those bashing China’s useless banks, downgrading the sector to underweight due to “asset quality concerns”.
As ever, definitional and measurement issues ensure that one man’s NPL is another man’s PL. Nevertheless, Credit Suisse’s assumptions of credit growth and credit costs would mean Chinese banks — ICBC aside — are in for a tough time over the next few years. Read more