The whack-a-mole game that is China’s shadow loans market has just gotten some new rules. Or, as UBS put it, regulators are closing the shadow loan loophole.
A whole new Document is out that could see China’s banks having to raise over Rmb1tn in new capital. Read more
Mike Cagney is one of those Silicon Valley entrepreneurs for whom humility is a foreign language.
Since raising around $1bn at a $3.8bn valuation for his online lending shop, SoFi — which stands for Social Finance — he has called his peers unambitious dorks for working with Wall Street and told America’s biggest banks to watch their backs, I’m coming for you.
All with one key message: SoFi is not a bank. It’s “happily not a bank”. In fact, it’s “better than a bank!”. Or even better still, it’s a way to “un-bank millennials”. One could say, SoFi’s ‘not a bank’ almost to the point that the word ‘bank’ itself becomes entirely meaningless. (The common view is a bank’s a platform which uses network effects to transfer risk from those can’t afford it to those who can.)
Via Chinese research shop Red Pulse on Tuesday:
Ant Financial announced the beta version of an online private equity trading platform, Antsdaq, on November 23. Antsdaq supports four different types of products, aiming at fundraising between RMB2m and RMB10m. Trial fundraising will start on November 30, through to the end of December. However, investors need to prove net assets above RMB1m in order to be qualified; this can be illustrated by balances on Yu E Bao and other investment tools from Ant Financial, or tied to a credit card with an RMB50,000 limit.
For those who don’t know, Ant Financial is Alibaba’s financial services affiliate which (among other things) manages Alipay’s Yu E Bao money market product offerings. Alipay is Alibaba’s answer to PayPal, albeit a much more shadow banking-esque incarnation of the latter. Read more
Zoltan Pozsar — who will be at Camp Alphaville, so buy your ticket now! — has a fascinating new slide deck illustrating the changing landscape of US household debt, which, thankfully, is easier to read than his incredibly detailed map of the shadow banking system.
While the total stock of household obligations is only slightly lower than it was at the peak in 2008, the composition of the lenders has changed dramatically. The government, which for our purposes includes Fannie and Freddie as well as the Federal Reserve, has become far more important, while so-called “shadow banks”, private-label securitisation, and foreigners have all become less important. On the whole, this is probably good for financial stability. Read more
Zoltan Pozsar may have swapped his day job as senior adviser to the U.S. Department of the Treasury to that of a director in Credit Suisse’ global strategy and research department, but that hasn’t stopped him pursuing his favourite subject area: the plumbing of the shadow banking system.
Readers may remember that Pozsar’s last report set out the compelling theory of money hierarchy.
Pozsar is back now with a follow-up to that report, no less compelling, entitled Levered Betas and Wholesale Funding in the Context of Secular Stagnation in which he expands on many of the original themes.
The key proposition this time is that real money investors are being forced to plug asset-liability mismatches — brought on by shifting demographics — with leveraged bond portfolio positions, because this allows them to generate equity-like returns with bond-portfolio levels of volatility. Read more
This, from JP Morgan’s Flows & Liquidity team, gets to the heart of the difficulties (and irritations) involved with looking at the shadow banking system.
It’s based on the Financial Stability Board’s recently released annual Global Shadow Banking Monitoring Report. As they note, at first glance “the ratio of shadow bank assets, i.e. assets of Other Financial Intermediaries (OFIs), as a % of traditional bank assets, has been rising in recent years at a similar pace to the 2005-2007 period.”
Scary, but before ye crack each others’ heads open and feast on the goo inside it might be worth getting definitional. Read more
Via the latest report from the IMF, click to embiggen:
A little too quiet.
Speaking of which, here’s Mr Qiao in the FT on his LGFV “trust product” — “Eternal Trust Number 37” — the proceeds of which are going to a big public heating project for the central Chinese city of Yuncheng:
Mr Qiao admits the Yuncheng heating project will not provide any returns for his company, an unsettling fact for any investor. But he is dismissive that this is the problem.
“All of our investments are public works that should actually be paid for by the local government so when the trust product matures the government should take this project off our hands and give us the money to repay investors,” he says. “Don’t worry, it is impossible for there to be any sort of financial crisis here in Yuncheng.”
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
Since 2008, it’s somehow become conventional wisdom in regulatory and policy circles to deem shadow banking undesirable, risky or inherently unstable.
And yet, as SoberLook heroically alluded to on Wednesday, that may be a somewhat small-minded way to look at the phenomenon. Shadow banking is arguably as much an endogenous response mechanism to an under-banked area of the economy as it is a silo for risk and instability. In fact, if risk and instability end up concentrating in the shadow banking area it’s only because more conventional forms of banking have left those areas behind. Read more
We’ve been paying attention to the various ways in which oncoming regulations are likely to crunch parts of the shadow banking system.
After the Fed released its notice of proposed rulemaking for its implementation of the Liquidity Coverage Ratio last week, the Citi rates team noted that the matched-book repo market would be unaffected by the LCR but nonetheless should expect future regulations of a different kind. Read more
Money markets have a tendency to be misunderstood.
As we’ve mentioned before, this is because most people believe them to represent a market for loanable funds, in which said funds are objectified and thus absolute. Read more
The prospect of a US technical default is unfortunately becoming an ever greater reality.
That said, there’s no reason to panic just yet.
If there is a D-day it isn’t until November 15.
What’s more, there’s an ever louder chorus of voices suggesting that a technical default may not matter at all.
How can that be? Read more
Here’s a useful assessment of both shadow banking’s relationship to the real economy and how it will be affected by forthcoming regulatory reforms, by strategists at Barclays.
A few thoughts of our own follow the excerpt: Read more
When it comes to understanding the Fed’s recently touted — but initially overlooked — fixed-rate, full-allotment overnight reverse repurchase agreement facility, Cardiff covered pretty much all the bases here.
That said, there was a great quote recently in a follow up piece with FT colleagues. Barclays’ Joseph Abate said the facility resembled an “all you can eat collateral buffet” due to the fact that the trade would provide a fully collateralised investment opportunity with the Fed to almost all parts of the financial market. Read more
They are billed as a quick and easy way for investors to gain access to higher-yielding assets while still providing some protection if interest rates start to rise. They are ETFs which track portfolios of (floating-rate) bank loans.
And they are on fire. Read more
We know the Chinese have a propensity to raise money against almost anything (commodities, trade receipts, export inventory, tech goods), but in Hong Kong the Wall Street Journal reported on Tuesday that some lenders are even willing to accept borrowers’ beloved handbags as collateral.
From the WSJ: Read more
We think we’ve got this piece of artwork from the New York Fed the right way up. But we can’t be sure…
That’s a big (click to enlarge) chart from Moody’s on how they define “shadow banking” in China, via a Q&A comment on the growth of the sector. Read more
The China Banking Regulatory Commission last week issued several strict-sounding new rules applying to the issuance of Wealth Management Products. The investment products have seen massive growth in the past year, with assets tripling to RMB10tn in the past two years, equivalent to 10 per cent of all China’s bank deposits.
Apart from upsetting share prices of mainland Chinese banks, what are the new rules actually going to achieve — if anything? Read more
China’s National People’s Congress annual plenary began today, with soon-to-be-former premier Wen Jiabao outlining the official economic targets for 2013. We’ve written a few posts lately about how China’s growth has become increasingly driven linked to credit and, particularly, fast-growing shadow finance. More recently, there are signs the authorities are feeling less comfortable with letting shadow finance run riot — but at the same time, its role in fuelling growth makes a big or sudden curtailment look unlikely.
The targets announced today added to signs of discomfort with unchecked credit growth, according to various China watchers. Read more
First, a reminder of the degree to which China’s growth has been increasingly fuelled by credit over the past few years:
The chart above doesn’t quite show it, but non-bank credit growth outpaced bank loans last year. The rise of China’s shadow banking scene has happened very rapidly — much of the growth only happened since 2009. Read more
FT Alphaville spent part of the weekend at a conference on shadow banking organised by the City Political Economy Research Centre. Though, as it turns out, much of the message was: be not afraid of shadow banking, some classifications are born, some are achieved and others have a name that sticks but is very much disliked thrust upon them. Read more
Further dispatches from the Danish Institute for International Studies’ conference in Copenhagen on “Central Banking at a crossroads”.
Today we focus on the new age of collateral-based finance and the presentation given by Manmohan Singh (speaking in an independent capacity rather than as a representative of the IMF). 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
This post is not about another Chinese shadow financing innovation, or the possible or actual blowing up of said innovative products. Nope. Something even worse…
Although the new Chinese leadership seems so far unenthused about major reforms, a few strategists have detected signs in the past couple of weeks that the country’s authorities are preparing to crack down, somehow, on shadow financing. 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
A proposal by the Securities and Exchange Commission chairman Mary Schapiro to more closely regulate money market funds was abandoned back in September when three of the five commissioners opposed it. A week or so later it became clear that the Financial Stability Oversight Committee would keep advancing the cause of the MMF reforms. Read more