Beijing may have averted a crisis in its stock markets with heavy-handed intervention, but the world’s biggest corporate debt pile - $16.1 trillion and rising – is a much greater threat to its slowing economy and will not be so easily managed.
Corporate China’s debts, at 160 percent of GDP, are twice that of the United States, having sharply deteriorated in the past five years, a Thomson Reuters study of over 1,400 companies shows.
And the debt mountain is set to climb 77 percent to $28.8 trillion over the next five years, credit rating agency Standard & Poor’s estimates. [ID:nL4N0ZV68I]
Beijing’s policy interventions affecting corporate credit have so far been mostly designed to address a different goal – supporting economic growth, which is set to fall to a 25-year low this year.
It has cut interest rates four times since November, reduced the level of reserves banks must hold and removed limits on how much of their deposits they can lend. >> Read More
China’s banks are playing their part to ensure the country hits a 7 per cent growth target this year.
Aggregate financing, the broadest measure of Chinese new credit available, rose in June to its highest since January.
Total financing was Rmb1.86tn ($300bn) last month, a third higher than forecasts at Rmb1.40tn and up from Rmb1.22tn in May.
New yuan loans were Rmb1.27tn, up from Rmb900bn, suggesting much of pick-up came through normal banking channels rather than the shadow sector.
The advance indicates that lenders are responding to multiple moves from The People’s Bank of China. The central bank has cut interest rates four times since November and taken other action to free up cash reserves at banks.
Beijing must walk a fine line. It seeks to prop up the economy, which in the first three months grew at its slowest quarterly pace in six years, without exacerbating financial risks by unleashing a new credit binge like the one deployed in response to the 2008 financial crisis. >> Read More
Although it’s not possible to know exactly what the mood is among Party officials in China regarding the inexorable slide in stock prices that’s unfolded over the course of the last three weeks, it’s reasonable to assume that at least some officials in Beijing are in the throes of Politburo panic after watching some $3 trillion in market value disappear into thin (and probably polluted) air.
Amid the turmoil, China has resorted to an eye-watering array of policy maneuvers, pronouncements, and plunge protection schemes aimed at arresting the slide.
Nothing has worked.
Not suspending compulsory liquidation for unmet margin calls, not billions in committed market support from brokerages, not a PBoC backstop for the CFSC, and not even a ban on selling by the Social Security Council.
For reference, here (courtesy of Bloomberg) is an annotated chart of the wild ride Chinese stocks have had in 2015:
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What do you do when two policy rate cuts, $19 billion in committed support from a hastily contrived broker consortium, and a promise of central bank funding for the expansion of margin lending all fail to quell extreme volatility in a collapsing equity market?
Well, you can simply ban selling, which is apparently the next step for China.
According to Caijing, the country’s national social security fund is now forbidden from selling (but is welcome to buy). Here’s more, via Caijing (Google translated):
Social Security informed the public fund social security portfolio not only buy sell stock
“Financial” reporter learned that the Social Security Council on Monday (July 6) Call each raised funds, social security portfolio is not allowed to sell their holdings of stock.
Sources said that Social Security Council has just informed all social security portfolio can only buy stocks can not sell the stock; and it is not defined as the net selling, but completely unable to sell the stock.
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The Shanghai Composite ended today with a 2.4 per cent gain, but the finishing figure doesn’t begin to tell the tale of what happened.
The benchmark stock index for China jumped 7.8 per cent higher at the start of trading following a series of weekend measures to prop up the market. The central bank provided liquidity, banks suspended IPOs and brokers pledged to stabilise the market.
But within minutes the gain was halved. By lunch it was just 2.2 per cent. In the afternoon the market turned red, falling to a 0.9 per cent loss.
The late rebound could indicate investors eventually saw a bargain and responded to Beijing’s efforts. But there are reasons to be suspicious of the gain and to believe confidence is still broken.
What drove the climb in the final hour was state-backed blue chips. These are the companies that will be targeted by China’s largest brokerages, who agreed at the weekend to commit $19bn to a market stabilisation fund. >> Read More
If the Greeks were to vote ‘No’ what would happen next? Well no one can say. But here is a quick thought on what I hope the Greek government might have been exploring if they are excluded from the euro. It’s just food for thought nothing more.
They have to be prepared to have a currency that does not depend on Europe supplying Euros. So they will need another currency – hopefully their own. I think we can be sure no western company has been printing them. There are few such companies and there is, I think, no possibility that they would be able to keep secret a contract from Greece. But both Russia and China can print notes. So would it not have been prudent to ask Putin to print up plane loads of Drachma and be prepared to fly them in?
Who would back this currency? Greece is not Great Britain with a long established reasonably trusted currency backed by a big slice of global financial trade. So I do not think they could launch an orphan currency which the drachma would be if it did not have some relation to a major clearing or reserve currency.
For all Obama has, apparently, lobbied the EU to be more conciliatory towards Greece I am not sure he would leap at the chance to help Greece with its debt. He might of course. A chance to reenforce US power in that part of the world. But he already has power there so I doubt he would be willing to ‘pay’ much. Russia and China, however would gain much more by having Greece as a beach head in to the EU and, more importantly, into Nato. >> Read More
This week, market cap of MSCI Greece fell below that of Bed, Bath & Beyond, CDS of Puerto Rico jumped toward Venezuela & Greece, & 10 day loss on Shanghai exchange exceeded entire market cap of German DAX. Secular macro backdrop of low growth & high debt means global rates “glued to zero” at 5000 year lows.
Black Sheep & Black Swans Cyclical mix of extreme monetary ease & gradual economic recovery means Greece, Puerto Rico, China isolated “black sheep” events, not contagious “black swans.” US rate shock and/or global PMI’s dropping toward 45 needed for contagion.
What happens in China, stays in China June disobedience of Chinese investors to government stimulus attempts notable; and China travails clearly impeding leadership of global cyclical stocks. But until unambiguous evidence of macro policy failure & RMB devaluation, “what happens in China, stays in China.” Q3 risk-on triggers.
Absent a Greek “oxi” vote this weekend, and respecting current losses/outflows in bonds, we expect SPX 2054 to hold near-term: investors positioned for correction; global stocks just 2-3% away from BofAML Breadth Rule contrarian “buy” signal; China policy makers to act aggressively in July.
China has reportedly completed an airstrip on Fiery Cross Reef, one of the islands Beijing has constructed in the South China Sea.
Back in April, satellite images which appeared to show that construction had commenced on the runway set off alarm bells in the US and among Washington’s regional allies in the South Pacific.
Since then, China’s land reclamation efforts in the disputed waters around the Spratlys have sparked an international furor and touched off a war of words between Washington and Beijing, with the Pentagon assuring China that the US Navy will continue to operate as before in the region and the PLA claiming it will enforce a no-fly zone over the islands “if threatened.”
Although China recently claimed to have largely finished the dredging effort, construction atop the islands is moving forward and as Reuters reports, the airstrip on Fiery Cross, first spotted some three months ago, looks to be complete. Here’s more: >> Read More
A Partnership with China to Avoid World War (via The New York Review of Books)
International cooperation is in decline both in the political and financial spheres. The UN has failed to address any of the major conflicts since the end of the cold war; the 2009 Copenhagen Climate Change Conference left a sour aftertaste; the World Trade Organization hasn’t concluded a major trade round since 1994. The International Monetary Fund’s legitimacy is increasingly questioned because of its outdated governance, and the G20, which emerged during the financial crisis of 2008 as a potentially powerful instrument of international cooperation, seems to have lost its way. In all areas, national, sectarian, business, and other special interests take precedence over the common interest. This trend has now reached a point where instead of a global order we have to speak of global disorder.
In the political sphere local conflicts fester and multiply. Taken individually these conflicts could possibly be solved but they tend to be interconnected and the losers in one conflict tend to become the spoilers in others. For instance, the Syrian crisis deteriorated when Putin’s Russia and the Iranian government came to Bashar al-Assad’s rescue, each for its own reasons. Saudi Arabia provided the seed money for ISIS and Iran instigated the Houthi rebellion in Yemen to retaliate against Saudi Arabia. Bibi Netanyahu tried to turn the US Congress against the nuclear treaty the US was negotiating with Iran. There are just too many conflicts for international public opinion to exert a positive influence.
In the financial sphere the Bretton Woods institutions—the IMF and the World Bank—have lost their monopoly position. Under Chinese leadership, a parallel set of institutions is emerging. Will they be in conflict or will they find a way to cooperate? Since the financial and the political spheres are also interconnected, the future course of history will greatly depend on how China tackles its economic transition from investment and export-led growth to greater dependence on domestic demand, and how the US reacts to it. A strategic partnership between the US and China could prevent the evolution of two power blocks that may be drawn into military conflict. >> Read More
Vladimir Putin didn’t get an invite to the Angela Merkel-hosted G7 Summit in Bavaria last week, which means the Russian President not only missed out on two days at the scenic Castle Elmau, but also on lederhosen shopping with US President Barack Obama who, judging from eyewitness accounts and a variety of amusing photo ops, channeled his inner Clark Griswold upon touching down in the Bavarian town of Krun. The G7 isn’t pleased with Russia’s ‘behavior’ in Eastern Europe and so, Moscow has been expelled from the cool kids club until such a time as the Kremlin agrees to uphold Western democratic values.
(Obama in Krun)
But the G7 is an equal opportunity exclusionist which means it’s not just former superpowers that aren’t welcome, but rising superpowers as well, which means you won’t be seeing Xi Jinping at the table either.
But “Big Uncle Xi” (as he is affectionately known in China) likely isn’t losing any sleep because in the eyes of Beijing, the G7 — much like the IMF and the ADB — is a relic of a global economic and political order that is well on its way to obsolescence if it isn’t there already. >> Read More