Make no mistake, investors didn’t need any more reasons to be bearish on Chinese equities.
Mainland markets are veritable casinos dominated by retail investors who until last summer, were enthralled with the prospect of easy riches in an environment where shares only seemed to know one direction: up.
All of that changed last June when a dramatic unwind in the half dozen backdoor margin lending channels that helped to fuel the rally triggered an epic rout that became self-fulfilling once the retail crowd (which accounts for 80% of the market) became rip sellers rather than dip buyers.
Since then, successive efforts on the part of the CSRC to stabilize the situation by pouring CNY1.5 trillion into A-shares has met with limited success as periods of calm are interrupted by violent bouts of selling like those we saw earlier this month when China tried and failed to implement a circuit breaker.
Throw in the ongoing yuan deval fiasco and there’s every reason not to be involved in Chinese stocks.
But when it rains it pours, and now, analysts say margin calls on SCLs are the next landmine that may pose a “systemic risk” for China’s battered markets.
Banco Espírito Santo’s shares are within a whisker of an all-time record low after shedding another 9.2 per cent in early trading, as concerns over the bank refuse to go away.
The Portuguese lender’s stock stood at €0.403 at pixel time, only narrowly above the record low of €0.3922 hit at the peak of the eurozone crisis in June 3, 2012. The shares have now lost over two-thirds of their value since the start of April.
The yield of BES’s subordinated bond due in 2023 has climbed higher to 11.02 per cent today as investors speculate that junior bondholders might be “bailed in” to prop it up.
Investor fears are centred on BES’s biggest shareholder, the Espirito Santo family, and the bank’s possible exposure to their various companies.
To promote women entrepreneurship, the country’s first Women’s Bank — the Bharatiya Mahila Bank (BMB) — has chosen to do away with collateral for loans availed by the fairer sex.
The BMB will provide collateral-free loans for amounts up to Rs 1 crore, which will instead be covered under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
For loans availed for smaller amounts such as Rs 20,000, the bank will completely waive off the requirement for collateral.
“Women are moderate risk takers. So the question of collateral should not really arise,” said Usha Ananthasubramanian, CMD, BMB. The issue of collateral also tends to discourage women from availing loans, she pointed out, since much of the immovable property tends to be in the name of the husband or father. The bank, which was set up in November last year, has begun to receive queries for its various credit schemes such as kitchen loan, loans to set up beauty parlours, day-care centres and catering units apart from plain vanilla products such as car and education loans. Read More
2. As a prudential measure, it has been decided to prescribe a Loan to Value (LTV) Ratio of not exceeding 75 per cent for banks’ lending against Gold jewellery (including bullet repayment loans against pledge of gold jewellery). Therefore, henceforth loans sanctioned by banks should not exceed 75 per cent of the value of gold ornaments and jewellery. 3. In order to standardize the valuation and make it more transparent to the borrower, it has been decided that gold jewellery accepted as security/collateral will have to be valued at the average of the closing price of 22 carat gold for the preceding 30 days as quoted by the India Bullion and Jewellers Association Ltd. [Formerly known as the Bombay Bullion Association Ltd. (BBA)]. If the gold is of purity less than 22 carats, the bank should translate the collateral into 22 carat and value the exact grams of the collateral. In other words, jewellery of lower purity of gold shall be valued proportionately. 4. It is reiterated that banks should continue to observe necessary and usual safeguards and also have a suitable policy for lending against gold jewellery with the approval of their Boards of Directors.
2. We have received certain representations from NBFCs in the matter. These have been examined and it has been decided as under:
i) Loan-To-Value (LTV) Ratio
In terms of para 2.1 of circular DNBS.CC.PD.No.265/03.10.01/2011-12 dated March 21, 2012, NBFCs were required to maintain LTV ratio not exceeding 60 percent for loans granted against the collateral of gold jewellery. It may be recalled that to facilitate monetising of idle gold as far as possible through the organised sector, the KUB Rao Working Group had recommended that the LTV ratio may be increased from 60 percent to 75 percent once the business levels of the gold loan NBFCs come to a level considered appropriate. The Working Group had also recommended standardisation of the methodology of determining the value of gold. In view of the moderation in the growth of gold loan portfolios of NBFCs in the recent past, and also taking into consideration the experience so far, it has been decided to raise the LTV ratio to upto 75 percent for loans against the collateral of gold jewellery from the present limit of 60 percent with immediate effect.
In this context, it is understood that some NBFCs are adding making charges etc. to the value of the gold jewellery determined in terms of paragraph 2(iii) of ‘the circular’. It is clarified that the value of the jewellery for the purpose of determining the maximum permissible loan amount will be only the intrinsic value of the gold content therein and no other cost elements should be added thereto. The intrinsic value will continue to be arrived at as detailed in ‘the circular’.
ii) Standardization of Value of Gold in arriving at LTV Ratio
As per para 2 (iii) of ‘the circular’, NBFCs were required to give in writing to the borrower the purity (in terms of carats) and weight of gold. NBFCs have raised apprehensions on certifying the purity of the gold jewellery accepted as collateral on grounds that under the current practices it was possible only to arrive at the proximate purity of the gold and that such a certification could lead to dispute with the borrowers. It is clarified that the need to give a certificate on the purity of gold cannot be dispensed with. The certified purity shall be applied for determining the maximum permissible loan and the reserve price for auction. The NBFCs can, however, include suitable caveats to protect themselves against disputes on redemption.
iii) Verification of the Ownership of Gold Read More
Wall Street expects the Federal Reserve to announce the first reduction in the pace of monthly bond purchases it makes under its quantitative easing (QE) program at the conclusion of its FOMC monetary policy meeting Wednesday.
Right now, the Fed buys $45 billion in U.S. Treasuries and $40 billion in mortgage-backed securities each month – $85 billion of bonds in total – in a bid to stimulate the American economy. The consensus on the Street is that the Fed’s first “tapering” of QE will consist of a $10 billion reduction in monthly purchases, bringing the monthly total to $75 billion.
The Fed has maintained ever since the tapering discussion began early this year that its decision to begin this process of winding down QE is “data-dependent” – in other words, as long as the economic data continue to show improvement in the health of the American economy, the Fed’s plans for tapering remain on track.
Yet the data – especially in the labor market, where the Fed’s focus lies – have been disappointing in recent months. The U.S. economy added only 169,000 workers to nonfarm payrolls last month, below consensus estimates for 180,000. July payroll growth was revised down to 104,000 from 162,000.
In reality, the Fed may have several reasons to begin scaling back QE that have little or nothing to do with improvements in the labor market, despite what the central bank says.
1. Frothy markets.
One is the risk of financial instability resulting from asset bubbles created by over-accommodative monetary policy. FOMC members flagged this as a potential issue in their April 30-May 1 meeting, according to the minutes from that meeting.
“At this meeting, a few participants expressed concern that conditions in certain U.S. financial markets were becoming too buoyant, pointing to the elevated issuance of bonds by lower-credit-quality firms or of bonds with fewer restrictions on collateral and payment terms (so-called covenant-lite bonds),” read the minutes. “One participant cautioned that the emergence of financial imbalances could prove difficult for regulators to identify and address, and that it would be appropriate to adjust monetary policy to help guard against risks to financial stability.” Read More
Following his decision to leave rates unchanged, the investing public can only buy-first and hold their breath for some hint at more fragmentation-beating, collateral-easing, negative-rate hinting ‘promises’ from the most important man in the world for today.
There’s been an important development from the European Central Bank this afternoon, as it attempts to revive a market that was nearly left for dead in Europe by the financial crisis.
ECB will extend the range of collateral it accepts from banks in return for liquidity to include more asset-backed securities – an asset class blamed by many for exacerbating the downturn.
After a review of its risk control framework, the ECB said it would in future accept ABS with a lower credit rating and at a lower haircut – a writedown of the asset’s value to reflect its riskiness – than it had done previously.
The ABS would however have to be “plain vanilla” ones made up of a single pool of underlying assets – in sharp contrast to the complex ABS instruments that led to the collapse of Lehman Brothers during the financial crisis. Read More
Two years ago it was only gold and silver that saw the CME’s wrath on a daily, and sometimes hourly basis. Back then, however, it was due to soaring prices. Today, it is due to the bone-crushing price collapse in the Nikkei which has just seen the CME hike most Nikkei-related outright futures margins by 33%. So not only will those who resume trading Nikkei-related products in the futures market see a big loss in their P&Ls, they will also have to post some 33% more margin. We can only hope they still have some collateral and aren’t margined up 100%. That would not be good for the Japanese pennystockmarket and “experiment” no matter how much good luck Jens Weidmann wishes them.
The Bank of Japan said Wednesday it will inject 2 trillion yen in one-year funds through a lending facility under which the central bank will provide banks with loans against pooled collateral at a fixed interest rate.
The fund-supplying operation, which begins Friday and ends on May 16, 2014, will be the BOJ’s first with a one-year fixed rate since April 16.
The BOJ is conducting the operation to address the sharp rise in longer-term interest rates.