Despite China reporting solid economic data on Monday, with beats across the board in everything from retail sales, fixed asset investment, industrial production and GDP printing at 6.9% and on track for its first annual increase since 2010…
… despite the biggest net liquidity injection by the PBOC since mid June after the central bank injected a net 130 billion yuan, and despite yet another rebound in the Yuan, overnight China’s Shanghai Composite slumped by 1.4%, the most since December as a result of a plunge in the small-cap ChiNext index, which tumbled by 5.1%, and is now down 16% in 2017 to levels not seen since January 2015 following a fresh round of broad deleveraging amid concerns about tougher regulations and more IPOs following a high-level conference over the weekend attended by President Xi Jinping in which China hinted at the formation of a “super-regulator”.
The Institute of International Finance is perhaps best known for its periodic – and concerning – reports summarizing global leverage statistics, and its latest Q1 report was the most troubling yet, because what it found was that in a period of so-called “coordinated growth”, global debt hit a new all time high of $217 trillion, or over 327% of global GDP, up $50 trillion over the past decade. So much for Ray Dalio’s beautiful deleveraging, oh and for those economists who are still confused why r-star remains near 0%, the chart below has all the answers.
Not surprisingly, China continues to be the biggest source of global debt growth, with the country’s total debt load now surpassing 300%.
Hayman Capital’s Kyle Bass made a brief media appearance today, when he confirmed to Reuters that unlike some other “China tourist bears”, he remains staunchly negative on China, saying he is still short the Yuan because problems from China’s credit bubble are “metastasizing.”
Speaking to Reuters’ Jennifer Aboan, Bass said that “what the public narrative is and what they have been doing behind the scenes are two completely different stories,” and added that “China has been masterful controlling the public narrative. As a fiduciary, I have no idea how anyone can invest in China.”
Discussing his specific trades, Bass said Hayman’s yuan short is a “core” position and has “always been meaningful.” He also identified “fresh” warning signs that China’s credit problems are spreading.
First, Bass pointed to the yield on five-year MTNs, which are trading at 5%, exceeding the bank loan rate, about 4.75%, for the first time. We first highlighted this paradoxical “cross” one month ago when we observed that “rising base funding costs and interbank credit risk concerns have pushed banks’ cost of borrowing beyond the rate they charge customers for loans for the first time in history.”
Bass then noted last month’s downgrade of China by Moody’s – the first since 1989 – which however did not have a material impact on China so far, aside from prompting a panicked response by Beijing which actually sent the Yuan surging as the PBOC engaged every trick in the book to prevent Yuan bears from gaining momentum, including the recent change in the Yuan fixing mechanism. Next, he discussed his concerns about China’s shadow-banking system and the country’s capital controls as “multi-nationals can’t get their money out.”
Indeed, CBRC vice-chairman Cao Yu said China established 12,836 creditor committees by the end of last year, to help manage credit of 14.85 trillion yuan. Bass said this amount represents 20 percent of the loans in Chinese banks, net of mortgages.
Going back to the original “bear” thsis, Bass also said he believes that non-performing loans at Chinese financial institutions are currently approximately 20%, not the 1.7% rate that has been widely reported. “14.85 trillion is more than all of the equity in the entire banking system,” he said. “The Chinese have masterfully swept all of this under the rug.”
Bass also addressed the recent change to China’s Yuan fixing mechanism and said Beijing has been looking to force out one-way bearish bets on the yuan with the previously discussed second change this year in how the currency’s guidance rate is calculated. “This fixing mechanism throws a bit of unknown into the calculation,” he said.
Still, he said he was not throwing in the towel on his short position. “The PBOC wants you to do that,” Bass said. “I don’t know how they can hold this all together. The numbers are telling me that we are right. The numbers are getting so bad so quickly.”
Finally, a couple other things Bass should have thrown in the mix are the recent reemergence of China’s “ghost collateral” as a major risk factor, one which as Reuters framed, “lax lending practices and overvalued collateral spurred the U.S. financial crisis in 2008. Now, banks in China face risks of their own as fraudulent borrowers and corrupt bankers burden the financial system with loans lacking genuine collateral.” There is also the recent, rapid rise in interest rates which as explained last night, has led to a record plunge in net corporate bond financing, as companies find it increasingly difficult to issue new and rollover existing debt, especially that maturing in under one year.
At the end of February we first highlighted something extremely troubling for the global “recovery” narrative: according to UBS the global credit impulse – the second derivative of credit growth and arguably the biggest driver behind economic growth and world GDP – had abruptly stalled, as a result of a sudden and unexpected collapse in said impulse.
As UBS’ analyst Arend Kapteyn wrote then, the “global credit impulse (covering 77% of global GDP) has suddenly collapsed” and added that “as the chart below shows the ‘global’ credit impulse over the last 18 months is essentially mainly China (the green shaded bit), which even now is still creating new credit at an annualized rate of around 30pp of (Chinese) GDP. But the credit impulse is the ‘change in the change’ in credit and even the Chinese banks could not sustain the recent extraordinary pace of credit acceleration. As a result: whereas back in Jan ’16 the global credit impulse was positive to the tune of 3.8% of global GDP (of which China comprised 3.5% of global GDP) it has now fallen back to -0.1% of global GDP (China’s contribution is -0.3% of global GDP).”
The Nasdaq index was down nearly 100 points at the low but is ending the day down only -32.45 points or -0.52% at 6175.46. The low for the day reached 6110.66. The high extended to 6183.809. The other major indices did not have as volatile a ride.
The S&P Index fell -2.38 points or -0.10% to 2429.40. The low extended to 2419.97. The high reached 2430.38.
The Dow is finishing the day at 21235.67, down -36.30 points or -0.17%. The high reached 21277.08 while the low extended to 21186.15.
In he US debt market, the yields traded above and below the unchanged level.
2 year 1.3510%, up 1.6 bp. The high reached 1.3551%. The low 1.3347%
5 year 1.778%, up 1.1 bp. The high reached 1.7879%. The low 1.7516%
10 year 2.211% up 1.0 bp. The high reached 2.215%. The low 2.1848%
30 year 2.8671% up 1.1 bp. The high reached 2.872%. The low 2.835%.
US student loans, having boomed in the past 8 years, surged to their all-time highest at an aggregated $1.3 trln, representing roughly 11 percent of total outstanding household debt in the US, with over 7 mln borrowers unable to serve their obligations.
The situation is significantly holding back the improvements in consumer sentiment, offsetting recent improvements in the labour market, and limiting the prospects of US economic growth.
With some 72 percent of the US GDP driven by consumer purchases, the mounting concerns over student loans, especially non-performing loans (NPLs), are becoming an increasingly prominent factor is assessing the prospects of any further economic acceleration. Particularly so, as the Federal Reserve is normalising the US monetary conditions with borrowing costs going up, the issuance of the debt and refinancing of existing loans is now more expensive, and the downside risks of the monetary policy are increasingly prominent in the projected dynamics of the broader GDP expansion.
According to the Federal Reserve Bank of New York, during the past 15 years, the burden of student loans in the US economy has increased from just 3.3 percent of overall household indebtedness in 2003 at $240.7 bln to the current $1.3 trln, or 10.6 percent of total household debt. About 44 mln Americans currently have a student loan to service, and about every sixth borrower has defaulted on their obligations.
Anyone in mainland China with a lot of money to move — companies foreign or domestic, or individuals — now seems likely to run into the capital controls that the authorities have thrown up in hopes of stopping a sell-off in the currency.
Real estate tycoon Pan Shiyi has given up on selling the Hongkou Soho, a striking Shanghai office tower whose tenants include Japanese electronics group Panasonic. Located just north of the Bund, the city’s iconic waterfront, the building was designed by Japanese architect Kengo Kuma. Pan had been looking to invest proceeds from the sale overseas but sees little hope of gaining approval for that.
Similar cases of apparent official obstruction have surrounded other foreign deals. Online game developer Giant Interactive’s agreed-on purchase of an Israeli peer for 30.5 billion yuan ($4.42 billion) remains under review. Technology group LeEco and conglomerate Dalian Wanda Group have yet to complete their respective U.S. acquisitions of television maker Vizio and TV studio Dick Clark Productions.
Meanwhile, total social financing, China’s broad measure of credit and liquidity, continues rising by double digits. With limited outlets to overseas, Chinese money has nowhere to go but domestic assets.
With the reliability of a finely-tuned watch, the latest release of foreign-currency reserves held at the Swiss National Bank has shown yet another record, in a sign the central bank continues to swim against the tide.
Reserves swelled to SFr683.2bn ($SFr679.3bn) in March, up by nearly SFr15bn on the previous month.
Though the SNB famously dropped its hard upper limit on the franc two years ago, it continues to try and manage the currency’s ascent, buying foreign currencies, chiefly euros, whenever it sees fit. It often stresses its view that the franc is overvalued.
The euro now trades at SFr1.07. Deutsche Bank thinks the Swiss currency will climb much further from here, taking that rate to parity.
Among the reasons, it says the Swiss authorities may feel some pressure from the US:
The US Treasury looms large, as it is due to release its latest report on the FX policies of US trading partners sometime this month. As argued elsewhere, Switzerland is already closest to meeting all three criteria of currency manipulation. Its current account surplus runs well above 3% of GDP, and the SNB has intervened well in excess of 2% over the past year. In the past, the Treasury acknowledged the constraints on domestic asset purchases given the limits of the Swiss bond market; but such subtleties could fall by the wayside under the Trump administration. Free trade with the US is too important for Switzerland to be risked by continued FX intervention.
In addition, inflation is picking up, and the German bank disputes the idea that the franc is overvalued.
Back in October 2015, roughly around the bottom of the recent commodity cycle, we reported a stunning statistic: more than half of Chinese companies did not generate enough cash flow to even cover the interest on their cash flow, and as we concluded “it is safe to assume that up to two-third of Chinese commodity companies are now at imminent danger of default, as they can’t even generate the cash to pay down the interest on their debt, let alone fund repayments.“
While commodity prices have staged a powerful bounce over the past 18 months, and despite the government’s powerful drive to avoid major defaults over concerns about resulting mass unemployment, the inevitable default wave has finally arrived, and as Bloomberg reports overnight, “China’s deleveraging push has racked up the most defaults on corporate bonds ever for a first quarter, and the identity of the debtors is pretty revealing.”
Seven companies have defaulted on a total of nine bonds onshore so far in 2017, versus 29 for all of last year, according to data compiled by Bloomberg. In a sign of the struggles facing China’s old economic model, most of them depend on heavy industry and construction. While it’s still far from a crisis point, the defaults shows how policy makers’ efforts to reduce the liquidity that had propelled the bond market until late last year is exacting casualties.
Cited by Bloomberg, Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen said that “weak companies can’t sell bonds, which adds to the pressure on their cash flow.” As a result, “the pace of defaults will continue. It will be even more difficult for weak companies to sell bonds because corporate bond yields may rise further — the current yield premium doesn’t provide enough protection against credit risks.”
As discussed in recent months, the Chinese central bank has been curbing leverage in money markets leading to a spike in borrowing costs…