Microsoft Word – Ant’s Aggressive Strategy.docx
“Ant Financial has got just enough bullets to cause a small–scale financial crisis.”
Economist with a State Owned Bank.
l Growing Market Share. Ant Financial has quickly taken market share from
traditional banks, trust companies and other financial firms. Eventually, the
regulators may reduce Ant’s consumer lending business to prevent losses by the
l Undercapitalized “Bank.” We estimate that Ant’s outstanding credit stands at
49x Ant Cash Now’s registered capital. This 2% capital adequacy ratio is far below
the CBRC 8% requirement for commercial banks.
l Little Oversight. Ant Financial has lending data for Ant Credit Pay as it
utilizes a “virtual credit card” and tracks user purchases. However, there is little
data on Ant Cash Now’s loans issued directly to users. This raises red flags about
l Main Driver Behind Securitization. In 3Q 17, Alibaba and its finance units accounted for 82% of consumer credit ABS. This is a significant concentration of risk.
February 19, 2019
There is a widespread expectation among western investors that China will enact quantitative easing to counter the effects of the trade war and the slowing economy. This is highly unlikely. Although there is substantial data indicating signiDcant pain in the economy, including defaulting SMEs, unemployment, and general declining economic activity, the policy statements and actions from the leadership suggest Beijing is intent on avoiding an open-ended stimulus package. They are doing this due to concerns about debt, inefDcient use of credit, and over-use of monetary policy for stimulus purposes.
Fine-tuning the policy response
The actions so far are targeted at specic areas of the economy as opposed to widespread loosening. These include:
- Perpetual bonds.
- Swaps: The creation of central bank bill swaps, which banks can exchange for PBOC paper.
- SME loans: CBIRC suggested targeted loans to private firms, which are supposed to compose
one third of new loans of large banks, two thirds of new loans of small banks and no less than
50 percent of new loans in the whole banking system after three years.
- Local bonds: 2019 Quota RMB 1.39 trillion.
- Tax cuts: Approximately 1.3T
- Increase in the fiscal deficit: This equates, however, to a relatively minimal increase of around
RMB 300 billion (including other forms of deficit, such as bonds).
- The TMLF will have a maturity of one year, but banks can roll loans over twice, increasing the
maximum maturity as long as three years, the central bank said. The one-year interest rate on the TMLF will be 3.15 percent, 0.15 percentage point lower than the rate on the medium-term lending facility (MLF).
Many of these stimulus measures do not have a Dxed amount but are dependent on usage by the banks. By our rough estimate, they would supply roughly Rmb4.1 trillion to the economy.
The deeper issues – local fiscal problems and the property market
The bigger issue is that the de-risking measures so effectively implemented by the PBOC and other Beijing
institutions have failed to address two problems:
The unstable local fiscal economy.
The continued importance of the property market to growth.
Both of these areas have relied increasingly on financial intermediation through the shadow market, which has been substantially curtailed.
For full report contact OCR.
China has instituted several targeted stimulus measures designed to improve GDP growth and provide capital
for small businesses, the country’s largest employment sector. These measures, however, are likely to be
inadequate compared with the decline in capital due to the restrictions imposed on shadow lending. The
results are likely to be:
Difficulty maintaining land sales, which are already declining.
A potential downward trend in the property market.
Defaults of property developer bonds.
Continued rise in defaults of local SMEs.
The key point is Beijing is responding to tighter credit conditions by picking winners and losers. It is lowering credit to certain regions in order to restrict the allocation of capital. While official policy via the Peoples Bank of China (PBOC) can affect credit flows, the political system has a significant say in how the process works out. And we are seeing a distinct preference in those allocation decisions.
These measures are likely to provide less of a stimulus than the capital that was raised by the shadow banking
system prior to the earlier crackdown. Newly increased RMB loans only amounted to RMB 1.8 trillion, not
enough to compensate for the decline of RMB 6.5 trillion in shadow banking, which is more than three times
larger. Although loan growth remained steady at 13%, total social financing has slowed to 9.8% from 14% a
year ago. The chart below shows the decline in non-bank lending through mid 2018.This figure only includes
“official” shadow lending, such as Trusts, and does not include other forms of non-bank lending such as wealth
management products, which have seen flat growth even though the outstanding amount remains high at
around RMB 30 trillion.