Category Archives: Macro

Debt-Equity Swaps – Slow Progress is Good for the Banks

The leadership in Beijing has made debt-for-equity swaps an important part of restructuring of the state firms. However, opposition from other groups, including the banks, has slowed the program. We estimate only Rmb322 billion of swaps is under discussion, far less than the Rmb1 trillion targeted. As a result, it is unlikely the banks will incur significant losses in the near term due to political constraints.

China’s “New Normal” – Quiet Policies for Slower Growth

Summary. In 2015, Premier Li Keqiang broke new ground when he said China is preparing for a “new normal” as the result of slower economic growth. However, he focused his speech on the shining glory of new industries – rather than a realistic appraisal of the nuts and bolts of deleveraging. This has given rise to a debate about what China’s policies will be as GDP growth winds down. Will stimulus continue? Will there be reduced growth in bank loans and the money supply?

We believe that China is acknowledging the “new normal” in a series of policies that are designed to adjust the economy to slower growth, a kind of unofficial reform. Chinese policymakers have been busy designing and implementing significant changes in China’s economy – but they have not been announcing these as part of a major change in policy. There are two reasons for this. First, there is significant opposition to any retrenchment from pro-growth stimulus among senior leaders, including Premier Li Keqiang himself. And second, senior leaders do not want to hint at a slowdown for fear of losing political support among the Chinese people.

We believe, however, there is a significant change underway. These policies could help pave the way for a manageable decline in growth – although it’s too early to tell how effective they will be. They could also offer opportunities for foreign investors to acquire distressed assets.

Coming Clean on China’s “Hidden” Bank Debt

May 24, 2016 By Andrew Collier Borrowing, which has fueled many infrastructure and housing projects like this one in Shanghai, may be much higher than reported. (Qilai Shen/Bloomberg)   The IMF’s new “Global Financial Stability Report,” with a comprehensive overview of China’s credit outlook, suggests that 5.5 percent of all loans, or $641 billion, are […]

China’s Forced Reform

China’s Downturn Will Force SOE Reform  The standard analysis about China falls into three baskets. The first is the collapse or decline theory, with very negative views from investors like Jim Chanos and Kyle Bass against more benign economists who see China massaging the downturn. Others are hopeful that recent policy statements will lead to […]

Frank Talk from a Top Official

Gao Xiqing used to head China Investment Corp., the country’s sovereign fund. He’s a lawyer trained at Duke University. He was on a panel at the Council on Foreign Relations on April 19 and his comments are the most insightful I’ve seen in some time from someone in the higher levels in China. And quite honest. At one point, when asked about conflict between the Central Committee and the State Council, he said “I understand this is open to the media?…so I personally do not have a comment.” I interviewed him one-on-one a few years ago and he was quite straightforward.

China Banking Monthly – Capital Controls Will Decline

Interviews – Capital Controls Will Fade
Our interviews with local traders, economists and bankers suggest Beijing’s tighter controls on capital flight are unlikely to last. These controls have been effective in February/March at the expense of normal business activity. We also outline five possible policy choices for the RMB below.
Analysis – Declining Overseas Borrowing
There is significant confusion over the composition in the decline of China’s foreign currency reserves. Is the decline due to false trade invoicing, service flows, or other factors? We think the data suggests that reduced overseas borrowing by Chinese corporates is a significant contributor to the decline.
Liquidity Watch – Rise in Interbank Lending.
Interbank loans and reverse repos continue to rise, driven by high demand for credit between institutions. The largest consumer of loans continues to be the corporate sector, whose loans grew 14.9%. However, the biggest jump in credit occurred with “other” financial institutions, whose loans rose 79.2% YoY. Clearly interbank lending has shifted from unregulated “entrusted” loans, to the more regulated interbank sector.

What Has Kyle Bass Missed about the Chinese Banks?

By now, everyone has heard Kyle Bass’ very negative view on the future of banking in China. His main thesis is that the Chinese banks are woefully undercapitalized given undercounted non-performing loans (NPLS). “We believe that Chinese banks will lose approximately $3.5 trillion of equity if China’s banking system loses 10% of assets.” China will have to expand the PBOC’s balance sheet which will cause the currency to plummet in value by as much as 30%.
Everyone also has probably heard that Bass made a significant error in his calculation of total reserves by counting USD700 billion held by China Investment Corp., which shouldn’t be included.
Nevertheless, although exaggerated, he’s on to something…but…..
…We think he has ignored part of the problem, and also has not differentiated between the larger, more stable banks and the smaller, weaker banks.

How to Track China’s Downturn

I am frequently asked what data points to monitor to gage the likelihood of a hard landing, or at the least a credit crisis that alters the trajectory of China’s economy. There is no easy answer. Two years ago, many investors thought rapidly rising interbank rates were a strong negative indicator for China’s economy. But the interbank market is a relatively small tool utilized by the PBOC; the rates were useful merely because they are accessible on the Bloomberg Terminal. So what measures can we examine?

China’s Nervous Bank Reserve Cut

Serious Firepower China surprised the markets Monday by cutting the Required Reserve Ratio by 0.5 ppt, injecting Rmb 700 billion into the market. This was a desperate measure. There are several reasons why the PBOC chose to do this now. 1) Short Term Injections Too Expensive. The PBOC had been relying on Short and Medium […]

New PBOC Hong Kong Appointment Key to Renminbi

It is being overlooked in the noise about China but a key appointment was announced this week by the PBOC. Bao Mingyou was named a senior advisor to the Hong Kong Monetary Authority and is likely to be a forceful advocate for regulations regarding foreign trading of the renminbi.