2018-02-23

Anbang Seized Early in Deleveraging Effort

Anbang down.

Bloomberg: China Regulator Seizes Anbang, Chairman Faces Fraud Prosecution
It’s a remarkable turn for Anbang, which burst onto the global scene in 2014 with the purchase of New York’s Waldorf Astoria hotel and only a year ago was in talks to invest in a company owned by the family of Jared Kushner, U.S. President Donald Trump’s son-in-law and senior adviser. With 2 trillion yuan ($315 billion) of assets, Anbang represents China’s largest-ever takeover of a privately owned company.

...The surprise move furthers President Xi Jinping’s anti-corruption and de-leveraging campaigns while providing a government backstop for the high-yield investment products that Anbang sold to hordes of Chinese citizens.
The cost of the bailout depends on the value of the underlying assets. If those asset prices start sinking, the Chinese central bank will be called on to make up the difference.
The takeover may end in a year if asset disposals are completed, strategic shareholders have injected capital and the company is stable. Government control can be extended by as much as another year if needed, but Anbang will ultimately remain a private company.
Anbang grew by borrowing short and investing long:
Much of Anbang’s growth was tied to sales of short-term, high-yield products that the company used to fund purchases of long-term assets such as real estate -- creating a duration mismatch that worried analysts and regulators. One of its products, called Anbang Longevity Sure Win No. 1, boosted its premiums almost 40-fold in 2014 by offering some of the juiciest yields in the industry.
Maybe this is a coincidence, maybe not:
This isn’t the first time Chinese regulators have had to step in when an insurer ended up in trouble. In 2007, the government tapped an industry protection fund to take control of New China Life Insurance Co. by buying a major stake in the insurer, after its former chairman Guan Guoliang misused funds.
ZH: How An Anbang Default Could Rock The Market: Wall Street Explains
I guess the NYC Landmark signal still works. Anbang goes wobbly just a few short years after its splashy purchase of a trophy Manhattan property, the Waldorf-Astoria Hotel. It brings to mind the Japanese real-estate bubble in the late 80s, and one has to wonder whether China will suffer the same retreat eventually.
When HNA needed a bailout, UBS wrote:
A default scenario would increase funding costs for high-yield issuers, mainly Chinese property companies and LGFVs, and could push out spreads on junk bonds in the region by 160-240 basis points, according to a Feb. 6 equity strategy note
Contagion need not be falling dominoes, rather the rising cost of credit eventually causes widespread defaults.

China managed to contain smaller defaults in prior years, but the numbers keeps getting larger. It has strict capital controls in place because it cannot otherwise stop capital outflows. It is less than a year into deleveraging efforts, efforts that accelerated following the October 2017 National Congress.

There are no free lunches. Losses can be shifted, they can be papered over, they can be hidden, but they cannot be eliminated. As always, the most likely place China's mistakes will compile is on the central bank's balance sheet.

2018-02-21

Italy About to Turn Nationalist at Intermediate Peak in Social Mood

If you think the euro and European Union are out of the woods, that the populist wave has ebbed, think again. We are still part way through a decades long process. European nations are drifting in a nationalist direct despite social mood (measured by the market indexes) hitting new highs or at least multi-year highs. The elites of Europe (and most of the West) dug themselves so deep in the hole by pushing peak social mood policies well after social mood had peaked. They are still pushing in the wrong direction today, 18 years after the peak and 10 years after they should have woken up. I don't think the French Revolution is a good model for what is about to happen, but King Louis XVI actually tried reforming at first.


Update: other European debtor nations have similar charts.

10,000 Car Traffic Jam at Haikou Ferry, No Economy Class Tickets Until March 1

Hainan was a popular destination as usual, but if you didn't make returns plans, you're in trouble.

iFeng: 三亚过万车辆海口堵长龙 有航班3月1日才有经济舱
At the peak of the Spring Festival Golden Week visitors return peak, by the persistent Qiongzhou Strait foggy weather, a large number of people, vehicles stranded in Haikou. On the afternoon of the 21st, a news release was made by Haikou Municipal Government Information Office that a total of 10,556 vehicles were waiting to be ferried in Haikou and Sangong, causing a heavy traffic pressure.

Many travelers reflect the flight ticket prices from Hainan to Beijing, Shanghai and other places over 20,000 yuan. Ctrip found that recently that tickets from Sanya cost an average of 10,000 yuan.

Even so, "10,000 yuan ticket" is still a ticket hard to find. There are flight economy class to wait until March 1, many tourists from Guangzhou, Zhejiang, Harbin and other places "curve home."

Bonds on the Edge of Breakdown

If TLT completes the H&S pattern, a conservative target price is $90. The bottom chart shows the unadjusted price of TLT. A ballpark target for the 30-year bond yield would be around 4.5 percent.

Fed Response on Interbank Loans

The Fed has answered: Fed loans to banks are part of total Fed funds and effectively lost in a sea of data, but a part of it exists in loans to commercial banks.

What's more interesting is the death in interbank lending after the 2008 crisis. And based on the relative size of Fed funds and loans to commercial banks, if there was a drop of interbank lending it was the Fed reducing liquidity rather than a drop in bank-to-bank lending.

2018-02-19

If China Really Deleverages, Expect Recession

In the modern monetary/financial system, money is created by banks. (When the banks run into trouble, the central bank monetizes the debt and the banks start lending again. The central bank is the caboose, not the engine.) Most of this creation took place off-balance sheet and eventually led to the 2008 financial crisis. As Jeffrey Snider of Alhambra has shown, the U.S. financial system "peaked" in 2008 because the large financial institutions began shrinking their balance sheets. The European banks topped out in 2011. If China deleverages, it's banks will top out in 2017 or 2018. On-balance sheet lending will rise, but if China deleverages, it will not offset the slowdown in off-balance sheet lending.

Credit demand spends the same way as real demand. Goldman Sachs estimates total debt increased 13.5 percent in 2017 to 317 percent of GDP.

GDP was 82.7 trillion yuan and credit increased 31.1 trillion yuan, a total of 113.9 trillion nominal demand, up 9.0 percent from 2016.
If total credit growth slows to around 10 percent in 2018, and assume nominal GDP is goalseeked and rises 9 percent, then total nominal demand would be 116.4 trillion, or 2.2 percent growth. Even with a generous forecast for nominal GDP growth, the slowdown in total nominal demand is huge. If you take a more bearish view of GDP, then outright recession is likely even if it is masked by most official stats.

Bloomberg: While Washington Spends, China Moves to Cut Its $30 Trillion Debt Load
Few think China faces a near-term crisis from its debt. The economy is growing at a robust 6.9 percent, and domestic deposits of $27 trillion almost equal outstanding debt. If China were to simply continue the rapid credit growth and wasteful investment of the past, a sharp and wrenching downturn would likely result. At some point the country’s ability to roll over existing debt and fund new projects will wane.
China always faces a near-term crisis from its debt. That's why it must get a handle on debt levels. The longer it takes, the larger the inevitable crisis.
Make no mistake: China’s great deleveraging will be a multiyear undertaking, and the country is just getting started. There also may well be instances of backsliding. Yet China’s debt dynamics are now so pressing that there’s probably no turning back.
China needs a burst of real GDP growth to offset the decline in credit growth required to get credit-fueled, centrally-planned growth below the growth rate of the whole economy. It needs the private economy to overtake the state economy. It's like a race between the tortoise and the hare, the tortoise is private GDP and the hare is credit + state GDP. If China can't wait for the tortoise to catch up, it has to slow the hare. It can slow the hare anytime because it controls the hare, but slowing the hare will also slow the tortoise. Finding the right number isn't easy and the Chinese government can't control global growth or U.S. trade policy.

If China could have grown without credit-fueled centrally-planned growth, it would have done so. Had China implemented reforms in 2008 or 2011 or 2014 it would have needed a smaller bump in real GDP to offset the credit slowdown. A bullish view of a credit slowdown requires China to do what it failed to do for 10 years and do it far better than it would have back when the problem was smaller.

A less optimistic view is China avoids a major crisis, but that depends on how you view the financial markets of early 2016. If you think that wasn't a serious decline that required incredible credit intervention from China, then there's no reason to be worried if global growth slows. Or perhaps U.S. growth picks up thanks to fiscal stimulus, Europe improves too, and the dip in Chinese demand is partially offset by global demand.

And then there's the bearish scenarios that range from a repeat of late 2015 and early 2016, all the way to full blown financial crisis in China, global recession, EM carnage and the DXY at its final nosebleed high.

AfD Now Outpolling SPD

Social mood is still in a long-term downtrend, migration is still far above levels desired by the general public, and this is happening with global asset markets and economies likely near their cyclical peaks.

I will now predict that AfD becomes the largest party in Germany within 5 years, assuming an economic recession/financial market downturn.


I've previously covered the emergence of AfD.

AfD Could Become Largest Opposition Party in Germany; Catalonia Crackdown in Spain - this happened thanks to the grand coalition between the CSU-CDU and SPD, and now is doubly true as AfD pulls ahead of SPD.

AfD Wins Big in German Election, No Competition Yet - still true. Like Trump in the USA, they have a monopoly on the immigration issue.

From 2015: This One Chart Explains the Next 10 Years of Political Change. If you read only one post, that's the one to read. Thanks to the rise of nationalism, identity and immigration, the AfD is the only mainstream right-wing party in Germany. CSU-CDU and Free Democrats, right-wing on economics, are as of 2015 considered left-of-center parties.



2018-02-18

Lending Crackdown Expected After January Loan Surge

iFeng: 多地严控违规资金流入楼市 短贷虚增现象有望缓解
Subsequently, many local CBRC offices, including Beijing and Shanghai, made statements in the near future to prevent all funds from entering the real estate market illegally.

Kerry Real Estate Research Center Director Yang Kewei told the "Securities Daily" reporter, from the position of the China Banking Regulatory Commission and the banking regulatory agencies around the point of view, is expected to 2018 credit policy continues to become tighter will become a high probability event. For buyers, on the one hand speculative demand will be further suppressed, speculators arbitrage possibilities almost disappeared; the other hand, all kinds of illegal loans will be effectively controlled.

It is noteworthy that the People's Bank of China recently released in January 2018 financial statistics show that in January new RMB loans 2.9 trillion yuan, an increase of more than 867 billion yuan, an increase of 2.3156 trillion ring; which short-term loans 6856 An increase of 129.6 billion yuan over the same period of last year and an increase of 765.9 billion yuan more than the previous month.

"Residents of short-term loans increased significantly, does not rule out that there are still some residents to purchase loans in the name of consumer loans." Yang Kewei said that in fact, for some residents to consumer credit purchase behavior, all types of banks have stepped up the credit card and consumer loans Issued audit, is expected to post "inflated" short-term loans will be squeezed out, real estate "deleveraging" effect is expected to further show.