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China offers little help to solve bad bonds problem, aiming at deflation of the credit bubble
Respite on the Chinese stock market has quickly run out of steam after a pledge by the Chinese authorities to solve the trouble with bad private bonds.Respite on the Chinese stock market has quickly run out of steam after a pledge by the Chinese authorities to solve the trouble with bad private bonds. According to the latest data, they are relatively reluctant to directly participate in the rescue of firms, although in 2016 everything was different.
On Monday, a “recommendation” to private funds was followed to take part in the bailout of troubled shares that companies used as collateral for loans. 11 brokerage firms have agreed to allocate 21 billion yuan to buy shares, which is basically a drop in the ocean of 3 trillion. yuan of toxic loans, which are now collateralized by a falling stock market.
The government was not ready for anything more than putting some straw in the landing spot, what is surprising, as the private sector provides 50% of taxes, more than 60% of GDP, more than 80% of urban employment and 90% of new jobs created.
Perhaps the government bets on recovery of credit system with manageable credit bubble deflation (“defaults will start from most inefficient and high-risk which is good”) but at some point, may meddle with the process is something goes wrong.
But repairing consumer and corporate sentiments after the downturn of economic expectations is usually much more expensive and longer.
The situation is very similar to the 2008 crisis in the US, but instead of “share”, put the word “housing market”. The Fed has come to the rescue in the US, but in China, PBOC will only have to start carrying the can. While the Central Bank is focused on the banking system and the support of the manufacturing sector, which is rapidly losing pace of growth due to disrupted trade ties with the United States.
China, though, can’t fully deploy the mechanism of increased consumption to support the economy, despite the growth rate of imports overtaking production. Weakening yuan worsens the outlook for accelerating imports.
Here is the data that gives some clue on pledges shares problem in China:
· 724 out of 734 technology companies of ChiNext resorted to equity financing practices. The market capitalization of companies is about $580 billion. Since the end of May, the index has lost more than a third – from 1876 points to 1205 points.
· 16 percent of the “A” class shares are pledged as collateral for loans. In 2015, this share was 10.3 percent.
· In the broad market, 148 companies out of 3,571 have pledged more than 50% of their own equity loans, despite a 50% legal limit, thanks to shadow banking. (data from a national Chinese depositary).
· On October 9, value erosion of shares is close to margin call for 780 companies. Positions of 594 companies are approaching forced liquidation, i.e. the time when it comes to paying for loans.
Comparing the drop of the Shanghai Composite Index and ChiNext, the difference in the fall may be precisely the difference of risks from using financial leverage, which is higher in the technology index companies.
ShComp keeps solid footing after a bullish Monday, although closed today in a modest plus. A sweeping fall below 2,500 is unlikely to happen for some time, the index will mark time at the crucial round level. It is impossible for now to mention any essential drivers for upside correction though.
A few words about the past US treasury bond auction. With a progressive increase in placement ($26 billion per one auction in January against $38 billion at the moment), demand for paper remains high, the bid-to-cover ratio was at 2.671, against 2.437 at the last auction, slightly below the 6-month average at 2.75.
What’s really curious is a sharp surplus in favour of indirect bid. Their share amounted to 52.6% in the auction, the largest since December 2017, against 40% last month. Direct buyers, something “scared off” this time their share fell to 5.5% versus 13.4% last month.
Recall that indirect applications are mainly represented by foreign buyers acting through US intermediaries.
The main idea here is that demand for a risk-free security asset has increased from foreign demand. Definitely this trend is guided by the expectations of serious market turbulence ahead.
Respite on the Chinese stock market has quickly run out of steam after a pledge by the Chinese authorities to solve the trouble with bad private bonds.Respite on the Chinese stock market has quickly run out of steam after a pledge by the Chinese authorities to solve the trouble with bad private bonds. According to the latest data, they are relatively reluctant to directly participate in the rescue of firms, although in 2016 everything was different.
On Monday, a “recommendation” to private funds was followed to take part in the bailout of troubled shares that companies used as collateral for loans. 11 brokerage firms have agreed to allocate 21 billion yuan to buy shares, which is basically a drop in the ocean of 3 trillion. yuan of toxic loans, which are now collateralized by a falling stock market.
The government was not ready for anything more than putting some straw in the landing spot, what is surprising, as the private sector provides 50% of taxes, more than 60% of GDP, more than 80% of urban employment and 90% of new jobs created.
Perhaps the government bets on recovery of credit system with manageable credit bubble deflation (“defaults will start from most inefficient and high-risk which is good”) but at some point, may meddle with the process is something goes wrong.
But repairing consumer and corporate sentiments after the downturn of economic expectations is usually much more expensive and longer.
The situation is very similar to the 2008 crisis in the US, but instead of “share”, put the word “housing market”. The Fed has come to the rescue in the US, but in China, PBOC will only have to start carrying the can. While the Central Bank is focused on the banking system and the support of the manufacturing sector, which is rapidly losing pace of growth due to disrupted trade ties with the United States.
China, though, can’t fully deploy the mechanism of increased consumption to support the economy, despite the growth rate of imports overtaking production. Weakening yuan worsens the outlook for accelerating imports.
Here is the data that gives some clue on pledges shares problem in China:
· 724 out of 734 technology companies of ChiNext resorted to equity financing practices. The market capitalization of companies is about $580 billion. Since the end of May, the index has lost more than a third – from 1876 points to 1205 points.
· 16 percent of the “A” class shares are pledged as collateral for loans. In 2015, this share was 10.3 percent.
· In the broad market, 148 companies out of 3,571 have pledged more than 50% of their own equity loans, despite a 50% legal limit, thanks to shadow banking. (data from a national Chinese depositary).
· On October 9, value erosion of shares is close to margin call for 780 companies. Positions of 594 companies are approaching forced liquidation, i.e. the time when it comes to paying for loans.
Comparing the drop of the Shanghai Composite Index and ChiNext, the difference in the fall may be precisely the difference of risks from using financial leverage, which is higher in the technology index companies.
ShComp keeps solid footing after a bullish Monday, although closed today in a modest plus. A sweeping fall below 2,500 is unlikely to happen for some time, the index will mark time at the crucial round level. It is impossible for now to mention any essential drivers for upside correction though.
A few words about the past US treasury bond auction. With a progressive increase in placement ($26 billion per one auction in January against $38 billion at the moment), demand for paper remains high, the bid-to-cover ratio was at 2.671, against 2.437 at the last auction, slightly below the 6-month average at 2.75.
What’s really curious is a sharp surplus in favour of indirect bid. Their share amounted to 52.6% in the auction, the largest since December 2017, against 40% last month. Direct buyers, something “scared off” this time their share fell to 5.5% versus 13.4% last month.
Recall that indirect applications are mainly represented by foreign buyers acting through US intermediaries.
The main idea here is that demand for a risk-free security asset has increased from foreign demand. Definitely this trend is guided by the expectations of serious market turbulence ahead.