Charting China's Imminent Implosion

[Swordsmyth]

A household debt crisis may be brewing in China as the government tries to boost sluggish consumption amid a domestic economic slowdown and trade war with the United States.

China’s household debt
had ballooned to 60.4 per cent of its gross domestic product (GDP) at the end of 2018, the People’s Bank of China (PBOC) said in its annual financial stability report last week.

And for the first time, the household debt to income ratio hit 99.9 per cent, meaning that total debt is now roughly equal to total household income among the average Chinese household.

“[Household debt growth] is a major concern for the central bank,” said Xia Le, chief economist for Asia at Spanish banking group BBVA. “Looking at the rate of growth of household debt or leverage, in just over two or three years, it’s already grown to a level where you can’t say it’s particularly safe or low. It may be becoming a financial risk.”


Signs that people are struggling to repay their credit card debt are also showing. Late payments on credit cards have been rising this year, while there was also an increase in the number of credit card loans that had soured at some banks during the first half of 2019, according to Fitch.

Disposable income, on the other hand, has not kept pace with the surging household debt. The inflation-adjusted year-on-year growth of per capita disposable income in rural regions was 6.4 per cent between January and September, compared with 5.4 per cent in urban areas, according to the National Bureau of Statistics.

More at: https://www.scmp.com/economy/china-e...vernment-tries

[Swordsmyth]

Two weeks ago we previewed what we said would soon be a D-Day for China's bond market, as a massive commodities trader and Global 500 state-owned enterprise was set for an "unprecedented" bond default.
As of last week, this historic default is now in the history books after Tewoo, the closely watched Chinese commodities trader, became the biggest dollar bond defaulter among the nation’s state-owned companies in two decades, in what Bloomberg called a "moment of reckoning" for Beijing as China struggles to contain credit risk in a weakening economy, as bond defaults hit an all time high and are set to keep rising in the coming years.
Last Wednesday, Tewoo Group announced results of its "unprecedented" debt restructuring, which saw a majority of its investors accepting heavy losses, and which according to rating agencies qualifies as an event of default. As a result of the default, until recently seen as virtually impossible for a state-owned company, investors’ perceptions are undergoing a dramatic U-turn about government-owned borrowers whose state-ownership had for years offered an ironclad sense of security.
No more: The fact that a state-owned enterprise such as Tewoo has now defaulted on repaying its dollar bonds in full, confirms that Beijing will no longer bail out troubled SOEs, let alone private firms, perhaps due to the strains imposed by the economy which while growing at just below 6%, is slowing the most in three decades. It also raises concerns over the Chinese province of Tianjin, where Tewoo is based, following a series of rating downgrades and financing difficulties suffered by some of the city’s state-run firms. The metropolis near Beijing also has the highest ratio of local government financing vehicle bonds to GDP in China.

As a reminder, Tewoo ranked 132 in 2018’s Fortune Global 500 list, higher than many other conglomerates including service carrier China Telecommunications Corp. and financial titan Citic Group Corp. It had an annual revenue of $66.6 billion, profits of about $122 million, assets worth $38.3 billion, and more than 17,000 employees as of 2017, according to Fortune’s website. Tewoo is owned by the Tianjin government and operates in a number of industries including infrastructure, logistics, mining, autos and ports, according to its website. It also has footprints in countries including the U.S., Germany, Japan and Singapore.
Putting last week's "unprecedented" event in context, since the first SOE bond default emerged in China’s domestic market four years ago, 22 such firms have failed to make good on a combined 48.4 billion yuan ($6.9 billion) onshore bonds as of the end of October, according to Guosheng Securities. However, despite periodic scares such as late repayment, Chinese SOEs had yet to suffer any high-profile default in the dollar bond market since the collapse of Guangdong International Trust and Investment Corp. in 1998.
Tewoo is precisely that default.
Furthermore, Tewoo's exchange offer, which has bondholders accepting a major haircut on their bonds, is seen as a road-map for resolving similar debt crises in the future as the prospect of more failures by state-backed firms looms. 2019 has already seen over 20 billion in SOE bond defaults, nearly triple 2018's total and the highest on record.

Specifically, the former Fortune Global 500 company from the northern port city of Tianjin said dollar bond investors representing 57% of the the total $1.25 billion have agreed to be paid just 37 to 67 cents on the dollar, depending on the maturity of the bonds. Additionally, bondholders representing 22.6% of these bonds voted to exchange their debt for new bonds with sharply lower coupons to be issued by Tewoo’s offshore debt manager, a state asset manager from Tianjin.
"This is one form of default based on our definition," said Moody's analyst Ivan Chung, pointing out that the debt restructuring has resulted in losses for investors.
The distressed exchange offer which concluded hastily last week represents a "first of its kind" debt restructuring plan for the relatively immature Chinese bond market and for a state-run enterprise in the dollar bond market. It was rushed ahead of $300 million dollar bond maturity on Dec. 16, one of the four notes covered by Tewoo’s debt restructuring plan.
To be sure, the market was not surprised: late last month, Tianjin State-owned Capital Investment and Management, Tewoo's offshore debt manager, said on an investor call that Tewoo is very likely to default on this paper. That explains why Tewoo's bond prices were largely unchanged after the exchange offer.

Meanwhile, investors who turned down the company's forced exchanges face even steeper losses; their dollar bonds will be grouped into a comprehensive debt plan involving Tewoo’s onshore debt, according to Tianjin State-owned Capital.
Tewoo said settlement of the debt restructuring offers are expected to be on or about Dec. 17.
As Bloomberg summarizes, "Tewoo’s failure in the dollar bond market, the biggest for a Chinese SOE since the collapse of Guangdong International Trust and Investment Corp. in 1998, is a sign that the worst economic slowdown in three decades is limiting Beijing’s capacity to bail out its weaker state firms. As a result, the authorities appear increasingly willing to use a more market-oriented approach to clean up the mess."
"Tewoo’s default is a landmark case, and demonstrates a growing tolerance for defaults by distressed SOEs,” Cindy Huang, an S&P Global Ratings credit analyst said in a note.
Needless to say, Tewoo’s crisis comes as a wake-up call for investors, many of whom had expected to never incur losses in China's offshore (dollar) bond market where until now, moral hazard had been the only game in town. Alas, that game is now changing.
“This is a poor outcome for investors that bought the bonds at par. That said, there is now some track record as to the severity of loss for an SOE-related entity,” said Charles Macgregor, head of Asia at Lucror Analytics. "Hopefully, these types of restructures will bring more discipline to the market and result in investors properly pricing for the apparent risk," he added hopefully, although with developed nation central banks engaging in precisely the kind of moral hazard boosting activity that China is now desperately seeking to distance itself from, we doubt that any investors will learn any lessons, and if anything, creditors will only demand even bigger bailouts in the future.
* * *
What is perhaps just as concerning is that as we noted last month, the Tewoo default is a harbinger of the crisis facing China's insovent local governments themselves. Tianjin “is not an exception” and other local governments with deteriorating fiscal conditions might also see eroding support for their less competitive SOEs, S&P warned.


* * *
It gets worse: should Tewoo's default spread to provincial-backed debt, an already ugly situation could quickly turn catastrophic as Tianjin has the highest debt burden among mega-cities and provinces in China according to S&P. Earlier this year, Fitch cut ratings on several government-related entities from the city, which is reliant on heavy industry and commodities trading. As a result of having the highest debt, Tianjin also has to slowest growth - Tianjin’s local economy grew by just 3.6% last year, the slowest in China; at the end of last year, Tianjin’s government had 407.9 billion yuan worth of debt outstanding, or about 22% of the size of its economy, said the Chinese credit risk assessor.
And just in case the Tewoo default isn't troubling enough, Moody's said that it expected the number of Chinese defaults to jump further in 2020 as economic growth sputters and the government attempts to rein in support to indebted companies. Specifically, Moody's expects 40-50 new defaults in 2020, up from 35 this year, according to Ivan Chung, which will make next year another all time high.

More at: https://www.zerohedge.com/markets/ch...st-dollar-bond

[r3volution 3.0]

Beijing just made Washington blink.

[Swordsmyth]

Beijing just made Washington blink.

LOL

Not at all.

Trump is playing them like a fish.

[r3volution 3.0]

LOL

Not at all.

Trump is playing them like a fish.

By halving tariffs in exchange for nothing?

[Swordsmyth]

By halving tariffs in exchange for nothing?

Most of the tariffs are exactly as before and he got something.

[r3volution 3.0]

Most of the tariffs are exactly as before and he got something.

He undid some of the tariffs that he previously implemented, which is good; these should never have been implemented in the first place.

But what did he get in exchange? A vague promise to buy some soybeans at some point in the future?

LOL

[Swordsmyth]

He undid some of the tariffs that he previously implemented, which is good; these should never have been implemented in the first place.

But what did he get in exchange? A vague promise to buy some soybeans at some point in the future?

LOL

He got more than that:

U.S. Trade Representative Robert Lighthizer has released a two-page summary fact sheet [pdf link here] outlining the “Phase-One” agreement in principal. From research into the material the principal agreement appears to be an 86-page document covering nine chapters. The fact sheet covers the top lines of seven chapters:

(Source pdf – and – USTR Link)

More at: https://theconservativetreehouse.com...one-agreement/

And if they don't do what they promised he can and will add even more tariffs.

Meanwhile he gets to keep the tariffs as a new status quo for future negotiations and look "reasonable".

Trump is winning, China is losing.

[r3volution 3.0]

He got more than that:

U.S. Trade Representative Robert Lighthizer has released a two-page summary fact sheet

That would be the PR release, designed to persuade the goobers that it was all worthwhile.

The reality is that this is total capitulation on the part of the United States.

I'm shocked, actually; I thought the combination of Trumps' stubborn idiocy and the impending election would ensure that nothing happened.

Someone who actually understands what's happening must have explained it to Trump with the right crayons.

And if they don't do what they promised he can and will add even more tariffs.

Meanwhile he gets to keep the tariffs as a new status quo for future negotiations and look "reasonable".

Trump is winning, China is losing.

lol, sure

[Swordsmyth]

That would be the PR release, designed to persuade the goobers that it was all worthwhile.

The reality is that this is total capitulation on the part of the United States.

I'm shocked, actually; I thought the combination of Trumps' stubborn idiocy and the impending election would ensure that nothing happened.

Someone who actually understands what's happening must have explained it to Trump with the right crayons.



lol, sure

Dream on.

[r3volution 3.0]

Dream on.

We're Britain in the 1950s, delusional about our power in the world.

China is a giant $#@!ing gorillla, like the US 70 years ago.

The US just blinked in a major way (because the US is about to go into recession and can't afford this nonsense).

Historians of the future will note that agreement as the highwater mark of the Pax Americana.

You wait.

[Swordsmyth]

We're Britain in the 1950s, delusional about our power in the world.

China is a giant $#@!ing gorillla, like the US 70 years ago.

The US just blinked in a major way (because the US is about to go into recession and can't afford this nonsense).

Historians of the future will note that agreement as the highwater mark of the Pax Americana.

You wait.

China is about to collapse and America is turning around.

Trump didn't blink, if he blinked all the tariffs would be gone.
Trump is playing China like a fish and balancing the rebuilding of America with the demolition of China and making Europe play fair.

[r3volution 3.0]

China is about to collapse and America is turning around.

The whole world is heading into a devastating recession.

The difference between China and the US is that their political system can survive this, while our's cannot.

Trump didn't blink, if he blinked all the tariffs would be gone.

He undid his own tariffs in exchange for meaningless promises; he blinked.

Trump is playing China like a fish and balancing the rebuilding of America with the demolition of China and making Europe play fair.

LOL, right, there's Europe too.

He's talking about a 100% tariff on Scotch (listen here George), olive oil, and a variety of other consumer goods.

...he's flailing around like the retarded chimp that he is.

The Europeans are going to tell the US to go get $#@!ed, and good luck dealing with China, alone.

Dig?

[Swordsmyth]

The whole world is heading into a devastating recession.

The difference between China and the US is that their political system can survive this, while our's cannot.

You've got that backwards.

He undid his own tariffs in exchange for meaningless promises; he blinked.

He reduced some tariffs as part of negotiations, he didn't blink, he set the Chinese up for even bigger tariffs than before if they don't come through.

LOL, right, there's Europe too.

He's talking about a 100% tariff on Scotch (listen here George), olive oil, and a variety of other consumer goods.

...he's flailing around like the retarded chimp that he is.

The Europeans are going to tell the US to go get $#@!ed, and good luck dealing with China, alone.

Dig?

Europe needs us more than we need them and China is dependent on Europe 2nd to their dependence on us.

Trump is going to bring them both to heel or shatter both and leave the US as the last economy standing.

[r3volution 3.0]

You've got that backwards.

Aren't you always talking about civil war in the US?

..and you're not even a psychotic.

He reduced some tariffs as part of negotiations, he didn't blink, he set the Chinese up for even bigger tariffs than before if they don't come through.

What, specifically, were the Chinese concessions?

Europe needs us more than we need them and China is dependent on Europe 2nd to their dependence on us.

Trump is going to bring them both to heel or shatter both and leave the US as the last economy standing.

Europe can and will sit back, doing business with both the US and China, as the US exhausts itself.

That's what killing off NATO means.

The French and Germans, when you say you're hard pressed against the Chinese, tell you: "tough titty."

[Swordsmyth]

Aren't you always talking about civil war in the US?

..and you're not even a psychotic.

That will come eventually but it has nothing to do with the trade war, it will come because the left refuses to deal with the results of elections they lose or the limits on our government and is thereby making us more like China, the Chinese will collapse when their economy does because they can't resolve their problems electorally.

What, specifically, were the Chinese concessions?

See post 368

Europe can and will sit back, doing business with both the US and China, as the US exhausts itself.

That's what killing off NATO means.

The French and Germans, when you say you're hard pressed against the Chinese, tell you: "tough titty."

LOL

Europe is in deep trouble and BREXIT will make it much worse, they will come crawling on hands and knees begging for mercy soon.

[r3volution 3.0]

That will come eventually but it has nothing to do with the trade war, it will come because the left refuses to deal with the results of elections they lose or the limits on our government and is thereby making us more like China, the Chinese will collapse when their economy does because they can't resolve their problems electorally.

I see much more potential for civil unrest in the US than China, even with Hong Kong.

Europe is in deep trouble and BREXIT will make it much worse, they will come crawling on hands and knees begging for mercy soon.

BREXIT is relatively unimportant. The UK (or England, as it will be after Scotland and N. Ireland secede) is a sad little island on the edge of civilization. It would have been better if they'd remained in the EU, but they've now become a nearly failed state, which should not qualify for EU membership if they were applying today, so let them go (or push them out), I say. As for Europe, the EU will survive, because there are still enough Germans and French who remember the last two wars and don't want to refight them.

[Swordsmyth]

That would be the PR release, designed to persuade the goobers that it was all worthwhile.

The reality is that this is total capitulation on the part of the United States.

I'm shocked, actually; I thought the combination of Trumps' stubborn idiocy and the impending election would ensure that nothing happened.

Someone who actually understands what's happening must have explained it to Trump with the right crayons.



lol, sure

https://twitter.com/zerohedge/status...64210947559425

[Swordsmyth]

Investors have pulled $5bn (£3.77bn) from Hong Kong since pro-democracy protests began in April, highlighting the economic toll taken on the Asian financial hub.
The Bank of England said in its Financial Stability Report, published on Monday, that cumulative outflows from investment funds in Hong Kong have reached around $5bn since unrest began. The outflows are equivalent to about 1.25% of the country’s GDP.
“The protests, and their impact on the real economy, highlight political risk as a key vulnerability in Hong Kong,” the Bank of England wrote in its report. “And these political tensions pose risks, given Hong Kong’s position as a major financial centre.”


The unrest has tipped Hong Kong into recession and led to the weakest quarterly GDP reading since 2009. Hong Kong’s Hang Seng index (^HSI) has also declined by 12% since April and commercial property sales have declined by a third, the Bank of England said.

More at: https://news.yahoo.com/hong-kong-pro...085052999.html

[Danke]

Investors have pulled $5bn (£3.77bn) from Hong Kong since pro-democracy protests began in April, highlighting the economic toll taken on the Asian financial hub.
The Bank of England said in its Financial Stability Report, published on Monday, that cumulative outflows from investment funds in Hong Kong have reached around $5bn since unrest began. The outflows are equivalent to about 1.25% of the country’s GDP.
“The protests, and their impact on the real economy, highlight political risk as a key vulnerability in Hong Kong,” the Bank of England wrote in its report. “And these political tensions pose risks, given Hong Kong’s position as a major financial centre.”


The unrest has tipped Hong Kong into recession and led to the weakest quarterly GDP reading since 2009. Hong Kong’s Hang Seng index (^HSI) has also declined by 12% since April and commercial property sales have declined by a third, the Bank of England said.

More at: https://news.yahoo.com/hong-kong-pro...085052999.html

That's a bummer, we have pulled out of flying there from Chicago, my favorite trip.

[Swordsmyth]

That's a bummer, we have pulled out of flying there from Chicago, my favorite trip.

If it blows up that may save your life.

[Swordsmyth]

[Swordsmyth]

New electric vehicle (EV) sales in China plunged in November for the fifth consecutive month, extending a decline that we've been highlighting for the past 1.5 years.
Last month, we noted how China's EV bubble continues to deflate, mostly due to a reduction in government subsidies over the summer.
China's EV slump in November was shocking, and sales plunged 43.7% on year to 95,000 units after October recorded one of the fastest declines for the year, reported China Association of Automobile Manufacturers (CAAM).
CAAM said last month that EV sales plunged 45% in October Y/Y.

"Because of the insufficient demand of the domestic market, the pressure for automakers to upgrade their technology to the national standard, and the major subsidy cuts for new energy vehicles, the recovery of production and sales is still limited," said Chen Shihua, assistant secretary-general of CAAM.

CAAM warned that the EV market would continue to deteriorate through 2020. It won't be until the global economy troughs that the industry could stabilize.
The slowdown also hurt battery manufacturers as the EV slump in China weighs on Lithium prices.

At a press conference on Thursday, CAAM said China's overall auto sales are expected to dip 2% to 25.3 million units.

More at: https://www.zerohedge.com/markets/ch...al-auto-market

[Swordsmyth]

China’s sovereign wealth fund and Singapore’s third-largest lender are joining a group of investors to inject US$14 billion of capital to bail out a Shandong province-based lender as more cracks emerged among smaller lenders in the world’s second largest economy.

Hengfeng Bank, which has not produced its accounts since 2016, is seeking to sell 100 billion new shares through a private share placement to state and foreign investors, without disclosing the issue price.

Central Huijin Investment, a unit of China Investment Corporation, will inject 60 per cent of the capital while the provincial asset management arm will provide 36 per cent and United Overseas Bank 1.86 per cent. The troubled lender is seeking 100 billion yuan by selling shares at 1 yuan a piece, according to a UOB statement.

The stock placement came after the government took over the lender in August, making it the third bank seizure since May, as regulators took a stronger approach to expose and crack down on financial risks among debt-laden lenders.

More at: https://www.scmp.com/business/china-...n-us14-billion

[Swordsmyth]

In the peak days of the European financial crisis, when Spanish banks were on the verge of collapse and were desperate for depositor funding as the ECB scrambled to come up with a viable rescue scheme, one bank - the soon to be insolvent Bankia - had a "clever" idea: offer a Spiderman Beach Towel in exchange for a €300 deposit.

Fast forward 7 years when the cash-strapped banks of another country have come up with a similar trick to entice depositors: a growing number of small local banks across China have conceived of a "brilliant" scheme to lure new depositors: handing out servings of expensive pork as a reward for opening an account, the SCMP reports.
As we discussed in recent months, China's smaller banks were hit by a perfect storm of falling rates and declining state support, which culminated in bank runs and the nationalization of several small and medium banks. And since there is little hope that the status quo will change any time soon, Chinese banks - which on top of everything are facing a $400 billion liquidity shortfall in January - are forced to go to greater lengths to attract new deposits, since they generally earn less money from lending and have fewer funding options than their larger peers.

Unlike Spain, Chinese banks are offering a product which is in great demand for the nation that is reeling as a result of "pig ebola": pork. Indeed, as SCMP adds, the fact that pork could be seen as a desirable reward for opening a bank account also speaks to the country’s massive shortage of its favorite staple meat.
Who knew the intersection of the supply and demand curves would be marked by a pound of pork.
On Monday, clients who deposited 10,000 yuan (US$1,430) or more in a three-month time deposit at the Linhai Rural Commercial Bank in Duqiao in Zhejiang province were then eligible to enter a lottery to win a portion of pork ranging from 500 grams (18 ounces) to several kilograms.
"The money is still my own, and the interest is good. I’m happy to receive a piece of pork in addition," one female client, who deposited around 20,000 yuan (US$2,900), was quoted as saying by the Metropolitan Express. Unfortunately for said client, she failed to grasp that any bank that is resorting to such ham-headed measures to boost depositor interest will likely not be around for long, and her entire deposit will likely vaporize in the coming weeks.
In any case, the gimmick is working: according to the Express, the bank distributed 1,097 deposit rewards on Monday after scores of mostly elderly clients queued up in front of the bank from early that morning.
“It was quite a good idea and very popular among locals, especially the elderly,” said a bank staff member, who did not offer his name. He also refused to comment on how much money the bank had received in new deposits due to the promotion.
In retrospect, it is a brilliant solution: instead of offering higher rates which only accelerate the banks insolvency as these require higher payouts on deposits, the bank is instead making a one-time payment, and the novelty of the "handout" is enough to get substantial new deposits.
Other rural commercial banks in northern China’s Hebei province and western China’s Guizhou province have also launched similar pork rewards programs. Dushan Rural Commercial Bank, located in the remote mountainous county in Guizhou, offered a coupon for 10 yuan (US$1.4) worth of pork for every 10,000 yuan of new deposits.

More at: https://www.zerohedge.com/economics/...new-depositors

[Swordsmyth]

The improvement in China’s credit figures in recent months overstates actual demand for loans from the real economy, according to economists, suggesting that a recent stabilization in output will be hard to sustain.The amount of medium and long-term loans to non-financial companies has been rising compared to a year earlier since August, a trend that usually suggests improving sentiment as companies borrow more to investment.
However, not all the increase in lending is going to productive uses, with some helping local government financing companies repay or rollover debt, according to analysts from Everbright Securities Ltd and ANZ Bank China Ltd.
“Both new loans and aggregate financing could have been affected by debt swaps,” Zhang Wenlang, an analyst at Everbright Securities Co. in Beijing, wrote in a note on Tuesday. He estimates that 7%, or about 277 billion yuan ($40 billion), of new loans in the third quarter were used to repay or swap existing debt, and between 5% to 12% of newly-added loans will likely be used for that in coming quarters.
There’s increasing concern about the financial health of some of the so-called local government financing vehicles, with one in northern China recently narrowly escaping a bond default and a central bank adviser warning this week about systemic risks in the sector. If local governments are borrowing just so they can keep paying for older debt, that would add to concerns about how sustainable both current economic growth and the nation’s debt burden are.
More on LGFVs’ financial problems
In the past 10 years these local government bodies have amassed a huge pile of debt as they’ve borrowed to pay for infrastructure and other investment. Ming Ming from Citic Securities Co. estimates the amount of interest-bearing liabilities at around 40 trillion yuan, according to a note published in August.
“The real demand for credit now isn’t as high as the data show,” said Xing Zhaopeng, a market economist at ANZ Bank China Ltd in Shanghai. “The lending used in debt swaps doesn’t generate new deposits and it barely has any impact on the economy.”
Another trend to watch carefully is the amount of bill financing - a form of short-term lending to firms. These were used in late 2018 and early 2019 to artificially inflate the headline credit growth numbers to meet regulatory requirements about how much banks should increase their lending. That prompted Premier Li Keqiang to criticize the practice and ask banks to lend more long term.

More at: https://finance.yahoo.com/news/risin...210000651.html

[Swordsmyth]

Police in Hong Kong battled pro-democracy demonstrators on Christmas as unrest is expected to roll into the new year. Many residents have had enough of the sustained protests, are now fleeing the city, and buying homes abroad, reported Bloomberg.
Real estate brokers in top housing markets across the world have reported an uptick in interest in December from Hongkongers:

"There's been an increase in capital outflows from Hong Kong-based investors into other major global real estate markets, with Australia, Singapore, Japan, and the U.S. all seeing an increase in purchasing activity," said Ben Burston, Knight Frank LLP's Australia-based chief economist.

And with Hong Kong real estate some of the priciest in the world, an exodus of residents is disastrous news for a fragile market that could soon see fire sales and the eventual topping of the market.
Hong Kong property market exhibiting symptoms of a possible double top.

Hong Kong property market and regional stock market index are both under pressure.



More at: https://www.zerohedge.com/markets/es...tests-continue

[Swordsmyth]

More than 4 years since the last official Chinese rate cut (not of its far more targeted Required Reserve Ratio but its broad Benchmark rate), economists and pundits were wondering when, if ever, Beijing would finally cut its main rate again to ease financial conditions again at the broadest level and boost fading corporate profits while kickstarting the country's moribund economy whose GDP is now growing below 6% GDP, the lowest on record. To be sure, China has had its share of setbacks in the past year preventing it from implementing the type of monetary policy it desires, most notably soaring food inflation as a result 110% pork CPI...

... even as producer prices, a driver of industrial profits, slumped below zero earlier in 2019, a clear indicator that China's enterprises desperate for lower rates.

And yet, a wholesale easing, such as cutting the benchmark rate, could potentially spark even more food inflation, setting off violent popular protests. After all, the Chinese population's patience is already running thin, forcing Beijing to scrap import tariffs on US pork exports, a move which Xi Jinping (and Trump) quickly spun as a trade war concession, but in reality was a matter of preserving the peace for China which is desperate for any sources of cheaper protein to keep its 1.4 billion people fed, and happy.
Well, overnight China finally did what so many had been expecting to do, if once again it did so in a roundabout way.
Remember that back on August 17, China’s central bank unveiled detailed measures on its long-awaited interest rate reform by establishing a reference rate for new loans issued by banks to help steer corporate borrowing costs lower and support a slowing economy.
As a key part of the rate overhaul, the Loan Prime Rate (LPR) would eventually become the new Benchmark Reference Rate to be used by banks for lending which is aimed at supporting funding as well as lower borrowing costs for small businesses; the rate will be set monthly (20th of every month) and will be linked to the Medium-term Lending Facility rate. The current 1 year LPR stands at 4.15% after its latest cut on Nov 30 versus the Benchmark Rate 4.35%.
So even with the PBOC pushing the LPR lower by 10bps since its August inception, the benchmark rate has remained unchanged at 4.35% since October 2015.

It is in this context that on Saturday, China's entire interest rate framework was overhauled when the PBOC ordered lenders to adopt the new LPR rate as the de facto basis for all credit from next year, marking an end to the previous benchmark in what Bloomberg said was another step toward liberalizing the financial system (although many disagree).
In a statement, the PBOC said that financial institutions should stop using the old lending rate as the pricing reference for all credit from January, and gradually convert existing loans to a new base using the loan prime rate, from March to August. The one-year lending rate had provided the previous anchor for loans across the economy.
And since the PBOC is effectively forcing lenders to adopt a reference rate that is 20bps lower than the benchmark, Saturday's announcement is effectively stealth easing, and will lower costs for the roughly 152 trillion yuan ($21.7 trillion) in yuan-denominated outstanding loans held by financial institutions and boost economic growth, even though - as with most things in China - it does not involve a straightforward cut to interest rates.
The transition is "in line with the need to further reduce the financing costs for the real economy, although there’s still a long way to go," said Fan Ruoying, analyst at the Bank of China’s Institute of International Finance in Beijing, as quoted by Bloomberg. The shift to the LPR comes at a time when Beijing has unveiled a raft of pro-growth measures, including tax cuts, more infrastructure spending, reductions in the amount of cash banks must keep on reserve and lending rates to boost credit.
Ironically, while the move will benefit end-consumers and debtors, it could have an especially adverse impact for creditors, forcing even more bank failures, bank runs, bailouts and nationalizations. As Fan warned, "the move will present more challenges for commercial banks because the interest margin will be squeezed and lenders will need to improve their pricing ability." As a reminder, many of the small and medium-bank failures that took place in 2019 - and there have been more this year than ever on record - have been attributed to the ongoing drop in rates that banks can charge client which in a time of shadow bank crackdowns, has meant more bank failures amid a flattening of the Net Interest Margin curve.


So will a successful transition from a benchmark to an LPR rate stoke another asset bubble? Perhaps, although the PBOC is careful to avoid overheating among China's most important assets: housing. While the interest rate of home mortgages should also be converted to the LPR, the central bank said that the new borrowing cost must be the same as the current charges to "reflect the request to regulate the property market." Eventually, at some point in the future, home mortgages could be repriced in the future, based on the LPR, the PBOC said, giving itself a buffer for when China's housing market takes its next leg down.
And while Bloomberg concludes that this latest stealth rate cut shows the PBOC's "commitment to making the interest-rate system more market-driven" controls on deposits remain for now. In short, the step-by-step approach appears to be trying to open up the system without shrinking interest margins too rapidly and adding more pressure to smaller lenders. Unfortunately, with numerous banks having already failed previously in 2019 (as discussed here), and with more than half of China's banks failing a recent central bank stress test, the only guaranteed outcome from this weekend's effective rate cut is that, paradoxically, it will only accelerate the rate of failure of China's already cash strapped, and in many cases insolvent, banks.
Which begs the question: did Beijing, in hopes of gently stimulating the economy, start a cascade of failures that will eventually drag down more than just the small and medium banks (and result in the executions of many more bank CEOs) despite such "brilliant" marketing ploys as offering a pound of pork to starving savers with every new deposit, and precipitate China's long-overdue financial crisis?

More at: https://www.zerohedge.com/economics/...-funding-costs

[Swordsmyth]

Just in time for Tesla's big move to China, entire cities are popping up from within the country dedicated solely to making electric vehicles.
Shunde New Energy Vehicle Town in China is taking shape inside of the city of Foshun as a hub for EV production and research. It is estimated that the city could eventually generate $15 billion in revenue per year.
Bloomberg calls the cities "at least 20 electric-centric versions of Detroit under construction as China" as the country continues to bet big on EV technology. President Xi Jinping hopes that EV manufacturers will help boost other industries. He aims for the country to become a "manufacturing superpower" by 2025, in hopes that it'll make China more self-sufficient and diversified.
And cities in China are working to shift their economies to become a part of Xi's new plan. They are offering cheap land and tax breaks to bring in car makers, parts supplies and engineering labs, in hopes of bolstering their own local economies.

He Xiaopeng, chairman of Xpeng Motors Technology Ltd., said: “The new-energy vehicle industry is a bet local governments must take. A successful EV maker could bring at least 200 companies in the industry chain into a province.’’
So far, about $30 billion has been committed to developing these EV towns. The commitments range from fixed asset investments to development costs. It's a move that's typical of China's "command-led" approach to its economy, as Bloomberg calls it.
To us, it looks similar to the country's real estate strategy: try to build it, and hope they come.
That's what China has been doing, erecting industrial parks, apartments and schools while laying out their offers - and sitting back, hoping that companies come in to take them up on thier offers.
Between 2009 and 2017, the country spend about $36.5 billion subsidizing EV sales. This could be why China now accounts for more than half of all passenger EV sales worldwide.

The rapid urbanization of the country has taken up many available land tracts, which has in turn pushed prices higher and made zoning laws tougher. By committing to EVs, local officials are likely to find it easier to get central government approval for redevelopment plans.
Shunde NEV Town is being built by China's largest developer, Country Garden. The company has promised to bring EV-related businesses and meet tax revenue targets.
Liu Wei, who’s overseeing the project for Country Garden said: “The industry chain is far more comprehensive than car manufacturing. We’re well aware the fever will fade, but some emerging firms will grow, and that’s who we want to house.”


But EVs only make up less than 5% of total car sales in China. Some analysts see these pop-up towns as destined for failure, as a result. John Zeng, managing director of LMC Automotive Shanghai said: “Most of those EV towns will fail. This wave of electric-vehicle building will come to a life-or-death moment. When EV carmakers are being squeezed, the ‘EV Town’ bubble will burst.’’


More at: https://www.zerohedge.com/technology...across-country

[Swordsmyth]

The combination of Keynesian economic policies and the increasing strictures of China’s command economy is making for a bleak outlook for China for 2020 and beyond.
The idea that government spending drives economic growth is one of the myths that drive all central banks’ maneuvering. If some government borrowing and spending is good, then more is better — until it isn’t. While government spending has been a significant driver of China’s remarkable change from a third world poverty stricken economy to the world’s second largest economy, government debt is now a lead weight, pulling down the country’s economy.
That government spending has now created a debt-to-GDP ratio among the highest in the world: 300 percent. In other words governments in China — national, regional and local — owe more than three times the total economic output of the country.



As President Xi Jinping has attempted to rein in government borrowing, off-book borrowings (called “off balance sheet” loans) have soared. They now comprise a third of all borrowings, but because the credit-worthiness of the borrowers is questionable, any decline in the economy could push up default rates. In fact, it’s already happening.
But even worse, the Chinese consumer has been hit with rising food prices, making it increasingly difficult for the average family (which spends nearly twice as much of its income on food as does the average American household) to make ends meet. Thus consumer demand for other items is slowing.
This puts pressure on China to boost its exports in order to obtain the currency it needs to service its ever-mounting debt. But the latest data (that’s reliable) shows exports are slowing. As the Wall Street Journal noted, “Chinese consumer inflation is rising at its fastest rate in nearly a decade [while] economic growth ... is at its lowest level in three decades.” The Journal added: “[That] rising inflation has already dented China’s consumer and business confidence [and] could slow economic growth [further].”
Reliable numbers on China’s economy are notoriously hard to come by. But the China Beige Book (CBB) has made it its business to ferret out numbers that are reliable, and they aren’t pretty. On Friday it reported that business cash flows are rapidly deteriorating (as measured by the increasing number of late payments on invoices), while new orders are falling. Based on interviews with more than 3,300 Chinese businesses, CBB noted that fourth-quarter delays in “payables and deliverables soared to the worst levels we’ve recorded.”
The CBB noted further that the Chinese economy saw record levels of corporate borrowing in the fourth quarter: “Loan applications nationally shot to an all-time high, while rejections sank to an all-time low.”

More at: https://www.thenewamerican.com/world...dwinds-in-2020