China’s Brooding Brinksmanship Lesson
Chinese shares touched bear-market turf on single-digit valuation with mid-sized banks abandoned as the central bank allowed interbank rates to quintuple to 25 percent before declaring liquidity support for “deserving” institutions. The vise was reportedly designed to slow shadow financing expansion and reliance which has sent the debt-GDP ratio over 200 percent, and followed erratic bond auctions and default incidents signaling broader troubles. Listed companies themselves are prominent in entrusted loans and bankers acceptances which doubled in Q1 to $250 billion as the dominant informal wealth management products came under regulatory ceilings and inspection. Local government exposure through traditional and new channels poses a threat at the same time after the national auditor estimated their total debt at $2 trillion at end-2012. According to the survey ten provincial capitals owed more than revenue excluding guarantees which potentially worsen the burden. Ratings agency Moody’s cited negative implications and recalculated central government contingent liabilities at 40 percent of output. While China Everbright felt the squeeze and was unable to honor a $1 billion obligation, the big four state giants did not escape difficulty rumors with withdrawals at ICBC also complicated by a network glitch. Bad asset management company Cinda indefinitely postponed IPO plans under the circumstances as the Finance Ministry-created vehicle still holds legacy positions from the late 1990s Asian crisis. In mid-June the State Council which sets monetary policy reaffirmed interest and exchange rate liberalization and capital market deepening goals without specific timetables. The money supply continues to swell 15 percent annually, but the PMI has again dipped below 50 as economic growth may just nudge 7 percent. Housing prices rose in May in almost all the 70 cities tracked, but portfolio inflows and the trade surplus are softer following an official crackdown on fake invoicing. The yuan appreciation authorized prior to a bilateral presidential meeting in California may extend through mid-July’s regular Dialogue in Washington, but is widely expected to converge with the prevailing global weakness trend already reflected in foreign fund outflow numbers.
Hong Kong in particular has suffered from dual repatriation from the mainland and back to the US as the Fed may soon stagger quantitative easing. In the past five years loose industrial world policies have generated a $150 billion windfall that in turn has translated into bond and stock performance and record property credit gains. Profit downgrades are now double upgrades on the exchange after the long-awaited Galaxy brokerage IPO in May was disappointing. Renimbi-denominated dim sum bonds had begun to recover on $5 billion in issuance with dedicated ETF launches planned before a sudden freeze. Opening of a commodity hedging and trading platform to rival Singapore’s based on insatiable Chinese appetite has also foundered, and with real estate prices above the Asian financial crisis peak, the footing may again be slippery.
