China’s Bereft Band Aid Solutions
Chinese securities extended their bruising as the daily dollar fluctuation zone was bumped to 2 percent after sudden depreciation spooked investors getting a 7.5 percent volatility-adjusted return the past five years according to Bloomberg. Normal trade users were forced also to reassess with the currency the fifth most popular in the SWIFT interbank system, with mainland property developers and other heavy external borrowers feeling additional pressure from a raft of sobering economic statistics. The PMI again slipped under 50 and the monthly trade surplus was only $30 billion as gold demand around the New Year season reinforced commodity imports. The authorities unveiled a big urbanization scheme aiming to raise the city population 10 percent and prolong the infrastructure spending binge for 7.5 percent-range GDP growth, but half of global fund managers participating in Bank of America’s regular survey repeat “hard landing” risk. After the first listed bond default by a solar company, the green energy sector may encounter further troubles with $18 billion placed in 2012-13 and the industry after restructurings offshore not an apparent candidate for official rescue. Debt-equity ratios of over 400 percent prevail there and in other categories like materials and consumer goods, and altogether Chinese firms owe $650 billion by end-2015 according to data providers. Even before the unprecedented failure issuers had shelved $1 billion in the pipeline on rising yields with blue-chip policy bank CDB’s up almost 200 basis points from 2013. The state lender is often prominent in workouts and a large chunk of its $1.5 trillion balance sheet is for local governments. Abroad along with the Export-Import Bank it spearheads support for natural resource deals in Asia, Latin America and Africa, and with domestic stress lines have reportedly been delayed or suspended. Bank and non-bank financing totals have fallen in recent months, with the latter “shadow” share squashed to 40 percent under a bevy of regulatory guidelines and caveats. In January trust loans were half the corresponding 2013 sum, and new central bank rules hike disclosure of wealth management products in bank trading books where they were frequently offloaded.
Hong Kong as the hub for $150 billion in RMB deposits has also been shaken by the band move, as banks otherwise have one-fifth of their assets tied to the mainland. Property takes one-third of loans with private sector debt/output up 80 percent in the post-Lehman crisis period. Australian banks’ $30 billion Chinese exposure in turn is almost one-tenth of GDP as leaders ANZ and Commonwealth have nationwide branches and insurance joint ventures. Ratings agency S&P recently cast doubts doubt about cross-border portfolio quality during an industry and mining slowdown despite ranking the system among the world’s five most stable. The dollar has also softened there as a regional proxy with 30 percent of exports destined for the mainland and a bilateral swap line in place to cover commodity crash wounds.
