China’s Swirling Sediment Trails
China stocks were up 35 percent on the MSCI index through April on record $275 billion in retail investor margin debt, triple last year’s pace, to offset foreign fund outflows accounting for the bulk of $15 billion in equity exit according to EPFR. Over 3 million individual accounts were opened the last week of the month as regulators approved 25 Shanghai and Shenzhen IPOs. The Hong Kong connect has been the main channel for overseas cash, as the QFII quota half used at $75 billion has also not budged. International banks joined in aversion as BIS-reported claims dropped $50 billion in Q4 with $1 trillion outstanding. Repayment spurred $25 billion in net RMB selling in March, as the US Treasury Department again demurred in branding practice currency manipulation ahead of the annual Strategic and Economic Dialogue (SED) summer meeting between top officials. The summit will treat an extensive issue list including steps toward a bilateral investment treaty and Washington’s positions toward the new Asian Infrastructure Bank and Yuan inclusion in the IMF’s SDR basket. On the last question the US does not have a blocking vote, and Fund eligibility criteria do not presume full convertibility and will consider Beijing’s swap network with 30 central banks.
The PMI reading remains under 50 as the 7 percent growth target may be honored in the breach with state-owned firm profits off almost 10 percent in Q1 and fiscal revenue continuing to flag with declining property sales. To aid exports rare earth restrictions were lifted and the central bank cut reserve requirements 100 basis points to 18 percent and injected $30 billion each into the Export-Import and Development banks for cross-border and small business support. Bank loans rose 12 percent last year to $8.5 trillion according to Price Waterhouse but real estate developer credit has jumped at twice that clip with NPLs worsening 40 percent. The government giants barely registered better earnings, and central bad asset manager Huarong will soon go public to tap more resources. Local government debt refinancing is still a drag as banks have bridled at proposed low yields in swap operations estimated at RMB 1 trillion, with another RMB 500 billion to be issued through an updated municipal regime. Several provinces have announced but postponed sales with process uncertainty and sour market conditions.
Trusts have disappeared from the bidding with the shadow banking crackdown but traditional insurers have partially absorbed the slack for both LGFV and property transactions. Offshore creditors own 40 percent of the latter, one-third of Asia’s junk market, and Kaisa’s default may leave them with recovery value under 5 percent by consensus calculations. Other companies like Glorious Property and Rehne face big repayments amid ratings downgrades, as industry favorite China Vanke revealed a 60 percent slump in Q1 profit. Frequent state issuers like Petrochina, part of $200 billion in mainland placements abroad in 2014, are likewise experiencing balance sheet deterioration as they belatedly restructure. A solar power concern missed an onshore bond installment in April, after peers’ previous international troubles where Hong Kong negotiations ended in distressed exchanges. Political dialogue there seems stuck in similar recriminations as protests have not yet resulted in direct chief executive elections with holdout enclave thinking.
