China’s Citadel Storm Retreat
Chinese stocks were down 15 percent in July, including a one-day drop the last week for half the loss, with US hedge funds caught in the pervasive trading bans and suspected misconduct controversies as the “national team” led by margin lender Securities Finance Corp marshaled hundreds of billions of dollars in market support. Chicago-based Citadel had an account seized for “irregularities” and Connecticut’s Bridgewater Associates reassessed its safe haven estimation of mainland exposure in light of “bursting real estate and equity bubbles” and the growth drag from debt and economic restructuring. Financial services, now reeling with the exchange collapse, had contributed almost one-fifth of first half GDP expansion stretched to meet the 7 percent target with declining trade and car sales and the PMI around 50. The government will pump RMB 1 trillion through policy banks for new airport and sanitation projects as it admitted to “flagging” traditional economic engines with June’s 1 percent power consumption increase the smallest in decades.
Banks reported an NPL rise with the ratio just above 1 percent as they scrambled to quantify indirect stock market exposure through wealth management products and collateralized credit. According to Moody’s lending jumped 10 percent through June to almost 150 percent of GDP to widen the gap with shadow banking’s 35 percent share. The central bank injected $50 billion into the Development, Export-Import and Agricultural institutions, as the Postal Savings behemoth with 500 million customers and $1 trillion in assets prepares for an eventual IPO. State-run units have reportedly boosted contingent liabilities through offshore letter of credit activity as well, with bond guarantees nearing $10 billion in the last year and a half, Bloomberg calculates. On-line platforms have also come under scrutiny in the retail investor margin craze and may be subject to initial capital and liquidity as well as security rules. Wealth management product yields are at 4 percent on a shift to fixed-income components and assets are over RMB 15 trillion by official and private tallies. As buy and hold structures they are not affected by the short-selling suspension but their lack of disclosure may understate the stock-holding population typically put at less than 10 percent to experience income effects from the crash.
Foreign investors with a $75 billion quota have turned cautious as well in Hong Kong with investigations there and evisceration of the Shanghai connect program with core listings off-limits or heavily manipulated. Chinese company profits were off across the board in the first half with mining and energy producers taking a 50 percent hit. Manufacturing was up 10 percent, but producer prices continue to show 5 percent deflation. Home values are down in most cities, and property developers have rushed to sell onshore bonds with temporary appetite to the tune of $10 billion in the second quarter. Local governments are trying to complete RMB 2 trillion in debt swaps at the same time as capital outflows reached almost half a trillion dollars in the last year, with one-quarter thought to be “hot money.” The movement may complicate currency direction post-devaluation and the IMF indicated the freely usable threshold may bar immediate SDR inclusion although it could be granted with a delay.
