China’s Marauding Margin Creep
Chinese shares seesawed as regulators extended a crackdown on retail investor marginal loans beyond the biggest brokers after the amount reportedly ballooned to Yuan 1 trillion, following factory profits barely up in 2014 with an 8 percent drop in December. The central bank continued to inject liquidity ahead of the New Year break and sell dollars to support the currency, as reserves shrink on capital outflows at an estimated $120 billion in the last quarter. The trend may stabilize with the US Fed on hold and the ECB final launching outright QE, although outward momentum should persist with the Hong Kong dim sum bond market up to $70 billion and the government pledging additional support for overseas direct investment increasing 15 percent to $105 billion last year. With the external linkage the interbank network SWIFT ranked the RMB as the fifth most used payment unit at 2 percent of the total, with large trade and swap programs as in Venezuela where $20 billion in exposure remains. The latest PMI reading was almost 50, but the sub-index for inputs was at the lowest since the global financial crisis reflecting wholesale deflation and lagging import demand. Bank NPLs official rose to 1.3 percent as local government and property developer concerns heighten. The IMF puts the former debt at 35 percent of GDP with half of new borrowing for rollover purposes. A Jiangsu province vehicle defaulted on notes as a major private construction firm sued authorities for payment delays. According to Bloomberg one-third of publically-traded real estate groups have more debt than equity as domestic bank loans jumped 25 percent to $900 billion in 2014 despite falling home prices. The past two years sponsors issued $20 billion annually in junk bonds and giants Agile and Country Garden get half of funding offshore. Hong Kong stayed in the spotlight after mass protests ended as the currency peg was briefly tested after the Swiss Franc’s euro ceiling abandonment. The thirty year commitment is in contrast to Switzerland’s temporary move and the monetary authority fended off immediate speculation with the aid of Russian capital flight as the related Exchange Fund acknowledged both foreign exchange and equity losses in its portfolio.
The Swiss pain was instantly felt in Central Europe, with Austria’s Raiffeisen Bank experiencing stock and bond selloff in light of its subsidiary presence adding to Russian credit woes where equity could be wiped out. Poland, Romania and Croatia have proposed relief for mortgage borrowers reverting to previous or compromise exchange rates, but will avoid Hungary’s stronger measures including punitive taxes to enforce compliance. Greek banks are in an even tougher spot as a foreclosure moratorium will likely be reinforced by the left-wing Syriza government whose candidates advocated nationalization. A Troika split would sever ECB emergency lines as deposit exodus and double-digit bond yields have resumed with a thin margin for further error.
