The Bundesbank discussion panel included Federal Reserve of Dallas President Richard Fisher. And with Yellen in a dovish mood as she interacted with the Senators, I listened attentively for any subtle change in tone from the hawkish Dallas Fed head. Mr. Fisher did not disappoint. In an interesting testament to the tectonic shift unfolding in the U.S. monetary policy debate, Fisher went so far as to refer to the Dallas Fed as the “Bundesbank of the United States.” Moreover, he added the comment “we agree on almost everything” as he turned the forum over to the next panelist, Otmar Issing.
It is music to my ears to hear a top Federal Reserve official use the (catchy) word “Bundesbankification” and proudly state his agreement with prior Bundesbank Chief Economist Otmar Issing. It’s been a long wait! Over the years, I’ve chronicled the clash between the (“Austrian”) framework underpinning doctrine at the Bundesbank and an altogether different view of how economies and finance function from the Federal Reserve. I’ve always viewed Otmar Issing as a brilliant thinker and one of the great contemporary experts on monetary policy doctrine. One of my attempts to highlight the opposing economic doctrines dates back to an early-2004 CBB – “Issing v. Greenspan.”
I did my best to transcribe Dr. Issing’s astute comments below. He politely addressed his contrasting views over the years with those of the Fed, mentioning the “Greenspan put,” moral hazard, asymmetrical policymaking and the “risk management” approach adopted by the Greenspan and Bernanke Federal Reserves. I’ll go a step further than Fisher in agreeing with EVERYTHING Issing said.
Clearly, Issing and the Bundesbank decisively won the debate. The 2008 crisis illuminated the failings of the key facets of Federal Reserve monetary management. Yet, amazingly, instead of moving in the direction of a more Bundesbank approach, the Bernanke Fed lurched only further into the direction of experimental monetary inflation and aggressive market intervention. Adopting a sports analogy, Bernanke threw a “Hail Mary.” The ball might not have yet officially hit the turf, but there’s no way the play will end successfully. A new game plan is unavoidable, and I believe the heads of some of the regional Federal Reserve banks provide sound ideas. In the Q&A session, Issing shared an additional pertinent insight: “For me what is key: central banks should always make clear what they can deliver and what they cannot. And I think everybody’s experience in life is never take responsibilities for which you have no competencies.”
Sarcastically, Issing quipped: “I learn that we’re allowed to talk of Bubbles now, which was out of the question for a long time…” As I remember all too well, back in the late-nineties anyone warning of Bubble excess was dismissed as a nut ball. But after the technology Bubble burst the consensus view shifted to how obviously it was all a Bubble. During the mortgage finance Bubble period, it really amazed me how dismissive everyone was that housing and mortgage finance could be in Bubbles (see Issing’s comments below). And in the crisis period that followed, it was again commonly understood that excesses were conspicuous. Why then is everyone so blind during the Bubble period?
In the spirit of “Deja vu all over again,” Bubble analysis is again disparaged and almost completely dismissed. But I’ll make a few predictions: At some point in the future, it will have been obvious to everyone that Federal Reserve monetary policy created historic securities market and asset price Bubbles. Everyone will have known that Federal Reserve and global central bank liquidity were instrumental in inflating unprecedented Bubbles throughout the emerging markets. In hindsight, the Chinese Bubble will have been obvious to everyone. For now, I’ll continue chronicling history’s greatest financial Bubble.
February 28 – MarketNews International: “The yuan plunged through the key 6.150 level against the U.S. dollar on Friday morning as investors continued to unwind their bets on the currency in the wake of last week's depreciation signal from the authorities… The morning session saw some of the most violent moves in the currency since the People’s Bank of China triggered the sell-off with a dramatically lower central parity fixing on February 19. Traders said big state banks have been buying U.S. dollars again, sending the yuan sharply lower, but in light volumes.”
February 27 – Bloomberg (Lilian Karunungan and Yumi Teso): “The yuan has gone from being the most attractive carry trade bet in emerging markets to the worst in the space of two months as central bank efforts to weaken the currency cause volatility to surge… ‘A lot of investors globally were invested in the yuan because of the interest-rate differential and the low volatility,’ Rajeev De Mello, who manages $10 billion… at Schroder Investment Management Ltd., said… ‘All of a sudden, the low volatility part of the argument is no longer there.’ An unwinding of the carry trade may spur a slide in the yuan, which is set for the biggest monthly decline since the government unified official and market exchange rates at the end of 1993. Deutsche Bank AG, the world’s largest foreign-exchange trader, estimated this week that bullish bets on China’s currency amount to about $500 billion.”
February 28 – MarketNews International: “The violent sell-off in the yuan on Friday is a reflection of market expectations and is ‘tolerable,’ a senior source close to the People's Bank of China source told MNI. The source, who helps formulate the government's exchange rate policy, was asked directly about a morning of trading which saw the yuan fall nearly the full 1% limit of its daily trading range… ‘The fall (in the yuan) reflects market expectations. It is tolerable,’ he said.”
Central to my historic Credit Bubble thesis is the view that speculative leveraging has played a momentous role in creating self-reinforcing liquidity excess. This liquidity drives asset inflation and speculative Bubble dynamics. In prolonged Bubble periods, liquidity excess will also work to inflate system incomes, spending, corporate incomes and cash flows, government receipts/spending, etc. We saw this dynamic mostly on a sectoral basis during the late-nineties “technology” Bubble and then on a more systemic basis during the mortgage finance Bubble. The ongoing current Bubble is inflating and distorting on a deeply systemic basis. In previous Bubble episodes, the amount of time that passed between the exuberant phase of perceived endless cheap liquidity and the onset of fear, de-risking/deleveraging and attendant illiquidity wasn’t terribly extended.
I believe the dynamic between Fed, BOJ and global central bank market liquidity injections and aggressive speculative leveraging has been especially dangerous throughout this cycle. These excesses went “parabolic” over the past 18 months, with global securities markets awash in destabilizing liquidity excess. From my perspective, key sources of global liquidity have included the Fed and Bank of Japan's balance sheets, Chinese Credit excess, and speculative leveraging, certainly including the hedge funds, the “yen carry trade” and a perhaps massive “yuan carry trade” in China.
As a Bubble analyst, I’m on guard these days. The Fed is at this point seemingly determined to wind down its balance sheet growth this year. And as the strongest major currency year-to-date, there is also potential pressure on yen short positions and related speculative leverage.
Meanwhile, Chinese officials are in the midst of some type of change in currency policy. Initial thinking in the marketplace was that the People’s Bank of China was seeking simply to add a little volatility to send a message to aggressive currency speculators. What has evolved into a more significant currency decline has analysts believing the market is being prepared for a wider trading band in China’s currency peg regime. At the same time, a few are beginning to worry that the Chinese might at some point be willing to adopt a more aggressive “beggar they neighbor” currency devaluation posture. Perhaps in the future China will be compelled to respond to competitive currency devaluations from Japan, South Korea or other Asian competitors.
Chinese policies and motivations will evolve over time. For now, there has been a significant change in the risk vs. reward calculus for “hot money” speculative flows streaming into China. In terms of the Chinese and global Bubbles, this development could prove a meaningful inflection point.
And while on the subject of Bubbles, almost simultaneously Thursday Richard Fisher spoke of growing signs of financial excess while Janet Yellen again stated that stock prices are not excessive. As an analyst of Bubbles, I contend that valuation is generally not a very helpful indicator. And I would be especially cautious against using broad market aggregates as evidence for or against Bubbles. The bulls argued vociferously in 1999 that if not for a group of technology stocks, U.S. equities were not overpriced. And the tech bulls even contended that technology stocks were valued fairly considering their incredible growth prospects. To most analysts and participants, stock prices did not look expensive in 1929. Whether it was the bulls from 1999 or 1929, what they didn’t see coming was the post-Bubble collapse in earnings.
U.S. stocks are obviously back in a Bubble. For starters, one only has to monitor trading in tech, biotech or “short” stocks. Or one could look to the parabolic nature of moves throughout the small and mid-cap stock universe. And, from my vantage point, the nature of stock trading provides confirmation of the Bubble thesis now on an almost daily basis. Stocks are clearly in speculative melt-up mode, feeding off short squeezes, derivatives and performance-chasing flows. Moreover, I would add that as the global speculator community has grown to gigantic proportions, market speculation has become a highly sophisticated game.
Succumbing once again to the “lunatic fringe,” I’ve found recent attention paid to market charts comparing current stock price trends to 1929 interesting. It’s related to my long-standing fascination with the final “Roaring Twenties” Bubble speculative melt-up - commencing in 1927 (“coup de whiskey”) and culminating in the spectacular 1929 “blow off” top. For a while, it paid handsomely to ignore the deteriorating fundamental backdrop. Indeed, complacency had become deeply embedded in the marketplace, fomenting a problematic divergence between bullish perceptions and bearish underlying fundamentals.
In the face of mounting negative fundamental developments, stocks these days just march higher and higher. Not a worry in the world. Friday, with an alarming litany of troubling developments – certainly including Russian troops moving into Crimea – U.S. stocks posted another record high as the VIX volatility index end the week at 14 – not far off seven-year lows.
Comments from Otmar Issing, former Bundesbank and ECB Chief Economist and current president of the Center for Financial Studies, at the Bundesbank Symposium of Financial Stability, February 27, 2014.
“The Great Depression had a global, deep and lasting impact not only on policy concepts but also on economic theory. Suffice it to mention the rise of Keynesianism. So for me a big question is will the Great Recession also have comparable effects on economic theory – how will it react to that. To some extent, this has happened always in our science. New approaches are also taking up past ideas. So it’s not surprising that (Friedrich) Hayek and (Joseph) Schumpeter and how they judged the development in the Twenties of last century have kind of come back – at least for some economists. …The panel was asked: “Do we need a new paradigm for monetary policy?” I think we are now – all of us would agree –that financial imbalances can also develop in a context of price stability. And price stability might even foster the sense of certainty and initiate too high risk-taking, etc.
I’m reminded of a conference organized by the BIS – I think it was 2001/2002 – one of the questions was: is there a tradeoff between price stability and financial stability? I would not, of course, go so far. But price stability is not enough. And I think this has dramatic consequences for the conduct of monetary policy. For me, the implication is very clear: policy which relies on a forecast (model) based on a real economy only without a financial sector – without taking into account money and Credit in a sensible way - is not anymore state of the art. If you have just such a narrow aspect - in contrast to our experience, again, that price stability is not enough – it’s not enough. So, monetary policy has to take into account the development of money and Credit – by that I mean a very broad approach considering all aspects of financial stability.
What follows also for me is that monetary policy should have a proactive view on financial stability issues – “leaning against the wind” or whatever you would call it. And in this context I think a very important, interesting aspect comes into the picture which is this approach must be symmetric – must be symmetric. What we have seen in the past – I don’t know how many asymmetric cycles. And I wonder if we have a continuation of one asymmetric policy cycle after the other – where will we end finally? We are already in the midst of such a situation. And the asymmetric approach - the famous “Greenspan put” - was creating moral hazard. If you can rely that once asset prices collapse central banks come in to rescue the system, at least, this creates moral hazard in a very broad sense. This approach was for some time – I think it has more or less disappeared from theory and research – it was based on the “risk management approach.” The “risk management approach” was based on the idea that there might be events with low probability but with high impact. And I’m reminded in this moment of a remark from Greenspan – I think it was in Jackson Hole – when he said “of course we have to react asymmetrically, because the buildup of Bubbles” – and I learn that we’re allowed to talk of Bubbles now, which was out of the question for a long time in research – “the buildup of Bubbles goes very slowly – softly - but the collapse goes very fast. So it’s obvious that that the [central] bank should react in a decisive way one prices collapse.”
But I think there is no defense for the concept of asymmetrical policy once a Bubble – or whatever you will call it – is building up. One argument was that monetary policy is too blunt a tool. I think this argument has lost its credibility. We know from many studies that even small early increases in interest rates would have an impact on interest rate structure, risk-taking, etc. In the context of an asymmetric approach and “risk management,” I am reminded writing these few pages, I’m reminded of many, many meetings here or especially in the U.S. with my friends from the Fed. Their reaction was absolutely clear: when I referred to a potential Bubble in real estate, what I heard always was “never in the last 50 years have real estate prices fallen on a nationwide aspect. For me, this was not a comfort. Because in economics – and this was before the ‘black swan’ became popular – and once this happens their reaction to my critique or argument was very relaxed: “In the meantime, we have had much higher GDP, higher employment , more houses, etc. So compared to the cost of raising interest rates would be much too high – much too high.” I have never seen so far the comparison of the high cost of the mess we are in if we take this “risk management” approach.
Of course, this does not mean that monetary policy could do all the work. We need a combination of macro-prudential tools and this raises the question: ‘Who should have the responsibility – the competence for that?’ From an efficiency point of view, it seems clear that one institution should be responsible for macro prudential and monetary policy. And monetary policy should remain with central banks, central banks should also be responsible for macro-prudential policies. And this fits into the context of central banks having got so much power – partly on their own initiative and partly they were pushed into that position. I’m very afraid of that because the application of macro-prudential tools will have dramatic… distributional effects. And for such distributional effects, I think you need democratic legitimization. I’m very afraid that central banks entering in this field of politics will undermine their independence and this may not be positive for the welfare of society because in the end it will also undermine the efficiency of maintaining price stability.
Let me conclude by a remark: I made the note, Michael (inaudible) said ‘regulation should punish the bad guys and reward, so to say, the cautious ones.’ This is kind of a reformulation of the (inaudible) principle. What we’re seeing now is the opposite effect. Because in an environment of extremely low interest rates and low quality for collateral everywhere, this is just the opposite – it’s keeping so many banks alive and we know some of the banks will keep so many companies alive and then finally the economy might be trapped in a situation in which even the continuation of zero interest rate policy will not have very positive effects. So what I’m missing is, I think in most countries policies are still in the mode of crisis management. I think this time has passed. And crisis management must be linked to, a few at least, a structure of what sustainable policy in the future should be… If crisis management is just continued, and this is left out of sight, and I don’t see in many cases how crisis management finally will emerge into a sustainable situation of the financial system. If this continues I think we are in an extremely dangerous situation.”
For the Week:
The S&P500 gained 1.3% to a new record high (up 0.6% y-t-d), and the Dow rose 1.4% (down 1.5%). The broader market traded to all-time highs. The S&P 400 Midcaps rose 1.4% (up 2.4%), and the small cap Russell 2000 jumped 1.6% (up 1.7%). The Utilities slipped 0.9% (up 5.6%). The Banks jumped 1.7% (down 0.4%), and the Broker/Dealers advanced 0.9% (down 0.5%). The Morgan Stanley Cyclicals gained 1.7% (up 0.5%), and the Transports increased 0.5% (down 0.7%). The Nasdaq100 gained 0.9% (up 2.9%), and the Morgan Stanley High Tech index rose 1.1% (up 3.4%). The Semiconductors added 0.5% (up 5.4%). The Biotechs jumped another 2.0% (up 20.8%). Although bullion added $2, the HUI gold index gave back 3.2% (up 20.3%).
One-month Treasury bill rates ended the week at 4 bps and three-month bills closed at 5 bps. Two-year government yields were little changed at 0.32% (down 6bps y-t-d). Five-year T-note yields declined 3 bps to 1.50% (down 3bps). Ten-year yields fell 8 bps to 2.65% (down 38bps). Long bond yields sank 11 bps to 3.58% (down 39bps). Benchmark Fannie MBS yields were down 8 bps to 3.35% (down 26bps). The spread between benchmark MBS and 10-year Treasury yields was little changed at 70 bps. The implied yield on December 2014 eurodollar futures was unchanged at 0.315%. The two-year dollar swap spread was little changed at 13 bps, while the 10-year swap spread increased one to 11 bps. Corporate bond spreads narrowed. An index of investment grade bond risk declined 2 to 63 bps. An index of junk bond risk fell 11 bps to 312 bps. An index of emerging market (EM) debt risk dropped 13 bps to 320 bps.
US corporate debt issuance surged. Investment-grade issuers included Cisco Systems $8.0bn, Goldman Sach $3.3bn, Pepsico $2.0bn, Caterpillar $1.6bn, Williams Partners LP $1.5bn, John Deere $1.45bn, Nissan Motor Acceptance $1.0bn, Magellan Midstream Partners $550 million, Colgate-Palmolive $500 million, GATX $850 million, Branch Banking & Trust $1.3bn, Delphi $700 million, CMS Energy $550 million, CNA Financial $550 million, Fifth Third Bank $500 million, Huntington National $500 million, Piedmont Operating Partners $400 million, Juniper Networks $350 million and PG&E $350 million.
Junk bond funds saw inflows of $559 million (from Lipper). Junk issuers included Regal Entertainment $775 million, Lennar $500 million, Treehouse Foods $400 million, Greektown Holdings $425 million, Taylor Morrison Communities $350 million,Cloud Peak Energy $200 million and Principal Life $100 million.
Convertible debt issuer included Tesla Motors $1.6bn and Pernix Therapeutics $65 million.
International dollar debt issuers included European Investment Bank $5.0bn, Trans-Canada Pipelines $1.25bn, Japan Financial Organization for Municipalities $1.0bn, LYB International Finance $1.0bn, BNZ International $750 million, Kinross Gold $500 million, ING Bank $400 million, and Kizuna RE $200 million.
Ten-year Portuguese yields fell 8 bps to 4.85% (down 128bps y-t-d). Italian 10-yr yields sank 12 bps to 3.48% (down 65bps). Spain's 10-year yields declined 4 bps to 3.51% (down 64bps). German bund yields fell 4 bps to 1.62% (down 31bps). French yields dropped 6 bps to 2.20% (down 36bps). The French to German 10-year bond spread narrowed 2 bps to 58 bps. Greek 10-year note yields collapsed another 67 bps to (an amazing) 6.96% (down 146bps). U.K. 10-year gilt yields declined 6 bps to 2.72% (down 30bps).
Japan's Nikkei equities index slipped 0.2% (down 8.9% y-t-d). Japanese 10-year "JGB" yields declined 2 bps to 0.59% (down 16bps). The German DAX equities index gained 0.4% (up 1.5% y-t-d). Spain's IBEX 35 equities index added 0.4% (up 2.0%). Italy's FTSE MIB index increased 0.3% (up 7.8%). Emerging equities markets were mostly lower. Brazil's Bovespa index declined 0.6% (down 8.6%), and Mexico's Bolsa sank 2.4% (down 9.2%). South Korea's Kospi index was up 1.1% (down 1.6%). India’s Sensex equities index rallied 2.0% (down 0.2%). China’s Shanghai Exchange ended the week down 2.7% (down 2.8%). Turkey's Borsa Istanbul National 100 index fell 2.1% (down 7.7%)
Freddie Mac 30-year fixed mortgage rates increased 4 bps to 4.37% (up 77bps y-o-y). Fifteen-year fixed rates were up 4 bps to 3.39% (up 58bps). One-year ARM rates fell 5 bps to 2.52% (down 8bps). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 7 bps to 4.28% (up 22bps).
Federal Reserve Credit expanded $8.4bn last week to a record $4.117 TN. During the past year, Fed Credit expanded $1.040 TN, or 33.8%. Fed Credit inflated $1.306 TN, or 46%, over the past 69 weeks.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $715bn y-o-y, or 6.5%, to $11.702 TN. Over two years, reserves were $1.463 TN higher for 14% growth.
M2 (narrow) "money" supply jumped $35.9bn to a record $11.135 TN. "Narrow money" expanded $711bn, or 6.8%, over the past year. For the week, Currency increased $5.3bn. Total Checkable Deposits fell $23.8bn, while Savings Deposits jumped $54.5bn. Small Time Deposits declined $2.6bn. Retail Money Funds rose $2.9bn.
Money market fund assets rose $20.0bn to $2.684 TN. Money Fund assets were up $21bn, or 0.8%, from a year ago.
Total Commercial Paper contracted $16bn to $1.012 TN. CP was down $33.6bn year-to-date and declined $49bn over the past year, or 4.6%.
Currency Watch:
The U.S. dollar index declined 0.7% to 79.691 (down 0.4% y-t-d). For the week on the upside, the Swedish krona increased 1.9%, the South African rand 1.6%, the New Zealand dollar 1.3%, the Norwegian krone 1.2%, the Swiss franc 0.8%, the British pound 0.8%, the Japanese yen 0.7%, the Danish krone 0.4%, the South Korean won 0.4%, the euro 0.4%, the Canadian dollar 0.4%, the Mexican peso 0.1%, the Taiwanese dollar 0.1% and the Brazilian real 0.1%. For the week on the downside, the Australian dollar declined 0.6%.
Commodities Watch:
The CRB index increased 0.3% this week (up 7.9% y-t-d). The Goldman Sachs Commodities Index slipped 0.2% (up 2.7%). Spot Gold added 0.2% to $1,326 (up 10%). March Silver fell 2.6% to $21.24 (up 9.7%). April Crude increased 39 cents to $102.59 (up 4%). April Gasoline declined 0.9% (up 7%), and April Natural Gas dropped 8.0% (up 9%). May Copper was down 2.2% (down 6%). March Wheat declined 1.8% (down 1%). March Corn gained 1.0% (up 8%).
U.S. Fixed Income Bubble Watch:
February 26 – Bloomberg (Jody Shenn): “JPMorgan Chase & Co. and Wells Fargo & Co. are leading a shift in how banks account for their bond investments after a $44 billion plunge in value exposed a potential drain on capital under new rules. The largest U.S. lenders are moving assets into the ‘held- to-maturity’ column of their books instead of designating them as ‘available for sale,’ an accounting method that under post-crisis banking regulations allows paper losses to erode measures of their health. The change pushed the share of securities that the five biggest banks keep in the held-to-maturity category to 8.4%, the highest in almost two decades, according to Credit Suisse Group AG analysts.”
Federal Reserve Watch:
February 27 – Bloomberg (Aki Ito): “Federal Reserve Bank of Dallas President Richard Fisher says ‘prolonged accommodative monetary policy has the risk of creating risks’ such as encouraging ‘substantial financial speculation.’ ‘We have to be mindful of that, and this is something I worry about significantly.’ He mentioned the U.S. stock market’s ‘enormous rally,’ narrowing spreads on junk bonds and the use of margin debt. Fed’s mortgage bond purchases serve to ‘benefit a specific industry,’ ‘I firmly believe that’s not the role of a central bank,’ and ‘we’re still interfering in that marketplace.’”
February 25 – Bloomberg (Craig Torres and Lorraine Woellert): “Federal Reserve Governor Daniel Tarullo said central bankers must preserve the option of using interest rates to lean against dangerous financial bubbles even as they strengthen supervisory tools to curtail systemic risk. ‘Monetary policy action cannot be taken off the table as a response to the build-up of broad and sustained systemic risk,’ Tarullo said… An array of other tools, such as rules that would force banks to raise capital in times of overheating markets, could ‘reduce the number of occasions on which a difficult trade-off between financial stability considerations and near-term growth or price stability aims will need to be made,’ he said.”
U.S. Bubble Watch:
February 26 – Bloomberg (Alan Ohnsman): “Elon Musk added $1.1 billion to his fortune yesterday as electric-car maker Tesla Motors Inc. and solar power company SolarCity Corp. closed at records on investor optimism over his plans to build one of the biggest battery factories on Earth. Musk, who leads Tesla and is both its and SolarCity’s biggest shareholder, has a net worth of $11.7 billion, according to the Bloomberg Billionaires Index…”
February 24 – Bloomberg (Devin Banerjee): “KKR & Co.’s billionaire co-founders Henry Kravis and George Roberts received more than $161 million each last year, an increase of more than 17% from 2012, as the firm took advantage of rising equity markets to sell shares in companies.”
China Bubble Watch:
February 26 – Bloomberg (Kyoungwha Kim): “China’s credit-market gauges are triggering alarm bells, as banks grow cautious in lending to each other while investors prefer the safest government bonds. The spread between the two-year sovereign yield and the similar-maturity interest-rate swap, a gauge of financial stress, reached 121 bps on Feb. 19, the widest in Bloomberg data going back to 2007. Two days later, the cost to lock in the three-month Shanghai interbank offered rate for one year reached an eight-month high of 94 bps over similar contracts based on repurchase agreements, which are considered safer because they involve government securities as collateral… ‘What I do see are increasing parallels between China and the U.S. in the run-up to the global financial crisis,’ said Patrick Perret-Green, a London-based strategist at Australia & Banking Group Ltd. ‘Shibor-repo is similar to Libor-OIS. Shadow banking is subprime. Credit spreads are widening as they did in 2007. Money growth is softening as tightening bites.’”
February 24 – MarketNews International: “One of China’s biggest commercial banks has tightened lending to the real estate sector and related industries via the country’s freewheeling shadow banking system amid growing concerns about financial risks and asset bubbles, banking sources said. The Industrial Bank decision to curb lending to property developers highlights growing unease about the dislocations in the Chinese economy as growth slows but credit activity surges. The decision was taken by the country's ninth biggest bank by assets at a meeting held two weeks before the Chinese New Year holiday… According to a meeting document seen by MNI, the Industrial Bank warned risks are rising quickly as economic growth slows and asset bubbles have been allowed to inflate. It will be ‘very difficult to handle if risks are exposed...the whole bank must reach consensus and attach great importance to property sector risks and work together to step up risk controls for property-related businesses.’ The bank said it will completely stop lending to property developers via a shadow banking facility involving the bank buying a stake in a property company and selling that stake back at a later date to make the loan look like an equity investment. The bank also ordered a complete suspension of loans to upstream industries including steel and cement while it reviews lending policies. Chinese media reports said Monday that other major Chinese lenders… may follow suit, though that has been denied by banks.”
February 28 – Bloomberg: “China issued a new rule to hold trust company executives responsible for defaults even if the products go bust after they’ve left their jobs, two people with knowledge of the matter said. The China Banking Regulatory Commission recently issued a notice on the new rule, which is a response to a near-default by China Credit Trust Co. last month, the two people said, asking not to be named because the order hasn’t been made public. Companies with ownership stakes in the trust issuers would also be held liable, the people said.”
February 24 – MarketNews International: “Chinese Finance Minister Lou Jiwei has admitted that his country's monetary policy faces a dilemma of needing to respond to slowing growth but being prevented from doing so because of high debt levels. ‘For us, policy is in a dilemma... the current growth momentum doesn't seem very strong and monetary policy should be eased slightly but our M2 is already very high, corporate leverage ratios are too high and local government debt problems are pushing them to add more leverage so we can't ease policy further and have to remain prudent,’ Lou told Chinese media…”
February 26 – Bloomberg (Ye Xie): “Efforts by China to damp speculation in the yuan risks driving away investors just as the nation attempts to open up its capital markets in a once-in-a- generation economic overhaul. After allowing the currency to steadily rise in each of the past four years, China’s central bank let it tumble about 1% over the past week, the most since at least 2007. Volatility in the yuan has jumped the most this month among 31 major currencies tracked by Bloomberg… Further price swings may squeeze bullish yuan bets that Deutsche Bank AG estimates at $500 billion. ‘We are not used to volatility in the Chinese currency,’ Jens Nordvig, the New York-based managing director of currency research at Nomura Holdings Inc., said… ‘It’s very painful for market participants because, in a low-volatility environment, it’s possible to carry large positions.’”
February 27 - Financial Times (Paul J Davies and Josh Noble): “Chinese companies will face billions of dollars in losses from complex hedging products if the renminbi continues to weaken, analysts and investors have warned. Mainland companies and global investors have bought hundreds of billions of dollars worth of structured products that benefit from renminbi appreciation over the past year, and now face growing pressure after the Chinese currency fell to its lowest level since July. The way banks hedge these products could also provoke an even sharper decline in the value of the renminbi if a certain level is breached, according to analysts at Morgan Stanley… The renminbi has weakened sharply in both onshore and offshore markets in the past week, prompting concerns about the exposure of investors through structured products and carry trades. The currency has seen its steepest weekly fall against the US dollar since 2005…”
February 24 – Bloomberg: “New home price growth in China’s first-tier cities slowed in January after local governments implemented property measures to rein in escalating values and banks tightened lending. Home prices in the capital city of Beijing and the southern business hub of Shenzhen both rose 0.4% from a month earlier… Prices in Shanghai added 0.5%, the smallest increase since November 2012, and those in Guangzhou gained 0.7%.”
February 27 - Financial Times (Paul J Davies and Josh Noble): “Chinese companies will face billions of dollars in losses from complex hedging products if the renminbi continues to weaken, analysts and investors have warned. Mainland companies and global investors have bought hundreds of billions of dollars worth of structured products that benefit from renminbi appreciation over the past year, and now face growing pressure after the Chinese currency fell to its lowest level since July. The way banks hedge these products could also provoke an even sharper decline in the value of the renminbi if a certain level is breached, according to analysts at Morgan Stanley… The renminbi has weakened sharply in both onshore and offshore markets in the past week, prompting concerns about the exposure of investors through structured products and carry trades. The currency has seen its steepest weekly fall against the US dollar since 2005…”
February 24 – Reuters (Matthew Miller and Umesh Desai ): “China's corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise. Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year - equal to over 120% of GDP - according to Standard & Poor's estimates. Growth in Chinese company debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260%, from 1.82 trillion yuan ($298.4bn) to 4.74 trillion yuan ($777.3bn), between December 2008 and September 2013.”
February 24 – Dow Jones: “Chinese banks are trying to take on innovative tech companies that have set up successful investment funds in a contest that is reshaping China's banking industry. A number of banks, including big state-owned lenders…, have launched a flurry of investment products to compete with the money-market funds introduced by their tech-sector rivals. In June, China's e-commerce giant Alibaba Group Holding Ltd. launched a money-market-like fund called Yu'e Bao or ‘leftover treasure.’ It had scooped up 400 billion yuan ($66bn) in assets by mid-February. The success has prompted other tech firms, including Tencent Holdings Ltd. and Baidu Inc. to follow suit in recent months. Now traditional banks are jumping into the fray. Industrial & Commercial Bank of China Ltd., Bank of Communications Co., Ping An Bank Co. and China Guangfa Bank all have launched similar money-market funds that promise about 6% returns…”
February 26 - UK Guardian (Jonathan Kaiman): “Chinese scientists have warned that the country's toxic air pollution is now so bad that it resembles a nuclear winter, slowing photosynthesis in plants – and potentially wreaking havoc on the country's food supply. Beijing and broad swaths of six northern provinces have spent the past week blanketed in a dense pea-soup smog that is not expected to abate until Thursday. Beijing's concentration of PM 2.5 particles – those small enough to penetrate deep into the lungs and enter the bloodstream – hit 505 micrograms per cubic meter on Tuesday night. The World Health Organisation recommends a safe level of 25… He Dongxian, an associate professor at China Agricultural University's College of Water Resources and Civil Engineering, said new research suggested that if the smog persists, Chinese agriculture will suffer conditions ‘somewhat similar to a nuclear winter’. She has demonstrated that air pollutants adhere to greenhouse surfaces, cutting the amount of light inside by about 50% and severely impeding photosynthesis, the process by which plants convert light into life-sustaining chemical energy… She warned that if smoggy conditions persist, the country's agricultural production could be seriously affected. ‘Now almost every farm is caught in a smog panic,’ she said.”
February 25 – Associated Press: “China… labeled Japan a ‘trouble maker’ that is damaging regional peace and stability, firing back at earlier criticism from Tokyo over a spike in tensions in northeast Asia. Foreign Ministry spokeswoman Hua Chunying was responding to comments by Foreign Minister Fumio Kishida that China's military expansion in the region is a concern, although Kishida stopped short of calling China a threat. Hua told a regularly scheduled news conference that China's military posture is purely defensive and Japan is stirring up trouble with its own moves to expand its armed forces and alter its pacifist constitution… ‘I think everybody will agree with me that Japan has already become a de facto trouble-maker harming regional peace and stability,’ Hua said.”
Feb 25 – People’s Daily: “China's top legislature is considering designating two new national days, one to mark victory in the anti-Japanese war and the other to commemorate victims in the Nanjing Massacre, it announced on Tuesday. September 3 is expected to be the victory day and December 13 the national memorial day for massacre victims, according to two draft decisions submitted for review at the bi-monthly session of the Standing Committee of the National People's Congress… It is extremely necessary to set the days through legislative procedures to reflect the will of the Chinese people, said Li Shishi, director of the Legislative Affairs Commission of the NPC Standing Committee…”
February 26 – Bloomberg (Jody Shenn): “A court in Beijing for the first time accepted a lawsuit filed by a group of Chinese citizens against Japanese firms seeking compensation for forced labor during wartime, China Radio International reported… Beijing No. 1 Intermediate People’s Court accepted a lawsuit filed by a group of 37 people seeking compensation of about 1 million yuan ($163,327) each, as well as apologies from Mitsubishi Materials Corp., and Nippon Coke & Engineering Co., formerly known as Mitsui Mining Co., the report said…”
February 26 – Bloomberg (Kyoungwha Kim): “China’s credit-market gauges are triggering alarm bells, as banks grow cautious in lending to each other while investors prefer the safest government bonds. The spread between the two-year sovereign yield and the similar-maturity interest-rate swap, a gauge of financial stress, reached 121 bps on Feb. 19, the widest in Bloomberg data going back to 2007. Two days later, the cost to lock in the three-month Shanghai interbank offered rate for one year reached an eight-month high of 94 bps over similar contracts based on repurchase agreements, which are considered safer because they involve government securities as collateral… ‘What I do see are increasing parallels between China and the U.S. in the run-up to the global financial crisis,’ said Patrick Perret-Green, a London-based strategist at Australia & Banking Group Ltd. ‘Shibor-repo is similar to Libor-OIS. Shadow banking is subprime. Credit spreads are widening as they did in 2007. Money growth is softening as tightening bites.’”
February 24 – MarketNews International: “One of China’s biggest commercial banks has tightened lending to the real estate sector and related industries via the country’s freewheeling shadow banking system amid growing concerns about financial risks and asset bubbles, banking sources said. The Industrial Bank decision to curb lending to property developers highlights growing unease about the dislocations in the Chinese economy as growth slows but credit activity surges. The decision was taken by the country's ninth biggest bank by assets at a meeting held two weeks before the Chinese New Year holiday… According to a meeting document seen by MNI, the Industrial Bank warned risks are rising quickly as economic growth slows and asset bubbles have been allowed to inflate. It will be ‘very difficult to handle if risks are exposed...the whole bank must reach consensus and attach great importance to property sector risks and work together to step up risk controls for property-related businesses.’ The bank said it will completely stop lending to property developers via a shadow banking facility involving the bank buying a stake in a property company and selling that stake back at a later date to make the loan look like an equity investment. The bank also ordered a complete suspension of loans to upstream industries including steel and cement while it reviews lending policies. Chinese media reports said Monday that other major Chinese lenders… may follow suit, though that has been denied by banks.”
February 28 – Bloomberg: “China issued a new rule to hold trust company executives responsible for defaults even if the products go bust after they’ve left their jobs, two people with knowledge of the matter said. The China Banking Regulatory Commission recently issued a notice on the new rule, which is a response to a near-default by China Credit Trust Co. last month, the two people said, asking not to be named because the order hasn’t been made public. Companies with ownership stakes in the trust issuers would also be held liable, the people said.”
February 24 – MarketNews International: “Chinese Finance Minister Lou Jiwei has admitted that his country's monetary policy faces a dilemma of needing to respond to slowing growth but being prevented from doing so because of high debt levels. ‘For us, policy is in a dilemma... the current growth momentum doesn't seem very strong and monetary policy should be eased slightly but our M2 is already very high, corporate leverage ratios are too high and local government debt problems are pushing them to add more leverage so we can't ease policy further and have to remain prudent,’ Lou told Chinese media…”
February 26 – Bloomberg (Ye Xie): “Efforts by China to damp speculation in the yuan risks driving away investors just as the nation attempts to open up its capital markets in a once-in-a- generation economic overhaul. After allowing the currency to steadily rise in each of the past four years, China’s central bank let it tumble about 1% over the past week, the most since at least 2007. Volatility in the yuan has jumped the most this month among 31 major currencies tracked by Bloomberg… Further price swings may squeeze bullish yuan bets that Deutsche Bank AG estimates at $500 billion. ‘We are not used to volatility in the Chinese currency,’ Jens Nordvig, the New York-based managing director of currency research at Nomura Holdings Inc., said… ‘It’s very painful for market participants because, in a low-volatility environment, it’s possible to carry large positions.’”
February 27 - Financial Times (Paul J Davies and Josh Noble): “Chinese companies will face billions of dollars in losses from complex hedging products if the renminbi continues to weaken, analysts and investors have warned. Mainland companies and global investors have bought hundreds of billions of dollars worth of structured products that benefit from renminbi appreciation over the past year, and now face growing pressure after the Chinese currency fell to its lowest level since July. The way banks hedge these products could also provoke an even sharper decline in the value of the renminbi if a certain level is breached, according to analysts at Morgan Stanley… The renminbi has weakened sharply in both onshore and offshore markets in the past week, prompting concerns about the exposure of investors through structured products and carry trades. The currency has seen its steepest weekly fall against the US dollar since 2005…”
February 24 – Bloomberg: “New home price growth in China’s first-tier cities slowed in January after local governments implemented property measures to rein in escalating values and banks tightened lending. Home prices in the capital city of Beijing and the southern business hub of Shenzhen both rose 0.4% from a month earlier… Prices in Shanghai added 0.5%, the smallest increase since November 2012, and those in Guangzhou gained 0.7%.”
February 27 - Financial Times (Paul J Davies and Josh Noble): “Chinese companies will face billions of dollars in losses from complex hedging products if the renminbi continues to weaken, analysts and investors have warned. Mainland companies and global investors have bought hundreds of billions of dollars worth of structured products that benefit from renminbi appreciation over the past year, and now face growing pressure after the Chinese currency fell to its lowest level since July. The way banks hedge these products could also provoke an even sharper decline in the value of the renminbi if a certain level is breached, according to analysts at Morgan Stanley… The renminbi has weakened sharply in both onshore and offshore markets in the past week, prompting concerns about the exposure of investors through structured products and carry trades. The currency has seen its steepest weekly fall against the US dollar since 2005…”
February 24 – Reuters (Matthew Miller and Umesh Desai ): “China's corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise. Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year - equal to over 120% of GDP - according to Standard & Poor's estimates. Growth in Chinese company debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260%, from 1.82 trillion yuan ($298.4bn) to 4.74 trillion yuan ($777.3bn), between December 2008 and September 2013.”
February 24 – Dow Jones: “Chinese banks are trying to take on innovative tech companies that have set up successful investment funds in a contest that is reshaping China's banking industry. A number of banks, including big state-owned lenders…, have launched a flurry of investment products to compete with the money-market funds introduced by their tech-sector rivals. In June, China's e-commerce giant Alibaba Group Holding Ltd. launched a money-market-like fund called Yu'e Bao or ‘leftover treasure.’ It had scooped up 400 billion yuan ($66bn) in assets by mid-February. The success has prompted other tech firms, including Tencent Holdings Ltd. and Baidu Inc. to follow suit in recent months. Now traditional banks are jumping into the fray. Industrial & Commercial Bank of China Ltd., Bank of Communications Co., Ping An Bank Co. and China Guangfa Bank all have launched similar money-market funds that promise about 6% returns…”
February 26 - UK Guardian (Jonathan Kaiman): “Chinese scientists have warned that the country's toxic air pollution is now so bad that it resembles a nuclear winter, slowing photosynthesis in plants – and potentially wreaking havoc on the country's food supply. Beijing and broad swaths of six northern provinces have spent the past week blanketed in a dense pea-soup smog that is not expected to abate until Thursday. Beijing's concentration of PM 2.5 particles – those small enough to penetrate deep into the lungs and enter the bloodstream – hit 505 micrograms per cubic meter on Tuesday night. The World Health Organisation recommends a safe level of 25… He Dongxian, an associate professor at China Agricultural University's College of Water Resources and Civil Engineering, said new research suggested that if the smog persists, Chinese agriculture will suffer conditions ‘somewhat similar to a nuclear winter’. She has demonstrated that air pollutants adhere to greenhouse surfaces, cutting the amount of light inside by about 50% and severely impeding photosynthesis, the process by which plants convert light into life-sustaining chemical energy… She warned that if smoggy conditions persist, the country's agricultural production could be seriously affected. ‘Now almost every farm is caught in a smog panic,’ she said.”
February 25 – Associated Press: “China… labeled Japan a ‘trouble maker’ that is damaging regional peace and stability, firing back at earlier criticism from Tokyo over a spike in tensions in northeast Asia. Foreign Ministry spokeswoman Hua Chunying was responding to comments by Foreign Minister Fumio Kishida that China's military expansion in the region is a concern, although Kishida stopped short of calling China a threat. Hua told a regularly scheduled news conference that China's military posture is purely defensive and Japan is stirring up trouble with its own moves to expand its armed forces and alter its pacifist constitution… ‘I think everybody will agree with me that Japan has already become a de facto trouble-maker harming regional peace and stability,’ Hua said.”
Feb 25 – People’s Daily: “China's top legislature is considering designating two new national days, one to mark victory in the anti-Japanese war and the other to commemorate victims in the Nanjing Massacre, it announced on Tuesday. September 3 is expected to be the victory day and December 13 the national memorial day for massacre victims, according to two draft decisions submitted for review at the bi-monthly session of the Standing Committee of the National People's Congress… It is extremely necessary to set the days through legislative procedures to reflect the will of the Chinese people, said Li Shishi, director of the Legislative Affairs Commission of the NPC Standing Committee…”
February 26 – Bloomberg (Jody Shenn): “A court in Beijing for the first time accepted a lawsuit filed by a group of Chinese citizens against Japanese firms seeking compensation for forced labor during wartime, China Radio International reported… Beijing No. 1 Intermediate People’s Court accepted a lawsuit filed by a group of 37 people seeking compensation of about 1 million yuan ($163,327) each, as well as apologies from Mitsubishi Materials Corp., and Nippon Coke & Engineering Co., formerly known as Mitsui Mining Co., the report said…”
India Watch:
February 28 – Bloomberg (Kartik Goyal): “India’s economic growth slowed last quarter, holding below 5% and denting the Congress party’s chances of extending its decade-long rule in national elections due by May. Gross domestic product rose 4.7%... from a year earlier, compared with 4.8% the previous quarter…”
Europe Watch:
February 23 – Financial Times (Peter Spiegel and Kerin Hope ): “The Greek government and its bailout lenders are locked in a new stand-off over the health of Greece’s banking sector, with Athens contending its financial system requires less than €6bn of new capital, while international monitors insist it needs at least three times that amount. The €6bn estimate was calculated by the Greek central bank… and was provided to monitors from the so-called ‘troika’ of international lenders, ahead of their arrival in Athens on Monday to resume talks over their latest review of the bailout programme. The review, the most contentious in more than a year, was to be completed in September, but troika officials say less than half of the economic reform commitments made by the Greek government have been completed… The dispute over banks’ recapitalisation needs risks adding a new, potentially explosive point of contention between the two sides, as it will have a direct effect on whether Athens will require a third international bailout when the remaining €10.1bn in EU funding in the current €172bn rescue runs out later this year…”
February 26 – Financial Times (Adam Thomson): “French unemployment hit a new record high in January, adding to the woes of François Hollande, France’s Socialist president, in the run-up to municipal elections next month… The latest figure… brings the total number of unemployed to a record 3.32m – about 11% of the workforce. The total number of those seeking a full-time job… reached 4.92m.”
February 28 – Bloomberg (Kartik Goyal): “India’s economic growth slowed last quarter, holding below 5% and denting the Congress party’s chances of extending its decade-long rule in national elections due by May. Gross domestic product rose 4.7%... from a year earlier, compared with 4.8% the previous quarter…”
Europe Watch:
February 23 – Financial Times (Peter Spiegel and Kerin Hope ): “The Greek government and its bailout lenders are locked in a new stand-off over the health of Greece’s banking sector, with Athens contending its financial system requires less than €6bn of new capital, while international monitors insist it needs at least three times that amount. The €6bn estimate was calculated by the Greek central bank… and was provided to monitors from the so-called ‘troika’ of international lenders, ahead of their arrival in Athens on Monday to resume talks over their latest review of the bailout programme. The review, the most contentious in more than a year, was to be completed in September, but troika officials say less than half of the economic reform commitments made by the Greek government have been completed… The dispute over banks’ recapitalisation needs risks adding a new, potentially explosive point of contention between the two sides, as it will have a direct effect on whether Athens will require a third international bailout when the remaining €10.1bn in EU funding in the current €172bn rescue runs out later this year…”
February 26 – Financial Times (Adam Thomson): “French unemployment hit a new record high in January, adding to the woes of François Hollande, France’s Socialist president, in the run-up to municipal elections next month… The latest figure… brings the total number of unemployed to a record 3.32m – about 11% of the workforce. The total number of those seeking a full-time job… reached 4.92m.”