Anonymous Bond Auctions Arrive as Defaults Rise

China has released new rules for anonymous bond auctions of defaulted and high-risk debt. It's timely because institutions do not want to trade these bonds publicly:

In its view, current institutions are reluctant to trade risky bonds in the open market. First, they are unwilling to expose themselves; secondly, large institutions in particular have concerns: considering that the market will doubt whether there are any problems with the bonds they are selling. (Whether or not there actually is a problem), and the market speculates that large institutions know bad news ahead of time so selling leads to market panic.

Reuters: China plans to introduce anonymous bond auctions system: sources

China plans to introduce an anonymous bond auction system to support transactions of high-yield, low-liquidity bonds, two sources with knowledge of the matter said.

In a notice confirmed by the sources, the China Foreign Exchange Trade System (CFETS), also known as the National Interbank Funding Center, said that the anonymous bond auction system would apply to bonds with high-yield and low-liquidity characteristics.

The rules came out today.

Sina: 债券匿名拍卖业务细则出台 利于提升违约债券流动性

According to Circular 192, the bonds applicable to the anonymous auction business should meet relevant standards for circulation in the inter-bank bond market, including but not limited to default bonds, bonds affected by default, and low-liquidity bonds such as the sub-tranche of asset-backed securities.

　　The specific auction bonds are determined by the market dismantling center's intention to pool the market, and anonymous auctions are held from time to time. Participating agencies may submit their intention to anonymously borrow bonds to the interbank lending center through e-mail or telephone.

　　On the auction day, the anonymous auction of bonds is divided into two phases: two-way quotations and centralized bidding. The duration of each phase is based on the announcement of the interbank lending center.

　　In the two-way bidding stage, transactions cannot be matched. The participating institutions fully consider the factors affecting the pricing of the underlying bonds according to their own needs, and issue a two-way quotation within a range of pricing differences, and the system displays the quotation prices in real time.

　　After the two-way bidding period is over, the trading system determines the price range during the concentrated bidding period, and the price range is located between the better bid price and the better selling price.

　　In the phase of concentrated bidding, the participating institutions may quote in the price range determined in the two-way bidding stage. The trading system calculates the unified transaction price based on the principle of price priority and time first, and uses the principle of maximum matching, and determines the buying and selling of the counterparty after blacklist filtering.

　　In terms of risk control, Circular 192 stipulates that participating organizations that have entered into transactions through anonymous auction of bonds must not conduct reverse transactions with the same counterparty directly or indirectly on the same underlying bond within 5 working days. Between parties, for the same bond, one party buys first and then sells, and the other sells first and then buys. Except when reverse trading is achieved through anonymous auctions). If there is indeed a need, it is necessary to provide the necessary explanation of the official seal to the interbank lending center.

　　A state-owned big trader told a 21st Century Business Herald reporter that under the background of increasing defaults on bonds, the document was conducive to the trading of defaulted bonds and increased bond liquidity.

　　In its view, current institutions are reluctant to trade risky bonds in the open market. First, they are unwilling to expose themselves; secondly, large institutions in particular have concerns: considering that the market will doubt whether there are any problems with the bonds they are selling. (Whether or not there actually is a problem), and the market speculates that large institutions know bad news ahead of time so selling leads to market panic.

Beijing Banks Violated Regulations, ￥36 B in Consumer Loans Went Into Real Estate

Caijing: 9银行违规输血地产超360亿 未来若有违规或面临更严惩罚

Another confirmation of tightening property market regulation. On June 20, the "Report of the State Council on Auditing Work of the Implementation of the Central Budget and Other Fiscal Revenues in 2017" (hereinafter referred to as the "Report") issued by the National Audit Office showed that the audit found that nine large state-owned banks illegally provided financing to the real estate industry. In addition, 36.87 billion yuan, part of the individual consumer loans that were spot checked, actually flowed into the property market. The industry believes that this audit is a big inspection of the current real estate deleveraging. If various types of funds violate the regulations in real estate in the future, it is expected that the bank's credit department may face severe punishment.

According to industry insiders, the Audit Office annually audits the more prominent problem areas in the current market. For the bank's illegal "blood" property market data was included in the "report", the Central Plains chief analyst Zhang Dawei said that the release of the data itself is the performance of the property market to strengthen control. Yan Yuejin, research director of the Think Tank Research Center at the Yiju Research Institute also believes that this is obviously a big inspection of the current real estate deleveraging, which is good for the industry.

...However, Zhang Dawei pointed out that the Bank’s unlawful provision of financing to the real estate industry with funds of RMB 36.287 billion may not be all, particularly since 2017, when consumer loans suddenly skyrocketed, there is suspicion of going to real estate. Now that financial regulation has led funds into entities, banks have often violated regulations, packaged funds, and raised costs to enter real estate, which has increased market risk, while the real economy has still not received funding.

This is not a small number even if only 36 billion. In 2017, individual mortgage lending in Beijing totaled 136.6 billion. That's an increase of 27 percent beyond what was reported. If the real total is higher, the drop off in lending reported at the end of 2017 greatly overstated the slowdown in real estate lending. this helps explain why real estate prices keep zooming ahead despite government regulations. The discovery signals the government has caught on to the diversion of credit into real estate. Now the question is will official mortgage lending increase as this credit moves into the proper channel or will housing activity and home prices begin declining as credit restrictions kick in?

Elsewhere, banks are tightening up where credit flows through credit and debit cards: 楼市调控持续 银行限制信用卡房地产类消费

An announcement by Ping An Bank indicated that when a credit card was traded by domestic real estate merchants, the monthly transaction limit for RMB was adjusted from RMB 30,000 to RMB 10,000, and the cumulative limit for RMB 100 million per year remained unchanged. It is worth noting that the limit of 30,000 yuan is a quota announcement issued by Ping An Bank on September 27 last year. This announcement also states that it is not possible to conduct real estate transactions overseas.

Ping An Bank is not the only bank that currently imposes restrictions on the purchase of credit cards. On August 16 last year, the Credit Card Center of the Agricultural Bank of China issued an announcement to limit the amount of credit card purchases. The accumulated daily transaction amount of credit cards for real estate merchants must not exceed 50,000 yuan, and the cumulative monthly transaction amount must not exceed 100,000 yuan. It must not exceed 100,000 yuan, and the accumulated annual transaction amount shall not exceed 200,000 yuan. The transactions of credit card merchants in the real estate category shall not be applied for instalments or bills in installments.

On the same day, the Agricultural Bank of China also issued an announcement indicating that cash advances through ABC, including cash withdrawals, cash transfers, cash staging, etc., can only be used in the consumer sector and not in non-consumer fields such as production, operations, and investment. Including home purchases.

The CCB credit card center also announced in July last year that funds obtained through CCB's cash advance can only be used in the consumer sector, and should not be used in non-consumer fields such as home purchases.

Why Did A-Shares Drop Again? Yuan Depreciation Fears, Trade War, Technicals

Everything is horrible again in China thanks to a modest drop in the A-share market.

iFeng: 谁是大盘杀跌的幕后黑手？三大利空突袭

Who is the black hand behind the curtain?

I. Risk of RMB devaluation approaching

On June 21, the onshore renminbi fell below the 6.50 integer mark against the US dollar for the first time since January ; offshore renminbi fell below the 6.51 yuan mark against the US dollar. As of the press release, onshore RMB against the US dollar reported 6.5035.

Deng Haiqing, chief global economist at Haiqing FICC Channel, believes that the devaluation of the RMB exchange rate is a high probability event. In the midst of the divergent economic trends in China and the United States, the differentiation of the US-China monetary policy, and the appreciation of the US dollar, the Chinese policy layer should never repeat the tragedy of “abandoning foreign reserve and security exchange rates” from 2014 to 2016. Instead, it should imitate Europe and Japan (2014- In 2015, the exchange rate of the Euro and Japanese yen depreciated by 20%, which in turn promoted the economies of Europe and Japan, avoided normalized intervention in the foreign exchange market, and allowed the RMB exchange rate to depreciate at a reasonable level. In the context of Trump's unbelief, the trade issues between China and the United States have intensified, completely changing the basis for the equilibrium exchange rate of the renminbi against the US dollar, and the United States has no reason to criticize the devaluation of China’s exchange rate if it has the wrong circumstances. Instead, the devaluation of the renminbi can greatly improve China's passive situation in the trade war and allow China to gain greater room for maneuver.

Second, the trade war dark clouds

In recent days, Sino-U.S. trade frictions have continued to hit favorable news, especially in the United States.

The Spokesman of the Ministry of Commerce announced at the press conference on the 21st that on the basis of the consensus reached in Washington on May 19th, the two sides conducted specific consultations on agriculture and energy in Beijing in early June and were widely welcomed by all parties. It has been agreed that the manufacturing and service industries will conduct specific consultations in the near future, and at the same time conduct specific consultations on the structural issues of bilateral concern.

The Chinese side believes that the previous consultations between the two parties are positive and constructive. They are in the interest of both peoples. They conform to the established rhythm of China’s reform and opening up and are in line with the principles of the WTO. However, it is deeply regrettable that the US is becoming more volatile and intensifying. To provoke a trade war, the Chinese side has to make a strong response.

Third, the market is still not completely out of the shadow of the crash

Analysts believe that after the release of pessimism and concentration of risks, the market will soon catch a breather, especially the "self-rescue behavior" began to stir, and the index has also rebounded after a sharp fall, but the market is still in the risk and emotional digestion , short-term Did not release the rebound signal, so there are still repeated here.

When will A shares bottoming be completed?

For the short-term market, Tianxin Investment stated that the current market confidence is still devastated by the trade war, and the long-term axis of the trade war is still continuing. The external market is subject to greater uncertainties, so the short-term market needs to be stimulated by external factors. It is the buffer of time that can better change the current trend. With the release of panic, the appearance of heavy yin is also accelerating the formation of the bottom state of the market. From a technical point of view, the stock index needs to pay attention to an integer mark of 2900 points, and the GEM index is still in an empty state. After the new low, the overall trend needs to be reconstructed.

Tianxin Investment indicated that the construction of the bottom of the market is not a one-off process. It can be effectively confirmed after repeated depreciation and recovery. At the same time, changes in the external environment will also have a significant impact on the current market conditions. Therefore, in the recent operations, the control is good. His own desires and position, waiting for the formation of the bottom , while seizing the opportunity to fall out, low position Jiancang blue chips with performance support and well-growing technology stocks.

Xiangcai Securities said that due to the plunge on the first day of the festival (19th), the market is currently in a more panic-stricken atmosphere . This atmosphere needs a certain period of time to repair, so the index room and intra-block return The repetition is also normal, but investors do not have to be too panicky, and the probability of a lower limit of 1,000 shares will be greatly reduced. Although the disk continues to adjust today, the stocks of the two cities fell to a total of about 90 stocks.

Xiangcai Securities believes that since the bull market peaked in June 2015, there have been several consecutive major falls in the market in the past three years. The reasons for each major fall are different, but there is a commonality: the market after each major crash There has been a relatively obvious band rally market , and in most of the band's rally market, no matter how subject stocks are replaced, the new shares have never been absent. In other words, the probability that the new stocks will become the main force for the future rally is very high, but only among them. The opportunities for the near-end, high-quality, and underestimated new shares are relatively large.

In view of the current market recovery after the sudden fall of popularity takes time, repeated will still exist, but this does not affect the perspective of investors to upgrade the strategy, Xiangcai Securities proposed to do a good job in advance of high-quality varieties of strategic attention and tracking to prevent the broader market suddenly caught the bottom after hitting the bottom . Due to the fact that market funds are still lacking, we are still pinning our perspective on small-cap stocks , especially those with excellent quality, low valuation, and high growth , for possible band opportunities that may occur after a continuous plunge .

Yuan Depreciation Expectations Return

The yuan has completed a short-term topping pattern. It broken the uptrend support in place since the late 2016/early 2017 bottom. The next area of support/resistance is in the mid 6.60s. If the yuan closes its performance gap with the euro this year, USDCNY would trade in the mid-6.60s.

A top headline in China today asks, what's the fallout from yuan depreciation? This article isn't great in its analysis, but it is great in that it tells us what's on the minds of Chinese investors. Depreciation expectations are waking up from their slumber.

iFeng: 人民币贬值究竟意味着什么？

Why is the U.S. dollar "more valuable"

The current 100 US dollars can be exchanged to 645 yuan, indicating that the exchange rate of the US dollar against the yuan is roughly 6.45. And about a few months ago when we were Spring Festival for the Year of the Dog, the exchange rate was 6.25, which means that 100 US dollars could only be exchanged for 625 yuan. It can be seen that compared with the Spring Festival, the current dollar is more valuable, which also shows that our RMB has depreciated.

Why did the dollar become more valuable in the past few months? The reason is that the economic prosperity of the United States continues to rise. Just a few days ago, the Fed announced an increase in interest rates. The market also expects that the United States will raise interest rates twice this year, and raising interest rates means that the price of assets denominated in dollars will rise. Not only that, the U.S. government expects their economic growth rate will rise to 2.8%, and inflation expectations will continue to rise. This further strengthens the global market’s expectation of a warmer U.S. economy and stronger asset prices.

More importantly, China has not followed the United States to raise interest rates. As a result, the level of interest rates between the United States and China has widened. Together with the strong US economic expectations, it will attract funds from the world and may include some overseas funds in China, and switch to the United States for greater investment. income. Under the combined effect of these factors, the number of people who want to use their own currency to exchange dollars will increase. Under the effect of supply and demand, the dollar will become more and more valuable.

As an example. The U.S. dollar index was very weak last year. In January 2017, the U.S. dollar index was around 103, but then it continued to decline. It fell to 92 in September, and even fell to around 88 before the Chinese Lunar New Year this year, compared to the beginning of last year. It went close to 15%. However, some economic indicators released by the United States after this appeared to be very strong. The sustained rapid rise of the US dollar since mid-April this year has risen from 89 to 95 now.

So from this perspective, the United States, with its global position and optimistic economic expectations, may continue to attract global funds for some time to come. The US dollar index is also expected to continue to strengthen. Therefore, except for certain countries or regions that have a fixed linked exchange rate system with the US dollar, the exchange rate between other non-US currencies and the US dollar has been depreciating without exception.

he overall renminbi remains strong

However, different non-U.S. economies have different levels of depreciation of the U.S. dollar. For example, the renminbi depreciated by about 3% against the U.S. dollar in the past two months. In the same period, the euro depreciated by more than 6% against the U.S. dollar. This is because the European economy is weaker than China and the regional political situation is not stable.

For another example, the Russian ruble depreciated against the U.S. dollar in the same two months, exceeded 4%, the South African rand depreciated about 14% against the U.S. dollar, and the Argentine peso depreciated against the U.S. dollar by more than 37%. In contrast, the renminbi against the U.S. dollar rose from a level close to 7 to 6.25 in February of this year at the beginning of 2017. During this period, the appreciation rate was close to 11%. The depreciation of 3% in the most recent two months was really not a big deal.

The sudden and significant drop in the Chinese stock market on June 19 may be a catalyst for market concerns. On the evening of the same day, the Governor of the People's Bank of China, Yi Gang, said in a heavy speech that China’s current economic fundamentals are good, its economic growth has increased its resilience, its total supply and demand has become more balanced, and its growth momentum has been accelerated. This year, the renminbi is one of the few currencies that have appreciated against the US dollar. one. Subsequently, A shares began to restore its rationality yesterday, which greatly eased market concerns.

In other words, since the U.S. economic recovery is expected to be even stronger, the Fed will raise interest rates several times in the future. Judging from the fundamentals of the economy, the two-way fluctuation in the exchange rate of the renminbi against the U.S. dollar is also a normal phenomenon. Contrarily, if the Chinese economy continues to decline and the yuan rose quickly against the dollar, that is rather a worrying thing.

Since USDCNY already rallied past 6.90 it may be the market won't be as jittery about a yuan depreciation. Outflows and depreciation expectations may not build as quickly as they did in 2015 and 2016. Still, there isn't a lot of room for this narrative. After today's move in the yuan, a 7.6 percent rally in USDCNY takes it to 7.00, at which point depreciation expectations will return with a vengeance. The market is relatively calm in a very narrow range between USDCNY 6.2 and maybe 6.9. Below 6.2, exporters go bust. Above 6.9 there could be significant outflows and financial market pressure.

RMB material maintains two-way fluctuations

Why are domestic investors worried about the devaluation of the renminbi? In fact, this is still "doing more thinking" in action. The most common and most popular investment method in China is undoubtedly the stock market. The vast majority of ordinary investors still rely on rising stock prices for gains. Therefore, it is easy for the subconscious to believe that no matter what the rise is right, the fall is wrong and it is wrong. The exchange rate of RMB against the US dollar was applied.

The most popular investment is housing, followed by wealth management products and trust loans, then stocks.

The exchange rate is a ratio between currencies. For ordinary domestic people, the dollar's exchange rate has gone up and down, and its impact on work and life is actually not great. In general, only those companies that need to rely on overseas markets in the areas of raw materials, product sales, etc., are likely to be affected by changes in exchange rates.

For example, domestic air transport companies need to rely on fuels such as oil imported from overseas, and oil is basically denominated in U.S. dollars. Once the RMB depreciates against the U.S. dollar, the RMB income from its service sales is used to exchange dollars for fuel. It will suffer more than before. On the contrary, the domestic garment production and trading enterprises will sell clothing shoes and hats produced in the United States to the US, and convert the US dollar into Renminbi for the payment of wages for domestic garment workers. Because the RMB depreciates, so the same dollar income can be Change to more renminbi, so the devaluation is beneficial to this clothing company. On the contrary, when the renminbi continues to appreciate against the U.S. dollar, domestic exporters such as garments and textiles will continue to be affected. In fact, under the current macroeconomic conditions of China's current economic downturn, new and old kinetic energy conversion, and financial deleveraging, the devaluation of the RMB is not a bad thing.

Therefore, the current trend of RMB depreciation against the U.S. dollar is both reasonable and consistent with the expectation of Sino-U.S. economic fundamentals. At the same time, relative to most developing countries, the RMB exchange rate still maintains its existing firmness and balance. It can be said that in the coming period of time, the trend of the depreciation and appreciation of the renminbi against the US dollar will continue, and the two-way exchange rate fluctuations will become more apparent.

U.S. Big Stick Negotiating Won't Work on China

iFeng: 商务部：美方举着大棒谈判的手段对中国不管用

The United States is accustomed to holding big sticks to negotiate, but this does not apply to China. This irrational behavior is not conducive to solving problems.

Will make a strong response to the U.S. through comprehensive use of various measures including quantitative and qualitative tools

According to Gao Feng, if the United States introduces a so-called taxation list and adopts a method of distorting international trade and leads to unfair trade, the Chinese side is fully prepared to comprehensively use various measures including quantitative tools and quality tools. Make a strong response and firmly defend the interests of the country and the people.

The Sino-U.S. economic and trade consultations achieved results once, but the U.S.

The Spokesman of the Ministry of Commerce announced at the press conference on the 21st that on the basis of the consensus reached in Washington on May 19th, the two sides conducted specific consultations on agriculture and energy in Beijing in early June and were widely welcomed by all parties. It has been agreed that the manufacturing and service industries will conduct specific consultations in the near future, and at the same time conduct specific consultations on the structural issues of bilateral concern. The Chinese side believes that the previous consultations between the two parties are positive and constructive. They are in the interest of both peoples. They conform to the established rhythm of China’s reform and opening up and are in line with the principles of the WTO. However, it is deeply regrettable that the US is becoming more volatile and intensifying. To provoke a trade war, the Chinese side has to make a strong response. The United States is accustomed to holding the means of negotiating the big sticks, but this does not apply to China. This irrational behavior is not conducive to solving problems.

U.S. accuses China of theft of intellectual property rights is a serious distortion of reality

Gao Feng said that China’s position is consistent and clear. The U.S. threat to formulate a 200 billion U.S. dollar commodity taxation list is a practice of exerting extreme pressure and blackmail on trade protectionism. The misuse of taxation means by the United States and the provocation of a trade war in various parts of the world will seriously undermine the world trade order and harm the interests of its trading partners. It will also hurt the interests of its own businesses and people. This behavior is unpopular. The United States itself has a lot of structural problems, but it always treats other countries as scapegoats for its own problems and accuses others. The U.S. accuses China of stealing intellectual property rights and forcing technology transfer is a serious distortion of history and reality. In the process of China’s reform and opening up, many foreign companies proceeded from their own interests and developed good technical cooperation with Chinese companies. This is a typical form of market contract behavior, and foreign companies have received well-known and lucrative returns. The U.S. side blames these basic facts and accuses China of negating property rights and credit awareness, negating the spirit of the contract, and negating market laws.

No matter how the attitude of the US changes, China will respond calmly.

How will China-US economic and trade disputes develop in the future? Gao Feng said that the US’s fickleness is obvious to everyone. What I want to emphasize is that no matter how the attitude of the US changes, China will respond calmly. We will adhere to the established rhythm, persist in taking the people as the center, firmly push forward the reform and opening up, firmly advance the high-quality economic development, accelerate the construction of a modern economic system, and manage our own affairs well. China has a bright economic future and great potential for development. We are full of confidence.

Converged Starbucks Tumbles

American college campuses are incubators for the self-described "social justice warriors," of SJWs for short. Many students come out of college having learned nothing of value and often retard their own intelligence by "learning" things that just ain't so. The version running around corporate America today was hatched a decade or two ago. The freshly minted versions will bring such advanced concepts such as kicking all whites or males out of a company or maybe segregating the seating in McDonald's restaurants to make "safe spaces" for "people of color."

Starbucks (SBUX) provides a good warning for any company that doesn't want be run by the American version of Mao's Red Guards. It's hard to say when Starbucks became a fully converged company because the CEO Howard Schultz is sympathetic to their politics, but the company was clearly converged after it opened its bathrooms to the general public after a single manager at a single store called the cops on two (black) people waiting for a friend (he thought they were loitering). He also closed all Starbucks locations across America to have racial sensitivity (employee struggle sessions) in response to one manager making one bad decision.

SJWs aren't only a threat to corporate board rooms. They've savagely attacked Nobel Prize winners and attacked a European Space Agency engineer who helped land a space probe on a comet because he wore a Hawaiian shirt with girls in bikinis on it. They try to get people fired at work, they hunt for"thought criminals" online and form mobs to attack the companies that employ them. They try to take over any organization, be it a company, church or volunteer group, and turn it into a political organization in tune with whatever SJWs believe today (We have always been at war with Oceania). If you start a bowling club and welcome everyone who loves bowling, they will complain about the race and sex of the group, or ask what the group's position on some political issue of the day. They will start agitating for "social justice" and for the group to take a political stance with no relation to its original purpose. A good book for understanding their attack strategies and how to deal with them is SJWs Always Lie: Taking Down the Thought Police.

Converged institutions are not simply political. A solar manufacturer could be run by a very political CEO who talks a lot about politics, but if he or she spends all day focused on making cheaper and more efficient solar panels, it is not coverged. A converged company is one where the original goal becomes secondary to political and "social justice" goals. Starbucks became fully converged and it paid the price. An organization that has effectively ceased to exist because it did not defend itself from SJWS is the Boy Scouts.

There will be many shorting opportunities in the future because many companies are well on their way to becoming converged institutions. One example is Marvel comics, now a subsidiary of Disney: Forcing Political Correctness On Employees And Characters Is Killing Marvel Comics There will also be many opportunities to create profitable companies devoted to their core mission.

RRR Cut Talk Boosts Optimism, But For How Long?

China's SMEs Cannot Obtain Low Cost Credit, Can Li Keqiang Finally Save Them? covered the recent State Council meeting chaired by Li Keqiang and focuses on SME financing. As part of the plan, credit costs will be eased through reserve requirement ratio (RRR) reductions.

A newer article discusses the coming RRR cut and who will benefit. A big question is whether it will be a broad RRR cut as in April or a focused cut as announced in September and implemented in January. That earlier cut lowered the RRR for banks that crossed a minimum threshold for SME lending.

iFeng: 国务院会议透露重要信号！定向降准要来了股市要沾光？

Which areas will benefit from targeted reduction?

1 SME

As the upcoming third directional RRR cut and the directional RRR cut in April all clearly point to the need to ease the financing difficulties and financing of small and micro enterprises, the most direct beneficiaries of the policy will undoubtedly be Xiaowei. enterprise.

Another related news is that today, the State Council issued a report that State Council Deputy Prime Minister Liu He served as the head of the State Council Leading Group to Promote the Development of SMEs. In December 2009, in order to strengthen organizational leadership and policy coordination for the promotion of SME development, the State Council decided to establish a leading group of the State Council to promote the development of SMEs. The office of the Leading Group is located in the Ministry of Industry and Information Technology and undertakes the daily work of the leading group. It is responsible for researching and proposing policy proposals for promoting the development of SMEs, and supervising the implementation of the agreed items of the leading group.

As Liu He is also the director of the State Council Financial Stability Development Committee (JSC), it is widely expected in the industry that more financial policies will be introduced in the future to promote the development of SMEs.

2 stock market

Although the executive meeting of the State Council stated that the targeted reduction was aimed at alleviating the difficulties of financing microfinance and financing, it is undoubtedly a good news for the stock market that the release of the news of the release of liquidity at the time when the stock market is more sensitive.

In fact, the performance of the A-shares has eased somewhat since Yi Gang’s “prompt” appeases the stock market. At the close of the trading day, the Shanghai Composite Index reported at 2,915.73 points, a slight increase of 0.27% from the previous day; Shenzhen Component Index reported at 9501.34 points, a slight increase of 0.92% from the previous day.

At the same time, global stock markets collectively rebounded today. Before the press release, European stocks extended their gains, and the UK’s FTSE 100 index led the gains by more than 1%, the largest increase in more than a month. US stock futures rose collectively, with Dow Jones futures up nearly 100 points and S&P 500 futures up 0.2%.

However, many interviewees also believe that this year's A-share market is more uncertain and it is difficult to have a clear and clear opportunity in the short-term. Therefore, it is still advisable to be cautious.

3 Bank

If the third orientation is still a replacement MLF, it is also good for banks. According to Wang Jian, the chief banking analyst of Guosen Securities, it is “lower borrowing and paying less interest, which will help improve bank profits.”

Wang Jian once stated that according to estimates, without considering the RRR cut, the base currency for the whole year of 2018 will need to increase by 3.2 trillion yuan, which is an absolute high in recent years, and 3.2 trillion yuan will be put in such a large amount of base currency, accounting for foreign exchange. Where funds, fiscal expenditures, and other channels do not contribute substantially, they can only be handed over to the central bank’s monetary policy instruments, including reverse repurchases and MLFs. If the foreign exchange funds, fiscal expenditures, and other aggregates only contribute 700 billion yuan in the base currency, then the central bank's monetary policy instruments will need to put 2.5 trillion yuan. This also means that banks should increase their liabilities to the central bank accordingly, pay interest for this purpose, and also need corresponding liquidity management to meet liquidity supervision indicators. It cannot be overlooked that this is a monetary policy operation cost for the central bank and a real money interest expense for the bank.

"Accordingly, the RRR cut is a more realistic option to reduce the costs of all parties. In order to avoid the release of the wrong signal of monetary easing, the central bank should adopt directional RRR cut," said Wang Jian.

Will an RRR cut help the market? The recent history is not encouraging. The September announcement had little effect on the market. The RRR cut took effect on January 25. The U.S. stock market peaked on January 26, China saw its intraday high on January 29. The closing high was on January 24. Maybe a coincidence.

China announced a more significant RRR cut on April 17. The impact on the stock market wasn't significant, but the U.S. Dollar Index would rally more than 6 percent in the next six weeks. Emerging market currencies and local currency EM bond funds still haven't reversed.

The last time China began cutting the RRR was from February 4, 2015 through February 29, 2016. Here's how the Shanghai Composite and U.S. Dollar Index performed. The dollar rallied 5 percent following the first cut. It cut again on April 19 and the dollar slid 5 percent. China cut the RRR in August (after the depreciation that surprised the world) and the dollar immediately rebounded.

The Chinese stock market was in the midst of a bubble that wouldn't peak until June, but as happened this year, the August RRR cut stabilized the market for a spell before it moved on to new lows. The final, last RRR cut came at the post-2015 low for the Shanghai Composite. If this is the last rate cut, it would be good news for the economy and bullish for stocks. If the PBoC isn't done lowering the RRR, it will not be long-term bullish.

As for SMEs and banks, it will depend on confidence and willingness to borrow. The RRR doesn't do much if banks don't want to lend. If its a targeted cut aimed at SMEs, the impact could be even more limited.

Avoiding a Minsky Moment in China

Caixin: 实体经济去杠杆谨防出现明斯基时刻

I. Analysis of High-leverage Situation of China's Real Economy

The attributes of capital appreciation give original capital owners the ability to obtain income through investment. Investors can also use financial institutions to finance their funds, expand the size of disposable capital, and obtain more investment returns. This is the logic of economic pro-cyclicality. Due to the fragility of financial markets, the economic recession triggered by several financial crises has confirmed the systemic risks caused by the economic cycle fluctuations. Most market participants are not immune. Investment through debt expansion will virtually enlarge the transmission effect of market risk, and the size of the risk is proportional to the size of the leverage. The Chinese economy has experienced a period of high growth of more than 30 years, and there have also been strong cyclical economic fluctuations during the period. However, the policy of loosening monetary and fiscal easing has smoothed the crisis. The main features are as follows:

(I) The rapid increase in the total amount of money promotes the formation of high leverage

Before 2008, China’s monetary policy had been promoting economic growth with low inflation. In 1998, the Asian financial crisis adopted a method of stimulating domestic demand to prevent the economic downturn. In 2008, the US subprime mortgage crisis not only hit developed economies represented by the United States, Europe and Japan, but also affected the world. For monetary policy, with the emergence of the subprime mortgage crisis, many innovative financial instruments have emerged, and a large number of unconventional monetary policies such as quantitative easing, interest rate corridors, and inflation target values ​​have been adopted. During the crisis period in China, the new “four trillion” investment helped us hedge the impact of the subprime mortgage crisis, but it also historically pushed up the leverage level of the real economy. At the end of 2006 before the outbreak of the financial crisis, China’s broad money supply was 34.56 trillion yuan. By the end of 2017, the stock of M2 was 167.68 trillion yuan, a short span of 11 years, an increase of 4.85 times, with an average annual growth of 15%. As of the end of the first quarter of 2018, the broad money supply M2 of the renminbi was US$27.67 trillion, equivalent to the sum of the U.S. dollar and the euro. At the end of 2007, the renminbi’s money supply was only less than one-third the U.S. dollar and euro supply over the same period. One of them, the rapid growth rate during the decade is amazing. Especially after 2008, the non-financial sector’s debt growth rate exceeds the growth rate of M2, and a direct result of the flooding of the broad money supply is the rapid increase in leverage.

From a worldwide perspective, China’s generalized leverage rate is also high. According to the statistics of the World Bank for International Settlements (BIS), as of 2016, China's M2/GDP ratio is 202, which is far higher than the global average of 121. Judging from the generalized macro data, China's currency does have a relatively obvious super-discovery, and the generalized macro-level has a higher level of leverage. At the meso level, the non-financial sector includes the government, residents, and non-financial companies. The debt-to-GDP ratio of the three is an important measure of a country's leverage ratio. According to the statistics of the Bank for International Settlements, as of the third quarter of 2017, China's non-financial sector accounted for 256% of GDP, slightly higher than the international average of 244.7%, slightly lower than the 277.1% average level of developed economies. According to the statistics of the Bank for International Settlements, as of the third quarter of 2017, the debt ratio of the household sector in China accounted for 48% of GDP, the government sector accounted for 46.8%, and the corporate sector accounted for 162%, of which the proportion of the corporate sector accounted for highest.

All of that M2 has a claim on the PBoC FX reserves and Chinese FX reserves are less than 12 percent of M2. It is wrong to think of China as having any reserves. The yuan is effectively unbacked if there is a major crisis. Furthermore, the fact that CNYUSD tends to track with FX reserves, it's debateable as to whether they can spend any of it in defense of the currency. Which is why there are strict capital controls in place.

To put China's credit growth in perspective through the prism of M2 and FX reserves, back in May 2015 FX reserves covered 17.6 percent of M2. In order for the current FX reserves to cover 17.6 percent of M2, and assuming all of that adjustment was borne by the exchange rate (this is for illustrative purposes, not a forecast), USDCNY would rise to 9.85.

The effective allocation of capital as a market resource is affected by the distortion of the market, and it also causes the continuous accumulation of high leverage problems in the real economy. In particular, the existence of budget soft-constraints in the market is not only a “supply of gold”, but also leads to a drop in input-output ratio. The rapid growth of the real estate industry, the soft constraints of state-owned enterprises and local government financing budgets, and the reduction in the rate of capital input and output have led to the rapid growth of GDP, and the increasing debt burden of “zombie” companies, which in turn has inhibited the healthy growth of the economy.

The imperfection of China's credit market is reflected in the high proportion of indirect financing markets. The risk preferences of financial institutions converge, preference is given to mortgages, and the government increases the risk of credit extension; second, credit risk mitigation tools are missing, and traditional financial institutions have a severe risk pricing mechanism. As a result, state-owned enterprises, government financing, and real estate companies have high financing convenience. Even under the control of policies, due to soft budget constraints, they can obtain capital through high costs and form a crowding-out effect on SMEs. The state-owned enterprises have relatively high financing convenience. In the period of fund easing, the issue of high leverage is even more pronounced. The vitality of SMEs cannot be released, the input-output ratio is reduced, and economic growth will inevitably decline.

Deleveraging is having some positive effects, such as shadow banking hitting a brick wall:

As can be seen from the above chart, the proportion of non-financial sector in GDP in the third quarter of 2012-2017 is gradually increasing, from 194.6% in 2012 to 255.3% in 2016, an increase of 60.75 points in 4 years, an average annual growth of 15.17. Points. After 2016, the growth rate has slowed down. De-leverage has a significant effect. In the third quarter of 2017, the proportion of non-financial sector debt to GDP increased by only 1.5 percentage points compared to the end of 2016, which was basically the same as 2016, and the effect of macro-delegation was obvious.

Many sectors have seen constant or falling debt ratios, some suddenly such as steel. The auto industry has been stable, chemicals and mining more cyclical. The one sector with ever rising leverage: real estate.

From the above figure, we can see that the asset-liability ratio of the real estate industry and the building materials industry are basically the same between 2005 and 2008, but the trends after 2008 are obviously different, the real estate industry has been rising, and the building materials industry's financial resources have been down.

The conclusion is "deleveraging" and reform efforts are delivering positive results, but real estate and local government debt is a risk. The economy's ability to create credit is significantly retrained by new regulations, threatening a much faster than expected contraction in money supply.

Third, policy recommendations

Risks that may arise in the deleveraging process have already received regulatory attention. The first is the shift in regulatory attitudes. In the "China Monetary Policy Implementation Report for the First Quarter of 2018" promulgated by the Central Bank, the expression of monetary policy is "stable growth, structural adjustment, and risk prevention." Compared with the report for the fourth quarter of 2017, the restructuring has replaced deleveraging. It shows that the regulator's attitude towards leverage adjustment has quietly changed. The current trend of increasing macro leverage has been significantly curbed, and at the same time frequent violations, and the central bank’s policy statement at this time just shows that the attitude of supervision has changed from de-leverage to stable leverage, at least at the macro level. Followed by the structure of policy operations. The tone of the central bank’s monetary policy this year is still stable and neutral, and maintaining a reasonable supply of liquidity will not flood the country, nor will it further tighten liquidity. There are also significant changes in the structure of the policy. For example, this year, the central bank created PSL deposits, set up temporary reserve arrangements, and adjusted the supply of funds through convenient financing tools such as MLF, SLF and repurchase transactions, and at the same time further extended liquidity for the market by expanding the range of MLF pledged bonds. However, the consistency of risk preferences of financial institutions will lead to a vicious circle of credit markets, and the liquidity of financial markets cannot be effectively transmitted to the real economy.

After the US subprime mortgage crisis, the policies of quantitative easing (even zero interest rate policy) and tax cuts were used to feed the real economy. As the market mechanism was relatively complete, a large number of low-interest-bearing currencies entered the emerging markets and gained capital gains before returning to the United States. Even if we enter the rate hike cycle, the real interest rate remains at a low level. Under the premise that China’s monetary policy is currently neutral, the central bank’s currency is increasingly diversified, but considering the hedging effect of stabilizing the exchange rate mechanism, it is difficult to reasonably control the growth rate of the base currency. At the same time, shadow banks, which account for a relatively large proportion of the total social financing, have lost the function of money [credit] creation in a relatively short period of time, and the contraction of the total money supply may exceed expectations. In particular, the “corporate debt repayment crisis” brought about by liquidity risks may further aggravate the market environment created by credit. Under the dual tightening effect of weakening real economy demand and superposition of financial institutions to reduce supply, debt risk can easily lead to systemic risks. If the actual financing rate of the real economy does not fall, the debt problem will not only be contained, but will also lead to greater risks.

From the effect of deleveraging, we can see that in the process of deleveraging in the real economy, after two years of adjustment in the traditional “two high and one surplus” [high pollution, high energy consumption and overcapacity industries], the “survival of the fittest” has achieved significant results, but the implicit debt of local governments and the leverage of the real estate industry have risen instead of declining. Therefore, the main contradiction should be grasped. For industries such as real estate, "two highs and one surplus", and local governments and other soft budget constraints, clearly put forward the goal of reducing leverage, and take targeted measures, such as supporting fiscal and taxation policies, etc. Related areas control debt The risk has risen further and is isolated from other industries to avoid the risk of infection and to prevent Minsky moments of market resonance effects.

The article is by the General Manager and Deputy Researcher of the Asset Management Department of the Postal Savings Bank.