Regulators Shut 4th P2P Lending Platform This Year After Customers Unable to Withdraw Cash

A week ago the authorities shut down an online lending platform. See: ￥80 Billion, 3-Year Old Online Lending Platform With 10 Million Users Implodes, May Be Ponzi. Now another, the 4th this year, has been "annihilated." All four of the site in question used high rebates that give off a distinct whiff of Ponzi, with annual returns far above what is offered by high-yield WMPs. This latest firm (联璧金融, translated by Google as United Finance below) had high rebates, free iPhones instead of interest and also scratch codes on products such as a router.

iFeng: 又一家爆雷 民间四大高额返利平台全军覆没！

Some investors told reporters that after Jingdong Mall, investors purchased a Kyeonsi K2 router for 399 yuan. Each router has a K code attached to the bottom of the router. After scraping the bottom coating to obtain the K code, download and register the financial app. Login, enter the K code in the APP into the financial coupon exchange port to activate the K code, you can get 399 yuan financial wealth. You can withdraw cash after one month and you can get the corresponding interest.

In Fiji's 0-yuan purchase, in addition to routers, there are purifiers, sweeping robots, and wristbands. The higher the price is, the higher the cashback period will be. The longest is 12 months. The reporter noted on the United Financial App that in the $0 iPhone model, as long as investors invested nearly 370,000 yuan to buy wealth management products, they could get one for the iPhone and get their principal and interest back after 90 days expired.

Why would a finance firm put scratch codes on routers? Did a technology firm report strong sales one quarter...? The free iPhone doesn't strike as fraudulent assuming its a newer phone. The interest rate is actually a bit on the low side.

The four major private high return platform army out of the bottom financial platform zero yuan to buy high rebate mode

Another high rebate platform "burst." Recently, it was reported that due to illegal fund-raising investigations by the Shanghai police, United Finance has been investigated and many criminal suspects have been subject to criminal compulsory measures.

At this point, Qianbao.com, Yatang Finance, Tang Xiaoxuan, and U-Finance’s four private high-flyback platforms were “annihilated”.

China Securities Journal reporter learned from the survey that the high rebate platform generally promises ultra-high yields and zero risks. It encourages other people to join and promise high rewards to attract investors. Investors, due to their lack of awareness of risk prevention, lack of understanding of financial product risks, serious speculative psychology, and many investments after being attracted by high rebates.

According to industry insiders, most high-return platform platforms have relatively low compliance, and the level of information disclosure is poor or seriously missing. At the same time, product online, such as part of the platform does not have a clear direction of investment, but also because of the large number of investors, the distribution of the country, the platform funds are hidden, the supervision is more difficult. It is recommended that investors appropriately reduce the expected earnings of wealth management products and be vigilant against wealth management products and investment companies that promise high returns.

Senior executives are investigated

Recently, Shanghai Lianhe Electronic Technology (Group) Co., Ltd., the operating entity of Lianhe Finance, one of the four high-return platforms, was placed on record by the public security department on suspicion of illegal crimes. The relevant senior executives were taken away to assist in the investigation.

According to the Shanghai Municipal Public Security Bureau Songjiang Branch announced on the official WeChat on June 23, Shanghai Songjiang Branch of the Public Security Bureau recently received reports from the masses that the relevant personnel of Shanghai Lianhe Electronic Technology Co., Ltd. were suspected of committing crimes. The Songjiang police have registered for investigation. At present, 15 criminal suspects such as Zhang have been taken criminal compulsory measures according to law and the case is under further investigation.

According to information from the official website of United Finance, Luen Yu Technology was established in 2012 with a registered capital of 100 million yuan. It was the operator who proposed the scenario solution for the Internet as a whole. In 2014, it established the establishment of the Internet Finance Division and invested in R&D to develop the Internet financial platform. The WeChat version of the wealth management platform “Lianlai Wallet” and the APP product “Lianyi Finance” were born.

The immediate cause of the investigation of the joint venture technology was the difficulty in the withdrawal of the recently discovered joint-finance platform. The reporter learned that starting from June 20th, some investors found that the joint financial APP client could not perform normal cash withdrawal, and some showed zero balance, triggering investor rights protection.

With regard to the difficulty of cashing out, APP's customer service has once responded that due to the impact of the Internet financial environment, the recent phenomenon of centralized payment by financial users is more serious. It does not rule out a malicious run, and will follow up with the regulatory authorities to solve the current problems. Progress will be unified at 3 pm on June 21.

However, from the afternoon of June 21st to evening, United Financial did not announce the redemption plan on time. On the same day, Shanghai Songjiang Branch of the Public Security Bureau announced that according to the investor's report, the investigation of Shanghai Songjiang Lianhe Finance's illegal absorption of public deposits had been filed. The case is currently under investigation. With regard to the latest developments in the case, the reporter contacted Union Financial. As of press time, Lianhua Finance Customer Service Hotline has been unanswered.

At this point, Qianbao.com, Yatang Finance, Tang Xiaoxuan and Lianhe Finance have all “thunderbolted” the platform. All of the reasons for “explosion” are due to overdue payments or business failures. In this regard, there are informed sources, the high back to the platform continuous "explosion of the thunder", may be caused by the investor panic and appear to pay cash. In addition, false labeling by the platform may also be an important reason.

According to Wang Minguang, a partner of Zhejiang Jinzhong Law Firm, the problems of high rebate platformare unending, mainly because the annual return on investment given by the platform is too high, so that the platform must use new debt to fill in old debts, plus the risk assessment system is not done well, bad debts are constantly appearing and cannot be recovered within a short period of time. In the event of an investor’s run, the platform will inevitably collapse.

A warning for investors:

After the high rebate platform “bursts”, how to safeguard its own rights and interests has become a major concern for investors. Fu Weigang said that there is little difference between rights protection and other civil disputes. It is almost impossible to return the principal too hard.

"Although all investors are propagating investors to distinguish whether the platform is good or bad, many investors still use interest as their primary criterion and believe more in advertisements." Wang Yi, a senior partner of Guangdong Huashang Law Firm, suggested that investors safeguarding their rights cooperate with the public security authorities. Submit evidence and declare your claims.

Xu Feng said that investors can collect reliable and available information on the flow of platform funds, take different measures according to the nature of the business model of the platform, and retain individual investment evidence to provide legal basis for compensation and other ways to safeguard their legitimate rights and interests.

Wang Minguang suggested that if the high-return platform is due to the “explosion” caused by poor platform operations, the platform often has real projects, but the profits generated by the project cannot cover the operating costs. At this time, investors should select representatives to actively negotiate with the top level of the platform, request the platform to hire an accounting firm to perform financial audits of the platform, sign reasonable payment plans with relevant person in charge of the platform according to the financial status of the platform, and hire a law firm at the same time. Provide legal services for the healthy exit of the platform to protect the maximization of investors’ rights. If the high rebate platform is triggered by high-level misappropriation of funds for personal squandering, the relevant person in charge constitutes a fund-raising fraud, so investors must promptly The police let the public security authorities verify the whereabouts of the funds and preserve the assets of the platform. Investors must actively cooperate with public security agencies at this time. If necessary, they can hire lawyers to initiate criminal incidental civil lawsuits to protect their legal rights to the greatest extent possible.

Bond Funds Fail to Open Amid Defaults

JRJ: 债务违约频发 债券基金销售受阻

According to statistics, as of June 22, a total of 26 bond funds were issued, with a issuance size of more than 25 billion yuan, and accounted for nearly 70% of all funds in the month. However, the regular open-ended launch funds that are customized by similar institutions account for the largest proportion, reaching more than 80%. The number of bond funds and the size of the issuances have clearly rebounded in May. In May of this year, 19 bond funds were established, and the issuance quota was only 8.269 billion.

At the same time, bond funds still face the embarrassment of “selling”. According to rough statistics, as of June 22, 13 fund extensions have been made in June, of which bond products accounted for more than half. At the same time, the cases of bond fund raising failures are also increasing. Of the 10 funds that have not been put into effect this year, the bond funds accounted for 6 of them.

“Originally the company planned to issue a bond fund, but it had previously communicated with the bank channels. However, feedback from the previous bank channel suggested that it should not be issued for the time being. It is difficult to send in the current market situation.” According to a fund company’s marketing department sources Since the beginning of this year, frequent occurrences of debt defaults and the thumping of funds have also been commonplace. As a result, many individual investors have kept away from bond funds.

...According to feedback from a state-owned Daxing Banking Manager, because the previous banking products have a fixed income and a rigid property, compared with the bond fund, the bank's financial management is more attractive, and the individual customers who choose to buy the fund are actually more inclined than the money fund. In partial stock funds.

In the eyes of a fund company's bond fund manager, bond funds have not been able to attract more individual investors in recent years, mainly because the characteristics of bond funds' risk-returns are not obvious enough to provide stable risk-adjusted returns to customers. “In the current context of financial deleveraging, the bond fund's price/performance ratio is even worse than that of a money fund. Currently, the management fee of the money fund is mostly 0.15%-0.33%, annualized earnings are about 4%, and the management fee of the bond fund is 0.5%- 1%, only from the cost point of view, money funds will have a lot of advantages."

...According to the above-mentioned fund manager, the current bond yield has fallen back for a period of time. Under the background of frequent defaults on credit bonds, it is very difficult for bond funds to obtain higher yields than bank wealth management products.

Lenders Can't Sell Restricted Stock, Ask for More Stock

Regulators have stepped in to prevent sales of restricted stock and some lenders are asking for more stock for collateral.

JRJ: 股票质押风险遭密集排查 有券商专项申报违约情况

The reporter was informed that some brokerage companies recently received regulatory requirements and made special declarations on stock pledges, paying particular attention to the situation of default and passive extension, but it is not mandatory that positions cannot be closed.

A person in charge of the listed brokerage credit trading department revealed that: “The stock pledge repurchases differ from the two kinds of financing, and the restricted shares cannot be closed, and the new regulations should be strictly observed. In general, closing a position is the last resort to be forced. An effective way to do a good job of risk control is to allow customers to reserve more shares outside the pledged shares to make up for their positions."

In addition, there are also many securities companies that have high requirements on the pledged items. Some relevant person in charge of securities companies said: "The risk does exist, and now the requirements for the project are high, and there is no resolute decision."

...“Regular reporting of stock pledges has always been the case, but the recent supervision also requires special reporting, with particular attention to the situation of breach of contract and passive extension. There was no such request for detailed information in the past.” A large securities company in East China stock pledge business told reporters.

...In particular, the new rules for reducing shareholdings stipulate that “maximum reduction of the total share capital by 1% through competitive bidding transactions within 90 days”, “no reduction in shareholdings within half a year for major stock transactions,” and “15 days of advance trading for major shareholder reductions in shareholdings” When other situations arise, the broker must negotiate with the pledgor.

"The stock pledge repurchases and the two financial differences, restrictions on the sale of shares can not be closed, the new regulations should be strictly abated." The head of a credit trading department of a listed securities company in southern China, said, "Closed position is always the last resort, most customers still It will make up the position according to regulations."

The head of a large brokerage sales department said that a stockbroker may have only two or three hundred stock pledge customers, and the amount of hundreds of millions of dollars in pledges can easily bring millions of profits to brokers. All are quality customers.

He said frankly: “The brokers will not close their positions as long as they have no choice. For brokers who have reached the liquidation line, the brokers will try their best to help them solve the crisis. For example, this company has no money, brokers will first help find the bridge. Capital, and other companies have the money to make up the percentage of security."

Another Sign This Could Be A Repeat of 2011 and 2014

CNBC: An unusual divergence in commodities is hiding signs of a global slowdown, economist says

The U.S. economy is bounding along but economic forecaster Lakshman Achuthan sees evidence of a global slowdown in an unlikely place: Demand for cow hides.

Achuthan, co-founder of Economic Cycle Research Institute, says hides and other non-exchange-traded sensitive industrial materials such as rubber are often the first item on the production line and their price movements are a barometer for economic activity.

"They're super sensitive, they're going to swing and have bigger swings than other things but they're very revealing in terms of direction," Achuthan told CNBC's "Trading Nation" on Friday.

...An unusual divergence is occurring in commodities markets is obscuring signs of a global slowdown, says Achuthan. The more closely watched exchange-traded commodities such as oil and copper have spiked on tighter supply from outlier events such as sharp drops in Venezuelan production.

The Austrian school argues slowdowns will start in the higher stages of production. This does not indicate a recession because the signal could reverse, but it is not an unexpected sign as global stimulus peters out.

Finding Value in A-Shares as Investors Look for July Rebound

There's increasing talk of the market bottoming in China following last week's decline. One saying going around is "May lose money, June capitulate, July rebound." Even if the bear market hasn't ended, a counter-rally is expected. One area worth investigating is the blue chip stocks. Similar to what has happened in the United States, the worst stocks in the market by valuation measures have led the market in recent years. The blue-chip A-shares are undervalued relative to the market and to U.S. blue-chip stocks that trade at a premium.
iFeng: A股情报：五穷了，六绝了，七月能翻身吗？

From the perspective of the Japanese K-line graph, the Shanghai Composite Index, Shenzhen Component Index, and the Growth Enterprise Market Index have fallen by 5.07%, 6.69%, and 7.39% in short days since the Powei declined on June 15, and short-term short-term kinetic energy began to weaken. The intention to enter the market for bargain-hunting was gradually strengthened. In the intraday trading session, high-sending transfer, intellectual property rights, software, semiconductors, and internet and other concept stocks rose sharply, indicating that the market’s most sensitive sense of hot money has been fully ignited. It also means that After the release of concentrated emotions and risks, the pessimism in the market has improved significantly and the overall risk has been digested.

There are stock market rumors that "May poor and June capitulate," and this year the stock index barely closed in May, with individual stocks plunging up and down. It is in a downturn, and the probability of closing lower in June is extremely high. Then can the "July rebound" really be realized? How can we upgrade the strategic perspective to meet "seven times"?

...Xiangcai Securities proposes to learn to enhance the strategic pattern after a continuous downturn, because even in a bear market, after each major sell-off, there is a very obvious staged rally, and in such a rebound, it will A lot of cattle stocks have emerged.

Huaxun Investment said that if we lengthen the analysis cycle, we can clearly see that the Shanghai Composite Index has come to around 2850, which is just the rising point of the rising prices in June 2016, and has experienced repeated bottoming. The process began after a round of mid-level uptick. Therefore, the current index has fallen to the pre-intensive trading area, the market outlook is expected to build a phased bottom near 2850.

A-shares also appear relatively cheap by some measures:

The famous economist Li Xunlei published a long article, saying that the historically tested blue chip stocks in the A shares have been undervalued compared to US stocks: By comprehensively comparing the valuations of Chinese and US listed companies under various performance levels, only ROE has been found for 10 consecutive years. In 10% or more companies, PE and PB are lower than those in the United States. Among the companies with poor performance, the valuation of A shares is still higher than that of US stocks.

East Money: 李迅雷：大跌之后谁将胜出 依据确定性溢价寻找投资标的

　Judging from the US stock market, the deterministic premium of the mature market is obvious

Large companies in the U.S. stock market have relatively high valuation advantages relative to small companies. Firms with stable performance have higher valuations compared to companies with large fluctuations in performance. The valuation premium of the US stock market is highly effective: From the two time nodes in 2005 and 2010, the high-valuation and low-valuation companies at that time scored distinctly in the subsequent five-year performance, and the valuation level reasonably reflected The company's future performance changes.

From the past history, A-shares are not clear about the definitive premium

In the past, A shares had a long-term existence of higher valuations of small-cap stocks and premium stocks did not receive discounts. However, from the two time points in 2005 and 2010, valuation premiums of CSI 300 constituent stocks reflected to a certain degree. The company's future performance changes, but it is significantly weaker than US stocks. The deterministic premium of A-shares in the past was not obvious, mainly because “shell value” became the largest certainty of small-cap stocks.

The deterministic premium of A-shares is fully regressing since 2017

Under strict supervision, the "shell value" subsided, and the risk premium for small-cap stocks was significantly increased. The valuation of companies with large fluctuations in performance was significantly reduced. In addition, the expansion of credit spreads is also a manifestation of the rise in uncertainty risk premiums. Judging from the current valuation of the CSI 300 constituent stocks and the changes over the past year, the effectiveness of the A-share market valuation premium is increasing.

Large-cap A-shares are cheaper than U.S. large-caps:

China and the United States contrast and combine the domestic environment to find certainty and uncertainty of the A-share market

1) The valuation of historically tested blue chip stocks in A-shares has fallen below US stocks: By comprehensively comparing the valuations of Chinese and US listed companies under various performance levels, it has been found that only companies with ROE of 10% to 15% or higher for 10 consecutive years, have P/E and P/B that are both lower than the United States. Among the companies with poor performance, A shares still have higher valuations than US stocks.

　2) The deterministic premium of the leading companies in the stock economy is expected to continue to increase: Although over a year of leading stocks, the valuation of the A-share leading portfolio is still significantly lower than the non-leading portfolio, which is in line with the leading companies in mature markets. There is a regular opposite of the valuation premium.

　3) Focus on cash flow in the context of financial deleveraging: A more stable cash flow can obtain a deterministic valuation premium while a deteriorating cash flow status implies a higher risk premium. In this article, we review the changes in the recent performance and cash flow of various industries.

There may not be much direct exposure to a Sino-American trade war in the A-share market.

4) Concern over the uncertainty of export business under external environmental factors: We conducted statistical analysis of the overseas business income data published in the annual report of listed companies in 2017, and announced that there were 2,068 overseas business income companies, of which the overseas business accounted for more than 20% of companies have 819, more than 50% of 299, mainly in electronic components, machinery, automobiles, textiles and clothing. In the annual report, there were 29 companies with North American business income, of which 21 companies accounted for more than 10% of North American business income and 14 companies exceeded 20%.

In recent years, the process of internationalization of A-shares has been accelerating, and the opening of the capital market to the outside world has been further opened. The A-share valuation system has also gradually moved closer to mature markets such as the United States. In the context of the stock economy, the pricing logic of mature markets is used as a mirror to reflect the differences and trends in the investment value of the domestic market.

This article stands on the valuation point of view and quantifies the Chinese and US stock markets and finds that over the past 10 years, US stocks tend to give firms with high certainty valuation premiums, while A-shares prefer smaller firms and “shell value”. Now that tight financial supervision has become the main theme, the valuation of A-shares has fully returned, the “certainty” value of leading companies and long-term performance stars has not been fully explored, and cash flow deterioration and “uncertainty” in export business should be more cautious.

This chart shows the worst performing 10 percent of each industry (red) versus the WIND Total A-Share Index.

Return on equity is higher for large firms (red) and recently started moving higher:

P/E ratios of large (red) and small-cap stocks:

On the other hand, the turnover of small-cap stocks has dropped sharply, and the market’s concern has weakened significantly and liquidity risks have emerged. With the small-cap stocks index accounting for 1,000% of the total turnover of the market, the continued popularity of small-cap stocks for many years turned down in 2017, and the proportion of small-cap stocks dropped significantly. On the other hand, the number of stocks with a daily average turnover rate of less than 1% and one stock rose significantly, and it seems that there is a trend of convergence to the status quo of small-cap stocks with poor performance in mature markets.

Mature markets, but also bear markets.

Exhibit 15 : The number of stocks with a daily average turnover rate of less than 1% and 1‰

The valuation of high (red) and low volatility stocks:

　3.3 The expansion of credit spreads is a reflection of the return of risk premiums

Credit spreads are a measure of the risk premium for low-grade credit debt. For a long time, the domestic bond market AA grade credit spreads have changed in the same direction as the 10-year Treasury bond rate (except for a short period of 2012), which is mainly due to liquidity. In theory, when the economy is goodRisk-free gains rise, but credit risk is reduced, and credit spreads should be narrowed, and vice versa. When credit spreads and Treasury yields are higher, they should change in the opposite direction. This shows that credit spreads have not effectively reflected credit risks in the past, and the risk premiums of domestic bond markets for low-grade credit bonds are not sufficient.

However, in the past year or so, credit spreads have continued to widen, and even in the range of falling Treasury bond yields, credit spreads have continued to rise, showing that credit risk premiums are returning.

Exhibit 17 : Credit Risk Premium Regression: AA Grade Credit Spread vs 10 Year Treasury Rate

In which industries will you find the 50 cheapest blue chips? Banks, 21. Real estate 8. Construction 5. Railroads 3. Coal 3. Building materials 2. Transportation 2. Autos 2. Basic chemicals 2. Energy 1. Utilities 1.

The valuation of the banking industry has remained low for a long time. As early as 2012, when the banking industry ROE was more than 20%, PE was only 10 times or less. In hindsight, the market's valuation of banks is still valid. Since 2013, the banking industry's ROE began to decline continuously. Currently, under the background of financial deleveraging, the profitability and asset quality of the banking industry are subject to large uncertainties. Therefore, the current low valuation is precisely for this uncertainty. Risk premium.

P/E and ROE of the banking sector:

Coal and steel are typical strong-period industries. Performance fluctuations rank among the front ranks of all industries. The current static low PE is an effective reflection of its future performance fluctuations.

Real estate, construction and other industries also belong to cyclical industries. However, from historical data, ROE fluctuations in these industries are of medium level. Does the current low PE indicate that these industries are underestimated? Exhibit 20 and Exhibit 21 show the ROE and cash flow status of the real estate and construction industry. It is not difficult to find that ROE did increase in these two industries in the most recent year, but the cash flow situation deteriorated significantly. Therefore, the current low valuation may reflect the uncertainty of the quality of their earnings.

Real estate cash flow as a percentage of operating income (red) and ROE:

Same data, construction industry:

Consumer stocks look attractive:

　4.2 Definitive premium of leading companies in stock economy is expected to continue to increase

The Chinese economy has entered the dominant stage of stocks. Under the stock economy, the leading companies have obvious competitive advantages and their market share is expected to increase continuously. Therefore, the certainty is much higher than that of non-leading companies.

After more than a year of leading stocks, is the premium of A-share leading companies sufficient? We analyze the combination of leading stocks in the large consumer and cyclic sectors for analysis. The screening criteria are: 1) The market value is greater than 80 billion; 2) The ROE is located in the top 20% of the sector in the past two years; 3) The listing is for 2 years.

Exhibit 26 and Exhibit 27 show a comparison of the valuations of leading and non-leading combinations in the consumer and cyclic sectors, respectively, where the valuation of the consumer segment is measured in PE and the periodic segment is measured in PB. Although the leading stock company's stock price rose significantly more than the overall sector in the past year, the valuation of the leading combination is still significantly lower than the non-leading combination. This contradicts the rule that the valuation of large companies in the U.S. stocks industry is slightly higher than that of small companies. It can be seen that the deterministic premium of A-share leading companies is expected to continue to increase compared to non-leading companies.

Leading consumer companies trade at lower P/E ratios than non-leading companies:

Leaders in cyclical industries are also cheaper:

We further analyze the performance (ROE) and cash flow status (operating net cash flow/operating income) of each industry. The industry that has seen the largest increase in the past year is food and beverage, and its ROE and cash flow are both upward. Correspondingly, the industry's most falling media industry in the past year has seen its ROE decline and its cash flow significantly deteriorated. Other industries with large declines, such as construction and machinery, also have significant cash flow problems (the ROE has not dropped significantly).

Exhibit 31 : Both food and beverage ROE and cash flow rise

Media ROE and cash flow sinking:

Finally, here are the stocks most exposed to North America. First number is overseas profit share and second is North American share:

The top one is Yotrio Group, a maker of outdoor furniture and products. Next is Shifeng Cultural Development, a toy maker. Third is Shandong Liancheng Group. It makes "precision machinery parts and components; iron, aluminum, and other metal casting products used for passenger cars, commercial vehicles, compressors, agricultural and construction machinery, hydraulic systems, and more."

Will RRR Cut Boost Stock Market?

A chart in the article below looks at how the A-share market performed between RRR cut announcements and implementation.

iFeng: 央行宣布定向降准！释放7000亿流动性 五问五答

Aside from the specific period, look at the overall macro picture. Aside from the A-share bubble from mid-2014 to mid-2015, all these RRR cuts were bearish for the global economy.

Banks Refuse to Lend, Don't Want to be Caught in Default Storm

This article shows there's a big split in China over the current monetary conditions and their cause. Some see monetary conditions as stable and even easing slightly. SMEs see a very tight market. Sentiment has clearly changed. Banks fear taking on bad debts. One banker blamed the companies for their own plight, saying they took on too much debt, are poorly managed and expanded beyond their fields of expertise. They assume the government will step in and bail everyone out. The banks clearly don't expect a bailout, at least not yet, and so are refusing to step in and risk taking on bad debts. In other words, an SME desperate for credit is advertising itself as a default risk. As one analyst says, the monetary policy isn't really tight, it is that investment confidence has fallen. In isolation, RRR cuts have no impact on investment confidence. As long as bankers are investors are worried about default risk they will not lend and invest, no matter what their capacity. Sentiment has turned and the mood is turning negative.

21st Century: 货币政策松紧争议升温，破解“紧信用”是关键

One side believes that China should follow the Fed to speed up the pace of monetary policy tightening and avoid an excessive narrowing of the spread between China and the United States, leading to a sudden increase in capital outflow pressure. In particular, the recent trade war escalation led to a sharp increase in the pressure on the RMB exchange rate downward pressure, and it is necessary to take a tighter monetary policy to boost The RMB exchange rate attracts foreign investment.

The other side believes that the growth rate of social financial growth in May is comparable to that of the previous year. In addition, the recent increase in corporate credit debt defaults and the downturn in the stock market indicate that financial deleveraging is experiencing “negative effects” and that monetary policy should be appropriately relaxed to boost the market and avoid economic downturns.

"At this moment, all parties are stubborn, and no one can convince anyone," said a brokerage macroeconomic analyst.

The official line is stable policy. FWIW, I do not believe this is propaganda, rather it is the policymaker's intent:

However, on June 18, the official website of the Central Bank published an article concerning responsible persons accepting media interviews, saying that a stable and neutral monetary policy has achieved good results and the banking system has a reasonable and stable liquidity. In spite of some material breaches, the newly added defaults were generally distributed in a dot-like manner, and there was no trend of risk concentration. The overall level of bond default rate was not high. As of the end of May 2018, the unpaid amount of corporate credit bonds after default was RMB 66.3 billion, accounting for 0.39% of the balance.

The executive meeting of the State Council two days later pointed out that it is necessary to adhere to a stable and neutral monetary policy, and to maintain reasonable liquidity and financial stability.

This seems to give an answer to the tight competition. Guotai Junan macroeconomic researcher Hua Changchun issued the latest report, pointed out that the current trend is quite clear - the monetary policy margin is slightly relaxed, hedge macro-prudential tightening; fiscal policy is "blocking the back door, open the front door," regulate the local government financing channels, but the overall Still a proactive fiscal policy.

What's the risk? Something goes wrong. What could go wrong? Investor confidence.

However, whether the policy can achieve the maximum effect or not, the difficulty lies in whether the implementation level can form a joint force, for example, hedging macro-prudential tightening at the margin of monetary policy, although the central bank has used liquidity adjustment tools such as directional cuts, collateral expansion, etc., if not The adjustment of the corporate structure and the establishment of a long-term mechanism for the regulation of real estate control are difficult to resolve the financial risks left by the previous round of monetary expansion and the side effects of current credit risks.

“Actually, under the environment of stable monetary, broad credit, and tight credit-based financial supervision, how to moderately relax the tight credit policy and solve the problems of credit debt defaults and corporate financing difficulties in the process of financial deleveraging, and guide the market to resume Investment confidence may be the key,” said the broker’s macroeconomic analyst.

Fragile.

Many 21st Century Business Herald reporters learned that current corporate financing situation is undergoing polarization: one side is state-owned enterprises, high credit rating private enterprises, large enterprises can continue to obtain large amounts of funds through loans and issuance of high-grade credit bonds, and the other side has a low credit rating. Private enterprises and small and micro enterprises have increased the number of defaulted credit debts, and they have almost never been favored by capital.

“Now it is almost impossible for private enterprises with a credit rating below AAA to issue new short-term financing bonds and corporate credit bond fundraising. Even if the annualized interest rate exceeds 12%, the capital market will not dare to take over.” Bluntly. In addition, the operating regulations of the new asset management regulations have not yet been settled. Some banks and trusts and other institutions have suspended non-standard and bond financing businesses, further exacerbating the difficulty of corporate financing. This is one of the main reasons why many people have called for a moderately loose monetary policy.

This is how bear markets begin.

M2 and GDP growth are highly correlated as shadow banking contracts:

Specifically, before 2008, banks mainly provided funds to the real economy through traditional credit methods, and the correlation coefficient between the growth rate of M2 and the growth rate of GDP was 0.24. After the financial crisis in 2008, with the introduction of large-scale economic stimulus policies and massive bank lending, In the meantime, the correlation coefficient between M2 and GDP growth rate fell to 0.18. In the past one or two years, financial de-leveraged, the internal financial circulation in the financial system kept shrinking, and a large amount of funds flowed directly to the real economy. Only M2 and nominal GDP growth during March 2017-2018 The correlation coefficient rose to 0.64.

In his view, the current marginal leverage of financial deleveraging can be gradually slowed down. Compared with the previously tight monetary policy, the central bank should consider adjusting and lowering standards, MLF, and other tools to make monetary policy more stable and neutral.

In fact, a number of bank financial market traders frankly stated that since the beginning of this year, the margin of monetary policy has tended to be loose, and the interest rate has been reduced in the financing market.

New credit spends as real demand in the economy. When credit rises to multiples of GDP, growth in credit represents an increasing share of nominal GDP growth. At a certain point, it is impossible to avoid a serious slowdown or recession because simply slowing credit growth causes a substantial decrease in demand.

As for reflexivity:

In his view, under the pressure of the current global currency differentiation triggering a new high of the dollar in the year, the reason why the RMB exchange rate did not depreciate sharply was an important reason that the opening up of financial markets this year has attracted a large number of offshore capital to invest in domestic bond markets. In the first quarter of this year, China’s capital and financial accounts created a surplus of US$28.2 billion, driving reserve assets to increase by US$26.2 billion, largely offsetting the pressure of capital outflows from the US dollar hawks raising interest rates.

“The reason why overseas funds are willing to invest in the domestic securities market is on the one hand the relative strength of the RMB exchange rate. On the other hand, the China-U.S. spread has always remained above 70 basis points.” He admitted that if the Fed continues to raise interest rates by hawks and China does not follow, Overseas funds will worry that the interest gap between China and the United States has narrowed significantly, and the increase in trade frictions between China and the United States will eventually trigger a surge in capital pressure.

Banks don't want to lend:

Many 21st Century Business Herald reporters learned that current financial institutions are generally cautious about corporate finance. On June 1st, the China Insurance Regulatory Commission issued the "Administrative Measures for the Administration of Credit Granting to Banking Institutions (Trial)". Many city banks acted swiftly and established local credit balances of over 2 billion yuan. Local companies with more than three lending banks established joint credits. The mechanism adopts anti-risk de-leverage measures that do not provide renewal for enterprises with high debt ratios.

“Actually, the regulations stipulate that banks can voluntarily establish a joint credit mechanism for such enterprises and form a certain degree of flexible operating space to help companies tide over the financing difficulties. However, in the financial deleveraging and risk prevention environment, banks prefer to let their companies suffer a lot. One point, do not want to let themselves into a bad debt crisis." A city commercial bank credit department director frankly told the 21st Century Business Herald reporter.

In addition, the supervisor heard that many city commercial banks suspended the investment banking business in view of the failure of the new rules on asset management, suspended the supply of non-standard assets for large local companies, or set aside a financing plan for debt issuance, which objectively caused the company's capital chain to be stretched. A person in charge of a large local private enterprise stated that he was the "victim" of this situation.

“Local joint-stock companies and state-owned banks are tightening credit. Every week, I have to run two or three local city commercial banks and rural commercial banks to see if there is any room for credit to make room for capital. But they told that they couldn’t provide companies with new loans and old support. In the first quarter of next year, the interbank certificates of financial institutions with asset sizes of 500 billion yuan or less will be included in the MPA assessment, and the scale of off-balance-sheet businesses will be further compressed. It is hoped that the company can repay the previous principal interest rate of structured financial products as soon as possible.” He told the 21st Century Business Herald reporter bluntly this is the bank's strictest lending standard that has been seen in more than 10 years since its establishment. If he uses most of the company's cash flow to repay loan principal and interest, the business will soon stagnate.

The banks disagree on the cause of the tight credit conditions:

“However, it needs to be differentiated by the recent increase in the number of credit debt defaults and increased difficulty in financing the enterprise. In the end, it is the lack of liquidity in the market, or is the result of excessive expansion of the debt-supported business.” The head of the credit department of the above-mentioned city commercial bank emphasized that currently more than a few companies' problems are more or less related to their own poor management, including lack of corporate cash management capabilities, blind expansion, and involvement in unfamiliar industrial fields. Once a company encounters financial difficulties, it expects the government to release liquidity, and it is inevitable that there is a "suspicion" of risk transfer.

The targeted nature of intervention supports the wider view of stable monetary policy:

It is worth noting that since the beginning of this year, the central bank has targeted to release more than 400 billion yuan of funds, continued to use credit policies to support refinancing, rediscounting, and PSL tools to guide financial institutions to increase the number of small and micro enterprises, "three rural issues", poverty alleviation and Shelf reform, water conservancy, and other major areas of national economy and weak links support efforts.

In the opinion of the above-mentioned macroeconomic analysts of brokerage firms, this seems to imply that the relevant departments believe that financial deleveraging mainly brings financing difficulties to specific entities such as small and micro enterprises, and that they need to take measures such as targeted cuts to ease the difficulties. As for the cash flow difficulties caused by blind expansion or mismanagement in many enterprises, it is necessary for companies to solve the problems themselves.

Modern banking requires a lender and a borrower to create credit. If there are no borrowers or lenders refuse to lend, credit creation contracts. The Chinese government can force lending and borrowing through local governments and SOEs, but thus far there is no sign of another stimulus.

China Spins the Dollar Wheel of Suffering, Cuts RRR Again

Rueters: As trade war looms, China cuts some banks' reserve requirements to boost lending

China’s central bank said on Sunday it would cut the amount of cash that some banks must hold as reserves by 50 basis points (bps), releasing $108 billion in liquidity, to accelerate the pace of debt-for-equity swaps and spur lending to smaller firms.

The reserve reduction, the third by the central bank this year, had been widely anticipated by investors amid concerns over market liquidity and a potential economic drag from a trade dispute with the United States.

But the 700 billion yuan ($107.65 billion) in liquidity that the central bank said will result from the reduction in reserves was bigger than expected.

The pain is worse than understood by financial markets.

Xinhua: China cuts RRR by 50 basis points

Funds released by the cut were about 700 billion yuan (about 108 billion U.S. dollars), with 200 billion yuan set for easing credit strain for small and micro businesses.

The cut for small businesses was expected. The larger cut for "debt-to-equity" swaps was not.

The quick take from financial media is: China is easing. They are not. They are filling a hole left by the contraction in shadow banking and unwillingness of banks to make uneconomic, risky loans. China's SMEs Cannot Obtain Low Cost Credit.

Some banks can't lend. From March: China Eases NPL Rules as Lending Constrained

China is making it easier for banks to lend if they declare their bad loans as non-performing. Regulations require a higher reserve ratio because its feared banks are hiding losses. Under the new rules, banks can lower their required reserves by reporting an accurate NPL accurately.

The shift is a regulatory step forward, but indicates banks are capital constrained amid deleveraging efforts. It is unlikely to boost lending when the credit market is in the contracting/disinflationary stage of the cycle.

China's financial system is still based on the U.S. dollar. As dollars came in from exporters, the banks buy them and send them to the PBoC. This creates base money. China creates far more credit that it has in reserves and no one cares when the system is expanding, anymore than they care that U.S. money supply roared ahead in the 2000s. When dollar liquidity tightens and there's outflow pressure, China's financial system risks collapsing like a house of cards. Even if the dollars are kept in the country, if the banking system wants to expand, it is creating "unbacked" credit. If China expands money and credit while the dollar is "deflating" it increases depreciation pressure on the yuan.

Meanwhile, credit keeps pouring into real estate through credit cards and consumer loans. There was a wild frenzy in Shenzhen over the past couple of days as wealthy people rushed to get divorced and qualify for a housing lottery. The winners of the lottery qualify can buy homes priced at least 2 million yuan below market prices.
Housing Lottery Frenzy in Shenzhen

In sum, Chinese banks either can't or do not want to make riskier loans. Sentiment is shifting. This second RRR cut follows changes in NPL rules, expansion of MLF, an April RRR cut. Deflationary pressure is building. The U.S. dollar (or eurodollar or "dollar" as Jeffrey Snider at Alhambra calls it) can blow everything up by itself and reflexivity is dangerously close to kicking in. Rising dollar causes China pain that spreads to EMs and causes rising dollar. Rinse and repeat all the way up to 120 on the DXY if all hell breaks loose.

Back in 2015 the PBoC was cutting the RRR heading into the peak of a stock market bubble. Today, the stock market is in a bear market. Real estate may be coming under control. It looks like restrictions are starting to finally have an impact, but the lottery behavior in Shenzhen and elsewhere shows sentiment remains bullish. The latest PBoC quarterly survey showed 23 percent of depositors say they intend to buy a home in the next 3 months, way above the 14.2 percent at this time in 2014 when the real estate market was already turning. Back in February 2014 I posted: China Real Estate Rage Is Back; Ghost Cities Everywhere; Offshore Yuan Plunges; Talk of Falling Real Estate Prices Across China. By 2015, China was already trying to rescue the housing market: MoH and PBOC Plan More Housing Bailout Measures, Cut Down Payments and Reduce Mortgage Rates. After the April RRR cut in 2015 I posted: Chinese Regulators Panic, Era of Tight Money Is Over.

I don't think there's any panic or reversal in monetary policy yet. Stocks are down, but have been for some time and are nowhere near as important as real estate. The real estate market hasn't slowed yet, but that is likely because credit restrictions haven't made their full impact yet. Local government policies such as lotteries are increasing speculative sentiment rather than quashing it. Comparing to the last cycle, I think the Chinese economy is much earlier in the cycle, but the PBoC is already behaving as if its moving into mid-cycle because three years of torrid credit growth has created a much larger problem.