2019-08-20

Naysayers Already Argue China Interest Rate Reform Will Fail

Caixin: Lending Rate Reform Could Benefit Big Borrowers Most, Analysts Say
Analysts hold different views on whether the new reforms will lead to loan rates actually being lowered. Economists at Nomura said “the new LPR regime and the PBOC quasi-policy rate cuts could favor big state-owned borrowers while delivering few benefits to small and medium-sized enterprises (SMEs),” as looming growth headwinds and financial risks have been making banks more risk averse.

Banks may need to do some “national service” by lowering their average loan rates, but they may try to make up for their lower profits by increasing the price of riskier loans to the private sector and SMEs, the Nomura economists said.

Economists at China Merchants Securities also think that if the implicit floor on lending rates is eliminated, the borrowing costs of big companies will probably decline substantially. But more policies will be needed to lower the borrowing costs of SMEs, which are relatively high risk and have little bargaining power.
Every effort to lower borrowing costs for SMEs has failed. I doubt SMEs will see much of a boost beyond some initial window-dressing by banks. The more important issue for the next couple of months is whether lending picks up at all and where the credit flows. The government also has tight restrictions on the property sector and those have also failed at every turn. Moreover, if credit doesn't pick up and real estate restrictions succeed this time, the result will be one of the last pillar's of GDP growth being starved of credit.

Trade-Weighted U.S. Dollar Exceeds 2002 Peak

If this is a basing pattern, God help the global economy. Although it doesn't look it in the zoomed out view, the horizontal is set at the 2002 high.

Prepare for Chaos: Voters Still Have No Idea on Mass Migration

A recurring topic on this blog is how the media and political establishment control debate and discussion, and replace reality with their own narrative of events. This is not the same as common knowledge, a correct or incorrect understanding of events, but a deliberate political act designed to change public perception and public opinion such that the establishment's desired policies can be enacted. Not all narratives fall in this category. Western financial media was convinced China would unleash another major stimulus around 2014, bailing out China and the global economy. Many resource producing companies apparently bought into the narrative and expanded production, with the predictable result of collapsing commodity prices and heavy financial losses. Currently, the financial media and economic establishment is centered on the "trade wars bad" narrative and blaming weak economic data on the trade war or the Federal Reserve's interest rate policies, instead of focusing on China's domestic economy and imbalances between major exporting and importing countries. False financial narratives tend to die though because reality intrudes in the form of losses. The narrative on trade war is already shifting.

Everyone has a narrative or a hypothesis. Expectations either match reality or they don't. When events contradict the hypothesis, people either retreat from reality or move from hypothesis to narrative. The American establishment has a narrative on immigration that is false almost from head to toe, from the economic benefit (it appears to be a net cost if you account for everything beyond GDP) to public support.

Back in 2014 I posted: Immigration Issue Set to Explode in America; Prepare for Political Volatility. UKIP was the first clear warning shot for the Anglosphere on the topic of immigration. UKIP started with a laser-like focus on a referendum to leave the European Union. They focused on topics such as how much money the UK paid to the EU, plus dry political arguments about who decides local policies. When they were out canvassing they heard the same thing from voters over and over: immigration. Being political neophytes, they were naive enough to think they should represent the voters wishes (and not offer false choices that fit into the approve narrative). They began using immigration as an issue and voila, scored a major political upset.
UKIP's reason for existence was to get the United Kingdom out of the EU. There are many issues that fall under the control of Brussels, such as economic regulations, but the big issue that voters wanted to hear about was immigration. UKIP realized immigration was the big issue and it focused on that issue, turning it into a shock electoral victory.
The post went through polling data that shows many voters prefer immigration restriction when the question is properly framed. Many polls put out by American media ask very open ended questions such as "Do you favor immigration reform?" that encompass everything from banning immigration to open borders.

The post concluded with:
UKIP was a distant warning shot. The defeat of Eric Cantor was a much closer shot. Few if any politicians have stepped up to advocate an immigration restriction policy. They have nearly all taken the easy road of bashing President Obama for inaction. This leaves an opening for an ambitious politician.
The final link went to a video of Trump discussing immigration at the time.

What followed? The shock Brexit victory, the shock Trump victory, the League dominating Italian politics and perhaps the quietly biggest news, the Danish center-left swung very hard-nationalist on immigration ahead of its political victory. I made 1700 percent profit on my Trump bets (mainly due to a quirk in the payoff condition, proving the adage the greatest profits are made in the shortest amount of time by the fewest number of traders).

How are things shaping up in the United States? Not good. President Trump has failed to deliver any substantive reform on immigration. Whether through his own failings and personnel choices or because the U.S. courts are now political weapons, nothing has happened. Trump was a gift to the United States and his opponents. If he could pass immigration reform, it would likely take the issue off the table. It would also likely re-anchor the issue to a new center of merit-based immigration. Instead, the border is being overrun by millions of migrants who believe if they simply get their foot in the USA with a bogus asylum claim, they can collect welfare and free healthcare for life. If events continue as they are now, a merit-based immigration system will be the policy of choice for the globalist fringe in a few years.

Meanwhile, Trump's opposition retreated into Narrative Hell. Large portions of the American progressive left live in a world where Trump is an openly-racist, white supremacist Nazi working for the KGB on direct orders from Putin.

Perhaps not incidentally, immigration is now the top issue according to American voters. Gallup: Mentions of Immigration as Top Problem Surpass Record High.
After hitting a new high last month, mentions of immigration as the most important problem facing the U.S. increased further to 27% in July. Since Gallup began regularly recording mentions of the issue in 1993, immigration has been cited by an average of 6% of Americans, though it has been higher in recent years. There have been occasional, typically short-lived, spikes when major immigration events were occurring.

...Race relations or racism (7%) and healthcare (7%) are the only other two issues to receive as many as 5% of mentions this month.
This is not a short-lived spike. It is the predictable new normal.

The media rejects this reality though, and bends every event in contradiction to the truth. A few weeks ago there were mass shootings in El Paso, TX and Dayton, OH. As with almost every mass shooting, the shooters are alienated young men with mental health issues, often taking brain-altering medications. Yet the lunatic in El Paso wrote a manifesto about immigration. The NYTimes: El Paso Shooting Suspect’s Manifesto Echoes Trump’s Language.

The gap between reality and media narrative is vast. Mass shootings are a very difficult problem because they're centered on mental health issues and wider societal developments, including social mood and historical cycles (an increase in mass shooting fits Turchin's model in Ages of Discord). Yet if you were a yellow journalist trying to manipulate random or unconnected events into a somewhat reality-based narrative, you might say the El Paso shooter was caused by mass migration. That is is a reaction to an extreme policy, pushed by government, media, corporations and other major institutions against the wishes of the public. I'm not arguing for that narrative. Shooters grab onto anything they find. If some nut has a website about a fast food chain being evil incarnate, another crazy might write a manifesto about it before shooting up a restaurant. I'm merely highlighting how the major media and everyone who consumes their output is unmoored from reality. The "immigration rhetoric caused a mass shooting" narrative is total nonsense, yet it is the widely-believed official narrative of America's political, social and economic establishment. The people running the United States are like Soviet commisards being told the people love the new 5-year plan and only the imperialst, running dog capitalists oppose it.

The reality is even worse though, because the media has created a situation where the public is almost as misinformed.

Unz: Media Failing Spectacularly
Anyway, a Harvard-Harris poll last Spring asked respondents “about how many people do you think are caught trying to enter through the southern border each year?”. Five possible ranges were offered as answers in multiple choice format.

The subsequent graph is extraordinarily generous in what is counted as a correct answer. Respondents are given credit for answering either “250,000 to 500,000” or answering “over 500,000”, since the reported total number of apprehensions for calendar year 2018 was 467,000, while 2019 is on pace to come in somewhere around 1,000,000.

So on a five item multiple choice question, we’re giving credit for two possible responses. If participants randomly selected answers, the rate of correct responses would be 40%. Well, not a single demographic category of the 26 the survey reported results for did as well as they would have had they randomly guessed:
The American public doesn’t just lack knowledge about what is happening along the southern border, it has anti-knowledge of the situation.
Republicans are only 9 percentage points more informed than the average voter and that was enough to produce President Trump. The average Republican voter is ignorant of the scale of mass migration, two-thirds are cluless along with roughly 75 percent of the general public.

Contrast the reality of mass migration against the reality that a clear majority of the public favors immigration restriction and more than one-quarter voluntarily name immigration as the biggest issue facing the country. That the public is shifting even more in favor of immigration restriction during a period of declining social mood that will turn extremely negative around the time the economy tips into its next recession.

A total ban on immigration that lasts at least one generation is becoming a major possibility. Mass deportation of illegal aliens and possibly foreigners on welfare is also likely if there's a deep economic downturn. That's the bright side. If the establishment instead pushes in a more extreme direction towards open borders, it will grow even more out of touch with the general public, setting up a cataclysmic collapse in legitimacy.

Back in 2014, I posed this video of a woman complaining about migrant children getting resources while her own children didn't. She is a black woman who statistically is not a Trump voter, and yet she expresses an opinion that is more nationalist that President Trump's rhetoric. This video should terrify the American establishment, but it does not because they believe they have enough control over the narrative such that the truth will not get out, that they'll be able to shape opinion. That anyone who points out the emperor's new clothes can be successfully silenced with charges of racism. My warning is that this woman is expressing the centrist immigration policy of the American voter, and yet she is to the "right", more nationalist, than President Trump. If and when this dam breaks, there will be a rush to a new political center. If the American establishment is far enough out on a limb, they will be wiped out be the flood and create an opening for whatever rises up to fill the power vacuum.

2019-08-18

Real Estate Financing Still Tightening

A big moment for the Chinese economy approaches. Economic growth has been propped up by real estate. Loan reform designed to funnel credit towards SMEs was launched this weekend, outcome unknown.

iFeng: 楼市调控政策趋严 银行房贷利率普涨
In this general rise in housing loans, the interest rates for first and second home loans of several banks have increased, and the approval of loans has been stricter. According to a reporter from China Business Daily, the China Banking Regulatory Commission recently requested banks in 32 cities to conduct a special inspection of their real estate loan business, with banks with large real estate loans bearing the brunt of the inspection. In addition, as banks have already made relatively large loans to the real estate industry before, the intention to control the size of loans by tightening credit is now more obvious.

Reporters learned through investigation that mortgage interest rates in second-tier cities such as Hangzhou, Suzhou, Nanjing, Xi 'an, Zhengzhou, Nanning, Wuhan and other cities have increased considerably. Some banks have raised the loan interest rate for first-tier apartments directly from the benchmark to 20%, while the loan interest rate for second-tier apartments has risen as high as 25% from the benchmark. In addition, banks have tightened their scrutiny of the use of funds for consumer loans and operating loans for housing loans to prevent funds from bypassing the property market.

Interest rates are high and the wind has changed?

In order to solve major problems such as people's livelihood housing, supervision has been implementing differentiated policies for mortgage interest rates. We will strictly control and raise the loan ratio limit and loan interest rate for the purchase of multiple apartments, while we will be more lenient with the loan interest rate for the first apartment.

It is understood that as early as three years ago, the state-owned big banks in many places were still able to implement a discount of 8.5% or even lower on their first apartments. However, now the trend of bank loans has changed, and the first apartments, which are just needed, are not immune from this general rise in housing loans.

Chen Hua (not his real name) is planning to get married in Changsha. Buying a house is the top priority before marriage. However, when he contacted several banks in the city, he found that the interest rate of the house purchase loan has changed greatly from six months ago.

"Compared with the beginning of the year, the house price in Changsha is still relatively stable, but the interest rate on the house loan has gone up a bit exaggerated." Chen Hua said that the bank loan for the first apartment had a discount on the benchmark interest rate, which was up to 5%. Today, the loan interest rate of most banks has risen to 15% above the benchmark.

He told reporters that a 15% rise in the benchmark mortgage interest rate seemed insignificant, but it meant that a loan of nearly 1 million yuan would have to be repaid more than 400 yuan per month. According to the 30-year term of the loan, the additional interest required for the loan is close to 150,000 yuan. "Since most bank loans are repaid in equal amounts, the part repaid in advance is more interest, which is even more uneconomical for buyers who repay their loans in advance."

Reporters found that the interest rate for bank loans in Changsha, Hunan province, has risen more widely, especially in joint-stock banks, with the interest rate for most first homes rising 15% from the benchmark. The loan interest rate for the second suite is mostly 20% higher than the benchmark, but the loan interest rate for the second suite of a big state-owned bank has also risen to 25% higher than the benchmark, which also means that the loan interest rate has broken "6".

In fact, Hangzhou, Suzhou, Nanjing, Wuhan, Zhengzhou and other places have also received frequent news of bank mortgage interest rate increases in the near future. Take Nanjing as an example. In May this year, many banks raised the interest rate for first-home loans by 5% on the benchmark, which is currently 15% on the benchmark, with a further upward trend.

Market sources said that the mortgage interest rate of some banks in Xi 'an has increased significantly. The loan interest rate for the first suite has increased by 20% according to the benchmark, which is even higher than the loan interest rate for the previous second suite.

Compared with the second-tier cities, Beijing, Shanghai, Guangzhou and other first-tier cities have smaller changes in mortgage interest rates. Reporters visited several large state-owned banks and joint-stock banks and learned that the current loan interest rate for the first suite of most banks is 10% higher than the benchmark, while the loan interest rate for the second suite is adjusted from 10% higher than the benchmark to 15% higher than the benchmark.

"The current change in mortgage interest rate may be closely related to the policy, and the scale of bank loans may continue to shrink in the future." A large state-owned bank disclosed to reporters that the rise in mortgage interest rates is determined by the overall market factors, and the bank will make adjustments according to the actual situation.

Tighter Supervision on Bank Shrinkage

The rise in mortgage interest rates is closely related to the tightening of regulatory policies. In order to strengthen the macro-control of the real estate market, the supervision will severely crack down on the illegal entry of funds into the real estate market and will not relent in its punishment.

It is understood that since July, the real estate trust has shown obvious signs of "braking", the supervision has implemented balance management, and the approval of products has slowed down.

It is noteworthy that the general office of the China Banking Regulatory Commission recently issued the Notice of the General Office of the China Banking Regulatory Commission on Carrying out Special Inspection of Real Estate Business of Banking Institutions in 2019, deciding to carry out special inspection of real estate business of banking institutions in 32 cities, and will severely investigate and punish all kinds of illegal acts that divert funds into the real estate industry through misappropriation or diversion.

Reporters learned that the special inspection will specifically target financial institutions with large real estate loan volume and will conduct spot checks on relevant business specifications.

"The real estate industry is a lever game. With the strong support of credit, house prices may have an upward trend. Supervision and strict control of real estate credit is also a policy of strict control of real estate to avoid risks caused by bubbles. " The aforementioned state-owned big banks said.

The source told reporters that under the supervision policy, banks will reduce the amount of mortgage loans and tilt credit resources to first-tier cities, which will reduce the supply of second-tier cities and raise the interest rate of loans. "The mortgage market will cool down in the second half of the year, and banks will increase their control over the total amount."

A stock broker told reporters that in the past two years, the bank's credit to the real estate industry has not been small in scale, with annual growth even reaching double digits. "As the supervision has tightened on real estate financing at this time, banks will also follow up with the contraction in credit."

"Housing loans will still be approved, but it is more difficult than before. There is no such big discount on interest rates." The source said.

China FX Reserves vs Yuan, DXY for July

A China Pattern

Here are two stocks. One is the China Technology ETF (CQQQ). The other is A.O. Smith (AOS), a company that generates about one-third of its revenue in China.

2019-08-17

Will Financing Costs for SMEs Finally Drop?

Reuters: China unveils rate reform to steer funding costs lower for firms
The People’s Bank of China (PBOC) said it will improve the mechanism used to establish the loan prime rate (LPR) from this month, in a move to further lower real interest rates for companies as part of broader market reforms.

Analysts say the move, which came after data that showed weaker than expected growth in July and followed a cabinet announcement on Friday, underscores the government’s attempts to use reforms to support a slowing economy.

“By reforming and improving the formation mechanism of LPR, we will be able to use market-based reform methods to help lower real lending rates,” the PBOC said in a statement published on its website.
Every effort to lower borrowing costs has failed. Every effort to steer capital away from zombie industries and real estate speculation has failed. That is the reality, not a prediction. This is a crucial moment for the economy.

iFeng: 重磅!央行降低贷款利率出大招 今后贷款更容易了
Financing Difficulties? Interest rate "two tracks and one track" needs to be promoted

The relevant person in charge of the central bank pointed out that at present, the upper and lower limits of China's loan interest rates have been liberalized, but the deposit and loan benchmark interest rates are still retained, and there is a problem of “interest rate double track” where the loan benchmark interest rate and market interest rate coexist. When banks issue loans, most of them still refer to the benchmark interest rate of the loan. In particular, individual banks set a hidden lower limit by a certain multiple of the benchmark interest rate (such as 0.9 times) through coordinated actions, which hinders the transmission of market interest rates to the real economy. An important reason for the obvious downward trend in interest rates but the lack of experience in the real economy is the core issue that needs to be urgently resolved in the current market-based interest rate reform.

"The main measures for this reform are to improve the formation mechanism of the loan market interest rate (LPR), improve the marketization degree of LPR, play a good guiding role of LPR on the loan interest rate, promote the loan interest rate 'two tracks and one track', and improve interest rate transmission. Efficiency, and promote the reduction of financing costs in the real economy," said the person in charge.

Dong Xiwei, vice president of Chongyang Financial Research Institute of Renmin University of China, told the China-China Jingwei client that due to the existence of interest rate “two tracks”, on the one hand, policy interest rates are difficult to be effectively transmitted among financial sub-markets such as currency, bonds and credit, affecting interest rate transmission. The effect is not conducive to the realization of monetary policy objectives; on the other hand, the pricing of financial products is difficult to accurately reflect the market interest rate in a timely manner, which is not conducive to the flow of funds from financial institutions to the real economy, affecting the efficiency of financial resource allocation. Therefore, we must actively and steadily push forward the interest rate "two tracks and one track" work.

Take more measures to reduce the actual interest rate of loans


The National Convention meeting held on the 16th pointed out that since the beginning of this year, all parties concerned have made active efforts, and the overall financing interest rate of the whole society has generally stabilized and declined. We must continue to maintain this situation, especially in the face of the current situation. We must maintain a reasonable and sufficient liquidity, adhere to the reform measures, promote a significant decline in the real interest rate, and work hard to solve the problem of “funding difficulties”.

The relevant person in charge of the central bank said that by reforming and improving the LPR formation mechanism, it is possible to use the market-oriented reform measures to promote the effect of lowering the actual interest rate of loans.

The person in charge said that first, the overall market interest rate in the previous period will be larger, and the LPR formation mechanism will be more reflective of the decline in market interest rates. Second, the new LPR is more market-oriented, and it is difficult for banks to coordinate the implicit lower limit of the loan interest rate. Breaking the implicit lower limit can cause the loan interest rate to decline. The regulatory authorities and the market interest rate pricing self-regulatory mechanism will supervise the banks, and the enterprise can report the bank's behavior of setting the implicit lower limit of the loan interest rate. The third is to explicitly require banks to refer to LPR pricing in newly issued loans, and use LPR as a pricing benchmark in floating-rate loan contracts. In order to ensure a smooth transition, the stock loan is still executed as originally agreed. Fourth, the People's Bank of China will incorporate the bank's LPR application and loan interest rate competition into a macro-prudential assessment (MPA) to urge banks to use LPR pricing.

For more measures to reduce corporate financing costs and loan interest rates, the relevant person in charge of the central bank said that the central bank will also take various measures with relevant departments to effectively reduce the comprehensive financing costs of enterprises. The first is to promote open and transparent credit rates and fees. Strictly regulate the fees and charges of financial institutions, and urge intermediaries to reduce fees and make profits. The second is to strengthen positive incentives and assessments, strengthen credit support for orders and credit companies, and better serve the real economy. The third is to strengthen multi-sectoral communication and coordination, form a policy synergy, and promote multiple measures to reduce the cost of corporate financing and other channels.

Global interest rate cuts look forward to the direction of domestic monetary policy

In early August, the central bank issued the China Monetary Policy Implementation Report for the second quarter of 2019. The report carried out a more comprehensive inventory of China's monetary policy implementation in the first half of the year. From the perspective of monetary policy, the report pointed out that a prudent monetary policy should be tight and moderate, maintain a reasonable liquidity, and implement counter-cyclical adjustments in a timely and appropriate manner to guide the broad-based monetary growth rate of M2 and social financing to match the nominal GDP growth rate.

Since the Fed cut interest rates, many central banks around the world have joined the “reduction of interest rate camps”. 28 countries or regions have chosen to cut interest rates to varying degrees, and have also strengthened domestic expectations for monetary policy liberalization. Looking forward to the direction of domestic monetary policy in the second half of the year, Dong Xizhen believes that China's monetary policy will still adhere to the stable main tone, maintain a moderate degree of flexibility, use a variety of monetary policy tools, and increase the frequency of pre-adjustment and fine-tuning, but there will be no “big flood irrigation”. "The situation." From the perspective of risk prevention, it does not support the further easing of monetary policy. At the same time, the deposit reserve ratio still has a certain room for downward adjustment, but the possibility of targeted RRR reduction is even greater. Dong Xizhen believes that as for the reduction of the benchmark interest rate for deposits and loans, the possibility is not high in the short term.

2019-08-16

China Home Price Increase Slows in July


New home prices increased 0.59 percent nationally in July. Existing home prices increased 0.37 percent.

Shine: China's home prices generally stable in July
Reuters: Modest gains in China's new home prices give authorities breathing room
SCMP: China’s July home prices cool, as escalating trade war and slowest economic growth in decades send shivers through property market
NBS: 2019年7月份70个大中城市商品住宅销售价格变动情况

The Slope of Hope Arrives: Bounce Edition

Ifeng has a special section dedicated to central bank surrender.

iFeng: 5年来首次!又有全球大国降息了:26国"大放水" 中国跟不跟?
Trump just shouted that the Fed accelerated the pace of interest rate cuts, and another national central bank announced its participation in the "reduction of interest rate legions."

The Bank of Mexico recently decided to cut the benchmark interest rate by 25 basis points to 8% on the grounds that global economic activity is slowing and international economic and trade tensions are tight, and this is the first time the central bank has cut interest rates in five years.

Since the beginning of this year, the central banks of 26 countries have announced interest rate cuts, and the interest rate cut camp has continued to expand. The agitation of the global interest rate cuts has undoubtedly strengthened the market's expectation that domestic central banks will open monetary policy space and follow up interest rate cuts.

However, will “saving” the global economy through the release of money bring about the expected increase? Under the tide of interest rate cuts, risk assets will re-emerge? A series of questions are still waiting to be resolved.

Mexico cuts interest rates by 25 basis points to 8%

The global interest rate cut has not stopped.

The Mexican central bank decided on Thursday to cut the benchmark interest rate by 25 basis points to 8%, citing the slowdown in global economic activity and the tight international economic and trade situation. This is the first time the central bank has cut interest rates in five years. Before the Mexican central bank announced a rate cut, the market is expected to remain unchanged at 8.25%.

The Bank of Mexico said in a statement that “the risks facing the global economy have increased” and mentioned the commercial disputes, the “disordered” Brexit process and the deterioration of “some political and geopolitical risks”. The agency added that there is still uncertainty in the US-Mexico relationship.

After the announcement of the interest rate cut, the peso fell back 0.4% against the US dollar and quickly fell back. Mexico's 10-year bond yield fell 19 basis points.

In fact, before this announcement of interest rate cuts, institutions have expected that the Mexican central bank may be in a difficult position to eventually choose to cut interest rates.

On August 14th, BBVA expects the Mexican central bank to cut interest rates by 25 basis points in September and cut interest rates by 100 basis points in 2020. Last month, Goldman Sachs released a report stating that Mexico’s economy remained “moderate” in the second quarter of 2019; the weakness of the Mexican economy increased the probability that the Mexican central bank would cut interest rates in August.

It is reported that earlier this week, Moody's analyst Alfredo Coutino predicted that Mexico's GDP growth rate this year is only 0.5%, which is "moderately positive", but the above analysts also said, "If investors remain silent, The economy of 2019 may not grow, and there may even be a moderate contraction."

According to a report by the Global Forex Network on July 30, Mexican President Andres Manuel Lopez Obrador said in an interview with Bloomberg that Mexican interest rates are too high for a slowing economy, but he added that he Respect the freedom of the central bank to independently set interest rates.


“The Central Bank of Mexico is paying attention to inflation, which is not bad,” Ovrado said. “But it’s important to lower interest rates to start economic development.” This is also the case after the presidents of advanced economies such as the United States and Turkey offered to recommend central bank interest rate cuts. Another president of the country publicly expressed his views on interest rate cuts.

Global central banks set off a wave of interest rates

From the beginning of this year, after India started the "first shot of interest rate cuts", central banks in various countries began to rush to cut interest rates in order to cope with the slowdown in global economic growth. According to statistics, at present, half of the G20 countries have lowered their policy rates, and four of the BRICS countries have cut interest rates.

Starting from August this year, the Fed’s rare interest rate cuts have intensified this round of global interest rate cuts. After the Fed’s interest rate cuts, several countries once again intensively announced interest rate cuts within half a month.

After the interest-rate meeting that ended on August 1, the Fed decided to cut the federal funds rate target range by 25 basis points to 2%-2.25%. This is the first time the Federal Reserve has taken interest rate cuts since December 16, 2008.

The policy statement shows that US economic activity is growing at a moderate rate, the job market remains strong, and household spending growth has accelerated, but corporate fixed investment continues to be weak. Federal Reserve Chairman Powell said that the interest rate cut is to cope with the downside risks of global economic slowdown, the uncertainty of the trade situation and the 2% inflation target as soon as possible.

On the day when the US announced a rate cut, the central banks of the United Arab Emirates, Saudi Arabia and Bahrain followed the Fed’s pace and lowered the benchmark interest rate by 25 basis points. The analysis said that the reason for the rate cut was that the currencies of the three countries were pegged to the US dollar. On the same day, the Brazilian central bank announced a 50 basis point rate cut and cut the benchmark interest rate by 50 basis points from 6.50% to 6.00%, exceeding market expectations (the market expects to cut interest rates by 25 basis points).

On August 7, New Zealand, India and Thailand, three central banks announced interest rate cuts on the same day. Among them, the New Zealand central bank cut interest rates by 50 basis points, the second rate cut in the year. It is worth mentioning that New Zealand's interest rate cuts exceeded market expectations. The New Zealand Federal Reserve announced interest rate resolutions, the committee agreed to cut interest rates by 50 basis points, reducing the official cash rate (OCR) to 1%, after the market forecast will cut interest rates by 25 basis points. The Bank of India announced that it will cut its benchmark interest rate by 35 basis points from 5.75% to 5.40%, setting a new low since 2010. The Bank of Thailand’s Monetary Policy Committee decided to cut the benchmark interest rate by 25 basis points to 1.5%. This is Thailand's first interest rate cut since 2015 to stimulate economic growth and curb the strength of the Thai baht.

On August 8, the Central Bank of the Philippines announced that it would cut the benchmark interest rate by 25 basis points to 4.25%. This is the second time the country has cut interest rates since May this year. On August 9, the Peruvian central bank announced that the reference interest rate (base rate) was set at 2.50%, compared to 2.75%. In just three days, five consecutive countries have successively implemented interest rate cuts, and the rate cuts are very dense.

In just half a month, 10 central banks announced interest rate cuts, and the global interest rate cuts swept through. From the perspective of the interest rate cut cycle, most of the central bank's interest rate cuts are the first monetary policy water release measures taken many years later.

The domestic central bank is still "not moving"

The global entry into the interest rate cut cycle and the surge in interest rate cuts have undoubtedly strengthened the market's expectation of domestic central bank interest rate cuts. However, in the analysis of industry insiders, China's monetary policy space will be opened, but the scope may be limited.

Judging from the current action of the central bank, although the global central bank has followed the action of cutting interest rates, the domestic central bank has always adopted the strategy of “doing no action”.

On August 15, the People's Bank of China carried out a medium-term loan facility (MLF) operation of 400 billion yuan, 17 billion yuan more than the amount due on the day, and the operating rate was 3.3%, which was the same as the previous period. At the same time, the 7-day reverse repurchase operation was 30 billion yuan, and the operating rate was 2.55%.

This also means that the central bank still adopts other monetary instruments such as MLF to adjust the monetary policy, and the market interest rate cut is expected to fall again.

Earlier, the central bank said in the second quarter monetary policy implementation report that "in view of the possibility of maintaining the medium- and low-speed growth of the global economy in the medium and long term, we must adhere to the principle of taking the initiative, taking into account international factors and grasping the overall balance in multiple objectives. Keep your strength and plan for a long run."

At the same time, in July, in addition to insisting on the attitude of housing and not speculation and long-term mechanism, the Politburo meeting also added a new phrase “not to use real estate as a means of stimulating the economy in the short term”, and real estate regulation has become more stringent. Industry analysts pointed out that since the mortgage interest rate is greatly affected by monetary policy, if the currency is further widened, it will be contrary to the policy intention of not stimulating the real estate bubble. From the perspective of preventing the real estate market bubble, the monetary loosening plus code will also be constrained.

Economist Deng Haiqing said that China's monetary policy is highly independent of the United States. The Chinese central bank is not just like the small country central bank, it can only passively follow the Fed. When judging the monetary policy of the People's Bank of China, giving overseas factors too high a weight may be more emotional rather than rational.

Deng Haiqing said that the central bank's monetary policy will maintain its strength, with structural credit and dredge monetary policy transmission mechanism as the focus to stabilize growth, rather than engage in "big flood irrigation." The crux of the real economy financing also appears in "wide credit" rather than "wide currency."

This also means that looking at the adjustment of monetary policy and simply cutting interest rates is not necessarily a "universal medicine" that stimulates the rapid recovery of economic recovery. It may also bring other effects. It needs to say goodbye to the traditional "big flood irrigation" traditional thinking, but The goal of importing “live water” into the real economy is achieved through diversified policy adjustments and fine-tuning of monetary policy space.

Asset style switched to safe haven assets

It is worth noting that under the surge of global interest rate cuts, the general concern about the economic slowdown has not been much reduced, the short-term elasticity of risk assets has risen hard, and asset styles are shifting from risky assets to safe-haven assets.

On Friday (August 16th), the Asian market reported that the spot gold short-term surge suddenly rose to a maximum of 1528.1 US dollars / ounce. The analysis believes that the recent concerns about the trade situation and the speculation that the Fed will cut interest rates again will support the gold price. Market risk aversion has warmed up again.

According to industry analysis, the price of gold is rising strongly and is currently above the $1520.00/oz mark, thus consolidating the expectation that the price of gold will continue to rise in the future.

At the same time, the gold ETF holdings increased significantly. On August 15, the gold holdings of SPDR Gold Trust, the world's largest gold exchange-traded fund, increased by 844.29 tons compared with the previous trading day, indicating that investors are more optimistic about gold investment.

The risk aversion has warmed up, and it has also brought the market's enthusiasm for investment in safe-haven assets. Some hedge fund managers said that as the valuation of traditional safe-haven assets continued to rise, many investment institutions turned their attention to emerging market high-credit rating bonds with relatively high yields as new safe-haven investment targets, including China, Thailand, etc. Emerging market countries, national debt, etc.

Analysts at Zhongtai Securities said that global safe-haven asset prices have risen sharply. Since October last year, the risk-free yields of major economies such as the United States, Europe, and Japan have fallen sharply, and international gold prices have risen by 26%. Although short-term safe-haven assets have risen rapidly or have some pressure to adjust, the global economic downturn is difficult to reverse, and safe-haven assets are still attractive.

2019-08-14

Low Volatility China Plays

Closed $CHU. Still holding $PTR.

July Economic Data Catches Down to Credit Growth

See the prior post on July credit growth for more context. Also the prior posts China Crisis Repeating a Familiar Pattern For the Last Time as well as China Credit Growth and Risk of Financial Crisis, the latter goes into why I believe China is getting very close to a tipping point. The punchline: credit bubbles do not burst when there is a recession and growth turns negative. Credit bubbles burst when credit growth slows to a rate that cannot sustains ponzi or speculative finance. That "no high enough" growth rate tips a high-flying economy still experiencing what looks like rapid credit growth into a recession and financial crisis.

Trade deal are not causing a slowdown in credit. Maybe exacerbating the effects, but not causing. Trade deals will not solve what's ailing China's economy or the global economy.

Here's July industrial production.
Drilling down into the numbers, the usual suspects are still in contraction, but the year-on-year contraction in July is below the YTD contraction, i.e. it's possible a bottom has been hit. Where was the new weakness to print a sub-5 percent industrial production number? Power generation. The left highlighted column is the July yoy, the right is YTD.
Also notable are the drops in pig iron and steel, alternative energy vehicles crash with 9.1 percent growth in July versus 32 percent YTD.

NBS: 2019年7月份规模以上工业增加值增长4.8%

Retail sales report from NBS: 2019年7月份社会消费品零售总额增长7.6%
Sales ex-autos rose 8.8 percent. Cars and fuel were negative, as was gold and silver jewelry.
The economy has been reliant on real estate as the PBoC admitted this week. Real estate did indeed prop up the economy last month, slowing slightly, but still at very elevated growth levels.

NBS: 2019年1—7月份全国房地产开发投资和销售情况
For context, this growth rate was sub-10% for nearly all of 2015 and 2016, several months saw contraction and the overall growth rate even threatened to go negative. Here's the chart from January 2017. I leave it up to readers whether the current growth rate indicates a healthy economy or not. My read is the underlying economy is in far worse shape.
Finally, fixed asset investment. Not negative, but also not positive as it remains at a depressed level.

NBS: 2019年1—7月份全国固定资产投资(不含农户)增长5.7%

2019-08-12

China's Intensifying Credit Slowdown, M2 Falls, TSF Approaching Stall Speed

TSF outstanding increased 10.7 percent in July. The yoy comparisons show a markedly negative trend. A year ago, TSF was up 13.8 percent yoy. The mtm increase in TSF outstanding was 20 percent lower in July of this year versus last. August and September 2018 also saw large increases in TSF, setting up unfavorable comparisons for this year (barring a stimulus or surprise surge in credit). The next two months need to both be ¥2 trillion increases to maintain current growth. The only months above 2T this year, however, were January, March and June. If TSF increases 3 trillion over the next two months, growth in TSF outstanding will slow to 10.1 percent, approaching stall speed for the Chinese economy. Probably need to be closer to 9 percent for fireworks, but the current trend points to an intensifying slowdown.

M2 fell in July. The yoy growth rate slowed to 8.1 percent from 8.5 percent in June. The 3-month annualized increase was only 7.6 percent. Notice on the chart, those big spikes are the end/start of year, the smaller peaks are the mid-year credit burst. You can see the declining trend.
SCMO: China’s bank lending weakened in July, suggesting Beijing’s stimulus efforts not working
Chinese monetary data for July was weak across the board, suggesting that Beijing’s efforts to galvanise new lending are not having the intended effect.

Chinese banks extended 1.06 trillion yuan (US$150.17 billion) in net new loans last month, down from 1.66 trillion yuan (US$235.17 billion) in June, according to the data released by the People’s Bank of China on Monday.

July’s lending was well below the 1.25 trillion added bank credit predicted by a Bloomberg survey of economists, and was the lowest level since April, when banks issued 1.02 trillion yuan in new loans.

The slump raises questions over the need for additional credit easing – when a central bank sets lower interest rates, for example – from the People’s Bank of China (PBOC) to offset the effect of a weakening economy and the impact of the protracted trade war with the United States.

2019-08-11

PBoC Digital Currency on the Way, Prototype Blockchain Completed

China is ready to roll out digital cash. It will be a two-tier system to protect the state banks, with digital cash issued through the banking system instead of directly by the PBoC. There's some question about the final technology, with the PBoC saying it remains technology neutral.

A public blockchain will give the PBoC (and the CCP)direct control over all economic activity in China and paving a way for full micro-implementation of the social credit reward/punishment system. It opens up new avenues for capital controls, direct stimulus for favored industries, negative interest rates and currency devaluation or direct inflation (mass money printing) into individual accounts.

CNStock: 穆长春:人民银行数字货币呼之欲出
Sogou: Mu Changchun: People's Bank of China digital cash Is Coming Soon
On August 10, Mu Changchun, a special member of CF40 and deputy director of the People's Bank of China's payment and settlement department of the Shanghai Stock Exchange China Securities Network News (reporter Zhang Jones), said at the 3rd "China Finance Forty-Person Yichun Forum" that the research on digital cash DC/EP of the People's Bank of China has been carried out for five years since 2014. "The People's Bank of China, digital cash, can now be said to be ready."

Mu Changchun said that the digital cash Research Group of the People's Bank of China has made a prototype and adopted a block chain architecture. Later, it was found that there was a problem, because the legal digital cash was replaced by M0. If we want to reach the retail level, high concurrency is an unavoidable problem. He said that in a large country like China issuing digital cash, adopting a pure block chain architecture cannot achieve the high concurrency required by retail. Therefore, it is finally decided that the People's Bank of China should maintain technological neutrality and not preset a technological route. In other words, it does not necessarily depend on a certain technological route.
I'm not sure what the technical argument is there. PBoC being technology neutral makes sense, but blockchain technology can scale.
In addition, according to his introduction, DC/EP adopts a two-tier operation system. The single-tier operation system is that the People's Bank of China issues digital cash directly to the public. The People's Bank of China first exchanged digital cash for banks or other operating institutions, and then these institutions exchanged for the public. This is a two-tier operating system.

There are several considerations for adopting a two-tier operation framework: First of all, China is a complex economy with a vast territory and a large population. The economic development, resource endowment, population education level and acceptance level for intelligent terminals are all different. If a single-tier operation framework is adopted, it means that the People's Bank of China has to face all the public alone. In this case, there will be great challenges. From the perspective of improving the availability and enhancing the public's willingness to use, a two-tier operational framework should be adopted to deal with such difficulties.

Second, the People's Bank of China has decided to adopt a two-tier structure in order to give full play to the resources, talents and technological advantages of commercial organizations, promote innovation and compete for the best.

Third, the two-tier operation system helps to resolve risks and avoid excessive concentration of risks.

Fourth, if a single-tier operating framework is used, it will lead to financial disintermediation.

Mu Changchun said that under the framework of single-tier deposit, the People's Bank of China will directly face the public to deposit money in digital cash. Compared with commercial banks' deposit money, digital cash's competitiveness is better than that of commercial banks' deposit money under the condition of credit endorsement of the People's Bank of China, which will have an crowding-out effect on commercial bank deposits, affect the lending capacity of commercial banks and increase the dependence of commercial banks on the interbank market. In this case, the price of capital will be raised, the cost of social financing will be increased, and the real economy will be damaged.

"To sum up, the People's Bank of China is the top tier and commercial banks are the second tier. This dual delivery system is suitable for our national conditions. It can not only use existing resources to mobilize the enthusiasm of commercial banks, but also smoothly enhance the acceptance of digital cash. "

Mu Changchun pointed out that the two-tier operation system will not change the relationship between the creditor's rights and debts of currency in circulation. In order to ensure that the digital cash of the People's Bank of China will not exceed the limit, commercial organizations will pay 100% of the reserve fund to the People's Bank of China. digital cash of the People's Bank of China is still a liability of the Central Bank, guaranteed by the credit of the Central Bank, and has unlimited legal repayment.

In addition, the two-tier operation system will not change the existing money delivery system and dual account structure, and will not compete with the deposit money of commercial banks. Since it will not affect the existing monetary policy transmission mechanism or strengthen the pro-cyclical effect under pressure, it will not have negative impact on the real economy.

Mu Changchun said that since digital cash of the People's Bank of China is a replacement for M0, no interest will be paid for cash, which will not lead to financial disintermediation and will not have a big impact on the existing real economy. In addition, all existing regulations on cash management, anti-money laundering, anti-terrorism financing, etc. should be observed, and large and suspicious transactions in digital cash of the People's Bank of China should be reported to the People's Bank of China.

Mu Changchun also pointed out that the digital cash of the People's Bank of China must have high scalability and concurrent performance, which is suitable for small retail high-frequency business scenarios. In order to guide the People's Bank of China's digital cash to be used in small retail scenarios, not to produce crowding-out effect on deposits, and to avoid arbitrage and pro-cyclical effect under pressure environment, transaction limits and balance limits can be set according to different levels of wallets. In addition, some exchange costs and friction can be increased to avoid pro-cyclical situations under pressure.
A currency crisis would be a great time to roll out the digital alternative.

Real Estate Trust Issuance Suddenly Cools in July

Real estate is the main driver of trust finance and its cooling sharply. Without offsetting credit growth or stimulus, the economy will slow yet again.

iFeng: 7月份房地产信托发行骤冷
Sogou: Sudden Chill in Real Estate Trust Issuance
Supervision continues to exert its power and the issuing market of the collective trust market is "cooled". Statistics show that the scale of real estate trust fund raising dropped sharply in July compared with the previous month, which may end the boom since 2018. However, the status of basic industry trust has risen after the real estate trust supervision has been tightened.

The scale of issuance has generally declined.

In early July, the China Insurance Regulatory Commission (CIRC) issued a warning to some trust companies whose real estate trust business grew too fast and increased too much. The rapid growth of real estate trust came to an abrupt end. Usufructuary trust data show that 63 trust companies issued collective trust products in July, with a total of 1,632 products issued, a decrease of 20.31% from the previous month. The issuance scale of collective trust products was 184.577 billion yuan, a decrease of 20.22% month on month.

Judging from the issuance situation, the issuance scale of Everbright Trust, which ranks first only, rose 2.48% month on month. However, the other four trust companies in the top five have seen their issuance scale decline to varying degrees.

In terms of product establishment, 59 trust companies established 1,473 collective trust products in July, down 7.06% from the previous month. The establishment scale of collective trust products in the month was 137.071 billion yuan, down 18.9% from the previous month. In July, due to the influence of "policy+window guidance", real estate trust fund raising encountered a "sudden brake" and the establishment scale of the overall collective trust market dropped significantly month on month.

Real Estate Trust Shrinks into Stereotype

In July, the real estate trust raised 58.425 billion yuan, a decrease of 19.63% from the previous month, but the proportion of the real estate trust still ranked first in that month. Since 2019, with the exception of February, which is affected by the long Spring Festival holiday, the scale of real estate trust fund raising in other months in the first half of the year has exceeded 60 billion yuan. The decline in July may be considered as the starting point for the scale contraction of real estate trust.

Industry insiders said that the regulatory requirements for real estate trust continue to tighten, and the contraction of real estate trust business is a foregone conclusion. For some trust companies that rely heavily on real estate trust business, the performance pressure in the second half of the year will be relatively great. Head real estate companies have become "hot cakes". Trust companies will face fierce competition against high-quality counterparties, and the rate of return of real estate trusts is expected to decline.

The scale of basic industry trust increased by 7.31% month on month

Tighter regulation of real estate trust forces trust companies to carry out other businesses to replace them. The continuous policy of "red packets" is an important reason for the growth of basic industry trust against the trend. The foundation scale of basic industry trust increased by 7.31% month on month.

The basic industry trust returned to the upward trend in March, and the product yield remained relatively high. In July, the amount of funds raised by basic industry trust was 36.385 billion yuan, up 7.31% month on month and 2.25 times over the same period last year. The basic industry trust has maintained a good upward trend since the second half of 2018, reaching its peak in March 2019. Influenced by the crowding-out effect of the massive issuance of local bonds and the improvement of local financing environment, the scale and yield of basic industrial trusts both showed significant downward trend in the second quarter. In July, the fund-raising scale of basic industry trust bottomed out and the product income also rebounded.

The status of basic industry trust has risen after the real estate trust supervision has been tightened. Industry insiders said: First, as an important means of counter-cyclical adjustment by the state, the policy effect of expanding investment in infrastructure has begun to emerge, with strong demand for capital in infrastructure and fewer policy obstacles in trust companies' development. Second, the mode of government-trust cooperation is becoming more standardized, and regions with strong fiscal revenue capacity should be carefully selected for cooperation.

It is worth mentioning that in July, the distribution of funds invested in basic industrial trust was distinctive, with economically developed provinces being the first choice, and gradually expanding to the central and western provinces. Jiangsu Province is far ahead with 151 products and has become the hottest area for basic industry trust development, while Sichuan, Shandong, Zhejiang, Guizhou, Hunan and Shaanxi are the second groups, and trust funds are also continuously flowing in.

Mortgage Interest Rates Rising, 56 Instances of Policy Tightening

In Journey to the West, Sun Wukong wears a band that can be tightened by saying a spell. It is used to control him when he is behaving badly.

iFeng: 房地产金融戴上“紧箍咒”
Sogou: "Band-Tightening Spell" put on Real Estate Finance
56 times, according to statistics from Centaline Real Estate Research Center, the number of national real estate control policies in July once again exceeded the year's record. This also led to 307 real estate control policies nationwide during the year, up 18% from 260 in the same period last year. However, after the downward trend of mortgage interest rates ended and rebounded in June, many places such as Hangzhou, Guangzhou, Suzhou, Wuxi and so on have recently received signals of rising mortgage interest rates and slowing down the approval rate.

Following the April 19 meeting of the Political Bureau of the CPC Central Committee, which reiterated that "housing will not be sold", the regulation of the property market has been upgraded again in the near future. On July 30, a meeting of the Political Bureau of the Central Committee proposed for the first time that "real estate should not be used as a short-term stimulus to the economy". The central bank also pointed out that the real estate industry occupies more credit resources at the symposium on the adjustment and optimization of credit structure of banking financial institutions held on July 29.

Zhang Dawei, chief analyst of Centaline Property, said that in 2019, the year with the densest real estate policies, the financial risks of real estate rarely mentioned in the past were intensively mentioned. Cumulatively speaking, since this year, the central ministries and commissions have issued 15 speeches or policies, all requiring attention to prevent real estate financial risks.

Under the background of the continuous release of tightening signals by the state and the regulatory authorities and the continuous implementation of the long-term real estate regulation mechanism, there is a great potential for further tightening in both residential mortgage business and financing for housing enterprises.

Interest rates on residential loans in many places tightened.

Judging from the mortgage interest rate, according to a survey conducted by a reporter from the Financial Times, the mortgage interest rate of major Chinese banks in Beijing has remained at a minimum of 10% upward since this year, and has not changed even in the first five months when the interest rate continued to fall. However, according to a real estate intermediary, in the near future, banks have strengthened their examination of mortgage qualifications and the speed of lending has also decreased slightly.

Different from Beijing's "staying put", mortgage interest rates in many parts of the country are showing a further upward trend. In the first half of the year, Hangzhou's first mortgage interest rate generally increased by 5% to 8%, but now, many banks have begun to implement the policy of increasing the first benchmark by 8% or 10%.

Among the first-tier cities, Guangzhou rebounded in June. According to the data released by Rong360 Big Data Research Institute, six banks in Guangzhou raised the mortgage interest rate in June, and Everbright Bank was the first to adjust the loan interest rate for the first suite to 20% above the benchmark.

In fact, the inflection point of bank mortgage interest rate appeared in June. According to agency data, the national average interest rate for first-home loans was 5.423% in June, up slightly from 5.416% last month. The average interest rate for second-home loans is 5.75%, which is also higher than 5.74% last month.

"In July, mortgage interest rates in some areas increased frequently, and more and more cities began to raise mortgage interest rates. However, the specific impact of the meeting of the Political Bureau of the Central Committee on mortgage interest rates is still uncertain. It needs to be seen in the light of whether there will be any specific adjustment measures in the future and the activity of transactions in the housing market. " Li Wanfu, an analyst at Rong360 Big Data Research Institute, told Financial Times reporters.

Strict control of real estate credit

"We will strictly check the' down payment loan'. For all kinds of consumer loan products, after lending, we will monitor the direction of the borrower's bank flow; For loans with specific purposes such as decoration loans, invoices need to be verified. Once it is found out that the loan funds are used for down payment, we will ask them to repay the loan in advance. " A joint-stock bank official said.

The risks existing in the mortgage business have already aroused great attention from the regulatory authorities. "In recent years, the leverage ratio of household departments in some cities in China has risen rapidly. A considerable proportion of households have reached unsustainable levels. What is more serious is that about half of the new savings resources in the whole society have been invested in the real estate sector." Guo Shuqing, Party Secretary of the Central Bank and Chairman of the China Banking Regulatory Commission, said at the Lujiazui Forum held in June.

In response, at the forum on the adjustment and optimization of the credit structure of banking financial institutions, the central bank proposed to maintain the continuity and stability of real estate financial policies. To maintain a reasonable and moderate growth of personal housing loans, it is strictly prohibited to use consumer loans to purchase houses in violation of regulations, and to strengthen the management of funds flowing into real estate through bank financing, entrusted loans and other channels.

Li Wanfu believes that "next step, the bank may adjust the conditions and amount of personal housing loans appropriately, at the same time, increase the proportion of consumer loans and personal business loans in retail loans, and strictly control the flow of consumer loan funds to the property market."

At the same time, the problem of real estate financing has also attracted attention. "Some real estate enterprises' excessive financing has diverted credit resources, further reducing the efficiency of the use of funds and encouraging speculation in real estate investment." Guo Shuqing said at the Lujiazui Forum.

Of the 56 real estate controls in July, nearly 10 were issued by the central ministries and commissions, of which there was a lot of tightening of funds for real estate enterprises. "Especially since July, we have issued two consecutive capital tightening policies for real estate trust and US dollar debt, both of which are aimed at real estate alone. The expectation of tightening policy is getting stronger and stronger. " Zhang Dawei said.

At the forum on the adjustment and optimization of the credit structure of banking financial institutions, the central bank also requested to strengthen the supervision and risk warning of the financing behavior of large housing enterprises with high leverage, and to reasonably control the scale of interest-bearing liabilities and asset-liability ratio of enterprises.

"For the public sector, banks may improve the conditions for loans for real estate development, and at the same time invest more credit funds in the manufacturing industry, small and medium-sized micro-enterprises and other directions currently encouraged by the state." Li wanfu predicted.

Building a Long-term Mechanism

"This meeting of the Political Bureau of the Central Committee will mark another stage of upgrading of real estate regulation." Zhang Dawei said that July was a node for real estate regulation to be upgraded again. Not only did the content of real estate regulation policies continue to be published frequently throughout the month, but the central government also made it clear for the first time that real estate would not be used as a tool to stimulate the economy, and the long-term mechanism would continue to accelerate its landing.

"Under the background of increasing downward pressure on the economy, the emphasis on' housing is not speculation' reflects the decision-making authority's firm attitude towards real estate regulation." Societe Generale believes that the request of the meeting of the Political Bureau of the Central Committee to "implement a long-term management mechanism for real estate" means that the real estate regulation will continue to be tight and the regulation policy will be more stable and continuous. With the long-term regulation, the market's expectations for housing prices will be more stable, and real estate sales may continue to decline in the second half of the year.

Compared with the previous meeting of the Political Bureau of the CPC Central Committee, this meeting did not mention such contents as "implementing policies for each city" and "implementing policies for each city". As for this, Zhu Jianfang, chief economist of CITIC Securities, believes that the real estate policy in the second half of the year will be tightened compared with that in the first half of the year, which is also consistent with the current tightening of financing support for real estate enterprises.

"The real estate market is under strict control, and' patching' measures against the rise in real estate prices continue to appear. It is expected that in the second half of 2019, the national real estate market will still be under two-way control. cities with stable house prices will not rule out loose policies, but as long as the increase is obvious, real estate control will definitely increase. " According to Zhang Dawei.

"From the point of view of credit interest rate, it is not excluded that the interest rate for real estate will be raised again." Zhang Dawei said that as long as there is no obvious change in the credit policy, the adjustment of other policies will have very limited impact on the property market. At present, the real estate policy is still fine-tuning more and more policies except credit, but the overall policy fundamentals remain relatively tight.

How Low Can They Go? Interest Rates in a Time of Deflation

Bank prime rate minus the 12-month change in the CPI.
Negative interest rates prevent a deflationary collapse and instead stretch it out for as long as the central bank can maintain the negative rates. A deflationary collapse or a sustained inflationary growth cycle or loss of faith in currency will end it.

Check out home prices in America's rural areas or inner cities. They were frontline in the decline of the country. As the country takes on more of the demographics of inner cities and, barring a successful rebalancing of trade and economic reform that doesn't involve a currency devaluation, what happened to home prices in these areas will spread to the entire nation. There will plenty of room for negative interest rates, up until the currency crumbles.

2019-08-10

What if China Dumped U.S. Treasuries

Unload treasuries into a bear market where everyone is fleeing bonds and you create a catastrophic collapse in treasuries and the U.S. dollar. Your currency will soar.
Dump U.S. treasuries in the middle of a crisis and there will be plenty of buyers. Your currency may collapse in value if you aren't swapping those treasuries for a more valuable asset.

Dumping treasuries doesn't make a lot of sense from a Chinese perspective since they would be blamed for the fallout. Global contagion may be inevitable, but putting your fingerprints on it isn't wise. It does make sense as a political maneuver if they fear repayment. It doesn't make sense economically since even if it succeeded, they'd unleash even worse deflation on their economy than is already happening. If they succeeded in pushing the dollar down and U.S. rates up, Germany, Japan, South Korea and other export economies would pancake as the U.S. "wins" the trade war by immediately ending its import of foreign-made consumer goods.

ZH: Former Chinese Central Banker Warns Beijing May Dump Treasuries In Retaliation
Chen Yuan, former deputy governor of the PBOC, said that the U.S.’s labeling of China as a currency manipulator “signifies the trade war is evolving into a financial war and a currency war,” and policy makers must prepare for long-term conflicts.

The U.S. currency-manipulation charge is part of its trade-war strategy, and it’ll impact China “more deeply and extensively” than the trade differences, Chen said Saturday. While China should try to avoid further expanding the disputes, policy makers must be prepared for long-lasting conflict with the U.S. over the currency.

And in a striking warning from the former central banker, he effectively admitted that dumping US Treasurys is certainly a possible retaliation: “The U.S. believes, in a geopolitical point of view, it’s being contained by China with China’s holding of its sovereign bonds,” Chen said,. “That means the U.S. is not completely without weakness.”

He also said that China should work to increase the use of the yuan in global trade such as the purchase of commodities.

Speaking at the same venue - the China Finance 40 meeting in Yichun, Heilongjiang - former PBOC Governor Zhou Xiaochuan said that conflicts with the U.S. could expand from the trade front into other areas, including politics, military and technology. He called for efforts to improve the yuan’s global role to deal with the challenges of a dollar-denominated financial system. Of course, the conflict that is most concerning is the military one. Luckily, that barrier has not been crossed yet, but it is only a matter of time before the US and China clash somewhere in the South China Sea with deadly consequences.

Sure enough, one of the other PBOC officials at the meeting signaled that tensions with the U.S. could increase. Zhu Jun, director of the PBOC’s international department, said “more ensuing measures are likely coming.” She didn’t elaborate.

Finally, ensuing that "more measures are coming", the Communist Party’s flagship newspaper People’s Daily said in a commentary Saturday that the U.S. move is an "appalling" act to gain an advantage during trade negotiations and is doomed to fail.

Oh yes, and speaking of more devaluation - with Citi, JPM and SocGen now expecting the yuan to tumble to 7.35 or lower - Yu Yongding, a researcher at the Chinese Academy of Social Sciences, said in Yichun, said that while markets haven’t reacted too strongly to the weakening yuan this week, it is possible that "the yuan could weaken further on unexpected shocks in the future."

Stimulus Prep or Prelude to Deflationary Crisis: China Tightening Screws on Real Estate

The PBoC second quarter report admits the economy is still highly reliant on real estate and infrastructure. As I reiterated back in January and many times before and since, any stimulus effort will likely flow into real estate. Home prices rallied this year because some localities eased buying restrictions, but also on the assumption of second-half stimulus. The government and central bank recently reiterated that "homes are for living in, not speculating on" and that real estate would not be used to pull GDP growth higher.

The government has failed to stop credit flowing into real estate. It has failed to make it flow to SMEs and other favored areas. It hasn't been able to reign in steel production. China can't afford a real estate slowdown with no offsetting growth. It can't afford a stimulus that flows into real estate. Given no sign of stimulus at the moment, a successful crackdown will be visible in deteriorating macroeconomic data.

21st Century: 32个城市银行房地产专项检查 房企融资闸口再紧
Sogou: 32 City Banks' Special Real Estate Inspection, Housing Enterprises' Financing Tight Again
Banks in 32 cities including the first-tier cities and the second-tier cities are facing a special inspection of real estate business, and financing of real estate enterprises is facing stricter supervision.

On August 8, a reporter from 21st century business herald learned that the general office of the China Banking Regulatory Commission recently issued the Notice on Special Inspection of Real Estate Business of Banking Institutions in 2019 (hereinafter referred to as the Notice), focusing on the inspection of real estate business of banks in 32 cities in four major areas.

Several bank branches said that the supervision had already entered the premises to inspect the agency's real estate business, including development loans, operating property loans and mortgage loans involving commercial bills.

The "circular" said that it insisted on the position of "no speculation in housing" and severely punished all kinds of illegal acts of transferring funds into the real estate industry through misappropriation or diversion, and was highly vigilant against the real estate bubble and financialization.

Real Estate Financing Supervision Becomes Tighter


"The current real estate supervision is to control the right and left hands, the left hand is the supply and the right hand is the demand." On August 8, a bank insider told reporters that the supply side controls the financing of real estate developers, forcing them to speed up the push and increase the housing supply. The demand side controls the down payment and interest rate of house loans through measures such as purchase restriction and loan restriction.

From the supply side, real estate financing has been tightened continuously since this year. In May this year, the China Banking Regulatory Commission issued Document 23 to scrutinize five real estate businesses such as direct or disguised use of on-and off-balance-sheet funds for land leasing. This notice can be regarded as a detailed and upgraded version of Document 23 in the real estate field.

The circular requires that, according to the national sales price index of 70 cities in June 2019 released by the national bureau of statistics, and in combination with the list of key cities participating in the "one city, one policy" real estate pilot, this special inspection of real estate business includes 32 cities such as Beijing, Tianjin, Shijiazhuang, Qinhuangdao, Hohhot, Shenyang, Changchun, Shanghai, Nanjing, Suzhou, Wuxi, Xuzhou, Hangzhou, Hefei, Fuzhou, Jinan, Zhengzhou, Luoyang, Wuhan, Xiangyang, Changsha, Guangzhou, Chongqing, Chengdu, Guiyang, Kunming, Dali, Xi 'an, Ningbo, Xiamen, Qingdao, Shenzhen, etc.

"The 32 hot cities are basically the national real estate market's nose. If these 32 cities are stable, the national real estate market will be basically stable." According to Zhang Dawei, chief analyst of Centaline Property. Jiang Guojun, a researcher in Zhuge's housing search market, believes that the risks of real estate funds are relatively high in cities with relevant market changes, especially those with large price changes. It is expected that cities with obvious changes in subsequent house prices and frequent policy changes may be included in such supervision.

All housing-related credits are included in the inspection.

This inspection involves bank real estate-related loans such as land reserve loans, development loans, personal loans and housing lease loans.

Specifically, in terms of real estate credit business management, check the implementation of real estate credit policy and internal control system; The management of real estate development loans and land reserve loans, including concentration management, authenticity review of capital sources, implementation of minimum capital ratio requirements, enterprise qualification review, etc., as well as illegal financing of "four certificates" incomplete projects; Personal housing loan management, including the implementation of differentiated credit policies, the implementation of minimum down payment ratio and loan restriction policy requirements, the implementation of down payment funds authenticity and loan applicants solvency assessment and inspection, etc.; Housing rental loans. Including the cooperation with housing rental enterprises, the problem of bank credit obtained by intermediary agencies, the problem of misappropriation of rental loans, and the provision of funds for intermediary agencies, housing rental enterprises and other acts that disrupt the rental market.

The growth of real estate development loans dropped significantly. According to central bank data, 21st century business herald reporters estimated that in the first and second quarters of 2019, the real estate development loans increased by 660 billion yuan and 190 billion yuan respectively. During the same period last year, the increase was 700 billion yuan and 480 billion yuan respectively.

Judging from the balance, by the end of the second quarter of 2019, the balance was 11.04 trillion yuan, up 14.6% year on year, 4.3 percentage points lower than the end of the previous quarter. Among them, the balance of affordable housing development loans was 4.61 trillion yuan, up 12.9% year-on-year, 7.3 percentage points lower than the end of the previous quarter.

According to the Circular, another focus of the inspection is that non-housing related credit funds are diverted to the real estate sector.

Specifically, it includes: personal comprehensive consumption loans, operating loans, "down payment loans", credit card overdrafts and other funds misappropriated for house purchase, and other bank credit funds misappropriated for real estate in violation of regulations; Funds illegally flowed into the real estate market through shadow banking channels; Loans such as M&A loans and operating property loans are not carefully managed, and funds are diverted to real estate development; Provide financing for real estate development projects through working capital credit and operating property credit.

This is also the focus of current supervision and inspection. On August 9, the CIRC issued a fine of 22.2367 million yuan to China CITIC Bank. Among the 13 violations, they included issuing real estate development loans in the name of working capital loans and failing to include loans from real estate enterprises in the real estate development loans.

Real estate trusts plummet

The Notice also gives clear requirements for off-balance-sheet funds from banks to flow into real estate.

Specifically, check the supervision and management of interbank and off-balance sheet businesses, including the investment of bank wealth management funds in non-standardized assets in the real estate sector; Interbank investment risk review, capital investment compliance review and post-investment risk management for real estate enterprises or projects; Problems such as providing financing for real estate enterprises to pay land purchase fees directly or in disguised form, or providing support or channels with their own credit, etc.; To bypass illegal land reserve financing, enlarge government debt and other issues, illegally flow into the real estate sector in a multi-level nested way, and entrust loan funds to illegally use in the real estate sector.

A North China bank insider said that the above policy has long existed and the key lies in the implementation. For example, land reserve financing has long been earmarked.

Earlier, on July 6 this year, the China Insurance Regulatory Commission (CIRC) issued a message calling on some trust companies whose real estate trust business has increased too fast and too much recently to carry out interviews and warnings, requiring these trust companies to control the growth rate of their business and improve the level of risk control.

Some analysts believe that the scale and proportion of trust products invested in real estate has continued to rise in the past two years, while the scale of trust has shrunk under the supervision of access channels. The proportion of real estate in trust products rose from 8.4% at the beginning of 2017 to 14.8% in the first quarter of 2019. In the third and fourth quarters of this year, the pressure on the maturity of real estate financing is great, and it is expected that the net financing of real estate trust may also face pressure.

Judging from July, real estate trust decreased significantly. According to the data of usufruct trust, the issuance scale of collective trust products in July was 184.577 billion yuan, a decrease of 20.22% from the previous month. Among them, the real estate trust raised 58.425 billion yuan, down 19.63% from the previous month.