China Banking: More Troubled Banks in Focus, PBoC Sets Up Deposit Insurance Company

The PBoC published rules for a deposit insurance plan back in 2015. Then in March came this report from China Daily: New deposit insurance agency in works

China may soon establish an independent deposit insurance agency covering financial institutions that accept deposits from the public, according to some knowledgeable policy advisers.

Necessity being the mother of invention, the PBoC established this deposit insurance company on the date of the Baoshang takeover.

财新： 央行设存保基金公司 从包商行开始探索风险市场化处置

Industrial and commercial registration data show that the People's Bank of China established a deposit insurance fund management limited liability company with a registered capital of 10 billion yuan (hereinafter referred to as the deposit insurance fund company) on May 24. The company's legal representative and executive director are Huang Xiaolong, deputy director of the Financial Stability Bureau of the Central Bank, and Ouyang Changmin, director of the deposit insurance system of the Financial Stability Bureau, is a supervisor.

It is worth noting that it was on the very day when the deposit and insurance fund company was established that the central bank and the bank insurance regulatory Commission jointly issued a notice saying that in view of the serious credit risks of the contractor bank, in order to protect the legitimate rights and interests of depositors and other customers, they decided to take over the contractor bank for a period of one year from now (see caixin.com, "the contractor bank has been taken over by the central bank and the bank insurance regulatory Commission for the first time in 20 years").

In their response to the reporter's question, the central bank and the bank insurance supervisor pointed out that the central bank, the bank insurance supervisor and the deposit insurance fund "guarantee the full amount of principal and interest of individual savings deposits and the freedom of individual access without any change".

Caixin reporter learned that the acceleration of the establishment process of the deposit insurance fund is also closely related to the background of the recent joint takeover of the risks of the contractor's bank by the central bank and the China Banking Regulatory Commission. "In this way, the deposit insurance fund can inject funds into the contractor's bank to purchase all kinds of creditor's rights of the contractor's bank and explore the establishment of a market-oriented financial risk disposal mechanism."

The creation of a deposit insurance company also comes as eyes turn to other troubled banks.

Update: PBOC Sets Up Deposit Insurance Fund Management Company

21st Century: 锦州银行年报“难产”迷雾： 六成收入来自投资 非标、票据占比较高
Sogou: Jinzhou bank annual report "difficult labor" fog: 60% of the income comes from non-standard investment and the bill accounts for a relatively high proportion

With the takeover of a city commercial bank on May 24, the small and medium-sized city commercial banks that delayed the disclosure of financial results attracted market attention.

According to statistics from the China Monetary Network, besides Jinzhou Bank, Baoding Bank, Jilin Bank, Handan Bank and other city banks have all delayed disclosure of their 2018 annual reports. These city banks have attributed the reasons to audit institutions or internal approval procedures.

On April 1 this year, Hong Kong-listed Jinzhou Bank (0416.HK) suspended trading and delayed the release of its 2018 financial report. Two months have passed, so far, the bank has not released financial results and resumed trading.

First note, the banks with delayed reports are all from the Northeast and Hebei province, the area that experienced a significant economic slowdown in the last cycle. Liaoning province, where Jinzhou is located, sank into recession.

Jinzhou bank's income is highly dependent on investment income. By the end of June 2018, over 90% of the bank's income came from net interest income, 61.2% from investment income and 34.5% from loans.

Its investment income is mainly non-standard. Jinzhou Bank's total assets of 748.4 billion yuan as of the end of June last year accounted for 56% of investment assets and less than 1/3 of loans. About 80% of the investment assets have become beneficial right transfer plans, which are also called "non-standard" in the industry.

However, an industry authority revealed that the recent bank custody incident is only a case with special background and reasons. The overall development of China's banking industry is stable and risks can be controlled. However, the bank custody incident has warned some small and medium-sized banks of radical development. Attention must be paid to stable compliance and long-term development.

The last paragraph is immediately followed by:

Secrets of Rapid Asset Growth

From 2013 to 2016, Jinzhou Bank's total assets maintained a high growth rate of more than 40% every year, with the asset growth rate reaching 49.05% in 2016 and falling to 34.20% in 2017. After five years of rapid growth, Jinzhou Bank's asset size has soared from over 120 billion yuan to nearly 720 billion yuan.

In 2018, Jinzhou Bank's asset growth suddenly came to a near standstill. At the end of June last year, its total asset was 748.392 billion yuan, a slight increase of 3.45% over the end of last year.

The secret of Jinzhou Bank's rapid asset growth and stagnation is not traditional credit but investment business.

Surprise surprise, NPLs were understated:

Judging from the credit, Jinzhou Bank's non-performing loan ratio at the end of June 2018 was 1.26%, 22BP higher than that at the end of 2017. The bank said that it was mainly affected by the country's macro-economic uncertainties and some difficulties occurred in the operation of customers in some industries. However, Jinzhou Bank's interest loans reached 3.3%, up 1 percentage point from the end of 2017.

Looking further, the non-performing rate of personal loans in Jinzhou Bank is high, exceeding 4%. As of the end of June 2018, the overall non-performing rate of personal loans in Jinzhou Bank was 4.22%, up 0.19 percentage points from the end of last year. Among them, the non-performing rates of personal consumption loans and personal operating loans were 4.34% and 4.78% respectively, significantly increasing by 3.12% and 0.16% respectively compared with the end of 2017. The NPL ratio of corporate loans was 1.16%, up 0.25 percentage points from the end of last year.

I have two posts related to Jinzhou from late 2015. Bank of Jinzhou Rallies After IPO and also here Rubber Meets Road: Liaoning Bank to IPO in Hong Kong. Considering the headline about non-standard income, the latter post is relevant:

The company's application proof is here: Application Proof, PHIP and Related Materials, Bank of Jinzhou Co., Ltd.

My curiosity got the better of me when I saw the bank is growing 50%+ yoy. I want to see how the bank increased assets to over 300 billion yuan with only 90 billion in loans. What are these assets? They're listed as debt securities classified as receivables. A look at the notes: wealth management products. The bank, as of June 30, had 90 billion lent out in normal banking and 125 billion lent out through shadow banking. Also from the notes: the average yield on their assets rose from 6.04% in the six months ended June 2014 to 7.80% in the six months ended June 2015.

These WMPs and whatever else is lumped in here, have been driving profits. "Interest income from investment securities and other financial assets" constituted 19.5%, 27.4% and 42.6% of interest income in 2012, 2013 and 2014. Note that they're investing in these products, in addition to offering them. Page 28 lists risk factors associated with these products. As of June 30, 2015, these assets were almost 70% of total assets.

They came to market as the prior deflationary wave was completing, a timely IPO if there ever was one. Yet here we are again.

PBoC Goading Shorts Into Squeeze or Trouble Ahead

Reuters: China confident of keeping yuan stable: central bank governor

China is confident of keeping the yuan basically stable at reasonable and balanced levels, Yi Gang, the governor of the People’s Bank of China (PBOC) told a meeting recently, state media reported on Tuesday.

iFeng: 易纲：对保持人民币汇率在合理均衡水平上基本稳定充满信心
Sogou: Yi Gang: Full of Confidence in Maintaining the Basic Stability of RMB Exchange Rate at a Reasonable and Balanced Level

President Yi Gang also made a speech on interest rate liberalization, RMB exchange rate and bond market mechanism construction. He said that the current benchmark interest rate for deposits and loans is at a moderate level, striking a balance between safeguarding the interests of ordinary people and maintaining the competitiveness of banks, which is suitable for China's national conditions... In the process of further pushing forward the interest rate marketization reform, the central bank's deposit benchmark interest rate will continue to play an important role. In fact, the loan interest rate has been liberalized, but we can still further explore the reform ideas, such as the study of no longer publishing the loan benchmark interest rate, etc. At the same time, we should continue to deeply study the trend of loan interest rate and the problem of switching existing loan contracts, and persist in pushing forward the reform on the premise of being beneficial to the common people and solving the problem of financing difficulties and high financing costs for small and medium-sized enterprises.

President Yi Gang said that he is full of confidence in keeping the RMB exchange rate basically stable at a reasonable and balanced level. The interest rate spread between China and the United States 10-year treasury bonds is still in a relatively comfortable range. The possibility of the Federal Reserve raising interest rates is reduced, which is conducive to the stability of the RMB exchange rate.

He also pointed out that the issuance of bonds should be effectively promoted to implement investor protection provisions, improve the quality of information disclosure during the duration of bonds, improve the efficiency, transparency and predictability of bond default disposal, and further enhance the attractiveness of China's bond market.

Starting from the level of market construction, the bond market should be opened to the outside world and the gap with mature markets should be continuously narrowed. First, market construction should be carried out in a legal thinking and legal mode to create a good legal environment. The second is to encourage ideological collision and full discussion in market practice, put forward new concepts, formulate and perfect new rules and agreements, and strive to be accepted by the international market, which is the embodiment of the strength of the financial market. In the context of the opening up of the bond market, financial infrastructure should give full play to its professional wisdom, put forward professional plans, and be compatible with the first-level custody and multi-level custody modes to better serve international investors. The third is to build a good market culture, in line with international standards, and strive to be widely accepted and loved; The fourth is to further improve the efficiency of resource allocation and better play the role of the market in resource allocation.

President Yi Gang attached great importance to the work of China's debt price index and fully affirmed the organizational form of the expert steering committee on China's debt index. He pointed out that the China Debt Index Expert Steering Committee is a professional platform for inter-bank exchanges and should jointly study and promote market development through ideological collision and free discussion.

In his speech, Chairman Li Yang pointed out that economic growth requires more financial resources than in the past. Global debt growth has become a trend and rising debt intensity will become the new normal. China's debt price index should pay close attention to the debt problem, study debt pricing, and make more in-depth technical preparations. Dean Zhang Xiaohui also pointed out that the benchmark bond price index represented by the yield curve is a "public good" in the financial market with strong externalities. It needs a professional platform such as the China Debt Index Expert Steering Committee to provide continuous supervision and guidance, and to continuously improve the compilation and application of the index during the free collision of ideas.

Translation is often imprecise, but I don't think the English headlines fully capture the Chinese in the latest PBoC jawbone.

Baosheng Large Creditors Only Covered to 70pc

Caixin: Exclusive: Baoshang Bank’s Creditors Get Added Backstop on Deposits, Debts Worth Over 50 Million Yuan

China’s financial regulators will guarantee at least 70% of the funds owed to corporate depositors and certain creditors of a bank that has become the first private lender in China to be directly taken over in 20 years, sources told Caixin.

The regulators also said in another statement (link in Chinese) on Sunday that all of Baoshang’s corporate deposits and interbank debts of up to 50 million yuan would be guaranteed. For those worth more than 50 million yuan, the takeover team will negotiate with creditors for further protection, according to the statement.

PBoC statement is here: 中国人民银行 中国银行保险监督管理委员会新闻发言人就接管包商银行问题答记者问

Baoshang Bank: Chicken or Monkey?

Baoshang Bank was seized by regulators on Friday. This was surprising news because China doesn't usually announce a bank failure this way. If you've been paying close attention to China the past several years, you'll remember lots of bankruptcies of trusts, indebted corporations and developers. At every turn, it was cleaned up by the local, provincial and or central government. It was swept under the rug and there was no systemic crisis. At several points it appeared a crisis could unfold, but one never did. The odds that "this time is different" go up as time passes because the credit market keeps growing faster than GD. This time USDCNY is again near 7, the economy is slowing and reliant on a smaller slice of the economy (real estate).

The question many are asking is, essentially, was Baoshang Bank a chicken or a monkey? The Chinese idiom "kill the chicken and let the monkeys watch" is a good description of Chinese justice under various regimes, including this one. A high profile target is taken down publicly to send a message to everyone else. Arguing for the "chicken" here is that the bank's owner is presumed under arrest for corruption. Against is that he was arrested two years ago, a bit late for sending a signal. On the financial side, the bank could be a chicken if the Chinese government is serious about deleveraging and serious about getting shadow banking under control ($1 trillion in new credit in January aside). Against is if you think the economic slowdown and trade war has China leaning away from a strict deleveraging policy.

The National Team was out in force on Monday. The Shanghai Composite gained 1.38 percent, the ChiNext 3.34 percent. Some banks rallied, some slipped.

ZeroHedge has the full doom coverage discussing China's ever present understated non-performing loans, massive credit growth, strict capital controls, etc. etc.

"A Big Wake Up Call": Chinese Bond Market Roiled By First Ever Bank Failure

And with the Baoshang domino now down, and the interbanking funding market suddenly freezing, Friday’s announcement will put shares of other Chinese banks under pressure, according to Sanford C. Bernstein. A Bloomberg Intelligence index of Chinese lenders dropped 0.9% on Monday to a four-month low. Predictably, ICBC, the nation’s largest lender, slipped 0.5% in Hong Kong.

Some tried to put a positive spin on the shocking failure: "Low quality, small regional banks are unlikely to pose systematic risks to the financial system or the operations of the big SOE and joint stock banks," said analysts Linda Sun-Mattison and Jason Li in a note on Monday. “However, the bail out of Baoshang Bank, a rare move by the government, and the involvement of CCB will no doubt heighten investor concerns over SOE banks’ risk exposure to national service."

Translation: nobody knows yet if this bank failure will result in a bank run, even as the market is clearly recoiling from the bail out. If a bank run does indeed materialize, and some of those $35 trillion in Chinese bank liabilities (i.e. deposits) flee... well, not only are all bets off, but Trump can celebrate an early victory in the US-China trade war.

Is this time different? We'll soon find out. If so, it is going to be a 12 to 18 month event in financial markets.

Bloomberg: China's First Bank Seizure Since 1998 Shows Hidden Loan Risk
Caixin: Chinese Government Takes Over Bank Linked to Fallen Tycoon
China Knowledge: Baoshang Bank seized by China’s financial regulators over severe credit risk

The People’s Bank of China (PBOC) and China Banking and Insurance Regulatory Commission (CBIRC) have seized control of Baoshang Bank, a private lender based in inner-Mongolia due to the severe credit risk the bank poses.

The China Construction Bank (CCB) has been entrusted to handle the business operations of Baoshang Bank while under state control. Principle and interest on personal savings in the bank will be fully guaranteed and business will continue to operate normally for the bank.

The takeover comes two years after Xiao Jianhua, the billionaire founder of Tomorrow Holding Group was placed under graft investigation by Chinese authorities with Baoshang Bank being identified as a key piece of Xiao’s business empire.

According to sources, the bank had helped Tomorrow Holdings to raise at least RMB 150 billion worth of funding through shadowy practices such as loans packaged as wealth management products, interbank lending that was received by the Group’s subsidiaries and funds which was obtained by the Group by pledging its stake in Baoshang Bank as collateral.

阿波罗新闻: 金融危机信号？包商银行因严重信用风险被接管

Experts: More and more financial institutions will disappear after the financial clearing

For example, Zhu Zhenxin, an economist at the Financial Research Institute, wrote on May 24 that Baoshang Bank was taken over by the central bank and the China Insurance Regulatory Commission for one year due to serious credit risks. It became the first commercial bank to be taken over by the regulatory authorities in history, and it is also following 2018 2 Another financial institution after the month of the Anbon Group was taken over by the China Insurance Regulatory Commission. With the supply-side reform focus shifting from physical capacity to financial capacity in 2017, more and more non-compliant financial institutions will disappear, and Ampang and Baoshang may not be the end.

Zhu Zhenxin said that in the past decade or so, finance has run too fast, and the consequences are bubbles and risks. In terms of stocks, the scale of financial assets grew at an average annual rate of more than 15%, far exceeding the growth rate of GDP during the same period. In 2009, the growth rate of financial assets in the 4 trillion period once reached 24.1%. In 2016, China's financial assets were about 553 trillion yuan, and the ratio of GDP rose sharply to 740%. In terms of increments, the proportion of China's financial industry's added value to GDP has increased year by year since 2005, reaching 8.4% as of 2016, not only far beyond developing countries such as South Korea (2.3%) and Germany (4.1%), and even More than the traditional financial powers of the United States (7.2%) and Japan (4.4%).

He believes that the result of the expansion of the bubble must be clear. When the financial building collapsed, the upper financial bubble was cleared, and then the underlying financial capacity was degraded. It has experienced two stages since 2015. The first stage is from 2015 to 2017. The core is financial de-leverage, which squeezes out the financial asset bubble. The second phase begins in 2017, mainly due to financial de-capacity, eliminating redundant financial institutions and financial migrant workers.

From the stock market point of view, the 2015 stock market crash made it the first financial bubble to be poked. The Shanghai Composite Index fell from 5178 points to 2638 points, more than 1,000 stocks fell more than 50%, and nearly 100 stocks fell more than 70%. %. From the perspective of the bond market, the bubble broke two steps. The first step was the individual bond default in 2014, which was earlier than the stock market crash, but the real large-scale debt crisis was in the fourth quarter of 2016. Due to the tightening of the central bank's monetary policy, the 10-year bond yield rebounded from 2.6% all the way to 4.0%, a drop of 140bp. At the same time, credit defaults have become more frequent. From 2015 to 2018, there were 162 defaults in the bond market. In 2016-2017, a total of 127 bonds defaulted, including debt bonds and AA+ bonds. In 2014, only six bonds were in default.

Wu Xiaoling, the former deputy governor of the central bank, said, “The best way to eliminate risks is to expose risks and allow financial institutions to go bankrupt.” Many people may have no idea about the bankruptcy of financial institutions, especially that banks are unlikely to fail, but in fact, Whether it is a securities company, a trust company or a commercial bank, there has been a tragedy of bankruptcy.

The most famous non-bank institutions in the bankruptcy are Junan Securities and Guangguotou. In January 1999, Guangdong International Trust and Investment Co., Ltd. filed for bankruptcy due to insolvency, becoming the first bankruptcy case of non-bank financial institutions in China. At that time, it was mainly affected by the Asian financial crisis, which led to the collapse of a large wave of trust companies. The data shows that in 1997, there were 242 trust companies in China, and now there are only 68, and most of them are bankrupt or stopped.

The collapse of the Hainan Development Bank is a typical case. In the 1990s, Hainan’s real estate bubble, a number of credit cooperatives carried out business through high-interest loans, and the assets were insolvent. In 1997, 28 credit unions were merged into the sea, but the sea issue announced that they would no longer pay high interest rates. Some speculators withdrew their funds and withdrew, causing other depositors to run. They queued for withdrawals at sea distribution outlets for two consecutive months. The bad debt pressure caused by the bursting of the bubble finally overwhelmed the sea issuance. On June 21, 1998, Hainan Development Bank became the first commercial bank in China to close down due to the payment crisis.

Zhu Zhenxin wrote that when the prosperity was over, the chickens and dogs were ascended to heaven, and when the crisis was over, the waves were washed. In the past two years, physical de-capacity has brought about industrial concentration. In the next two years, financial de-capacity may also bring about an increase in the concentration of the financial industry. In fact, in the past few years, the merger of small commercial banks has emerged in the banking industry (such as the establishment of Zhongyuan Bank by 13 local banks in Henan). The futures industry has seen a wave of mergers and acquisitions. In the past ten years, the number of institutions has dropped by nearly 30, and the securities industry has also There have been cases of mergers between Shen Wan and Hong Yuan, and this situation will increase in the coming years.

阿波罗新闻: 金言：包商银行—给中国金融业报丧的银行？

On May 24, the Chinese banking industry suddenly flew out of the first black swan, and Baoshang Bank was taken over due to serious credit risks. The rare move of the central bank and the China Insurance Regulatory Commission seems to mean that the systemic financial risks that have been “still immersed in the past” have been overwhelmed by the fire; people have repeatedly shouted “wolves”, this time true. It’s coming. Therefore, there are good people who have compiled a funny advertisement based on their homonyms: “Baoshang Bank – a bank that mourns (contractors) to the Chinese financial industry!”

Financial anti-corruption has worn the pustules of the banking industry?

Baoshang Bank was established in Baotou City at the end of 1998. It is the first joint-stock commercial bank established in Inner Mongolia. It holds 36.89% of the shares of Baoshang Bank tomorrow. The founder of the Department of Tomorrow, Xiao Jianhua, is regarded as the whitest glove of Zeng Wei, the son of Zeng Qinghong, the former wealthy steward of the Jiang Zemin Group of the Communist Party of China. He is also accused of being the former daughter-in-law of the Political Bureau of the CPC Central Committee and the daughter of the central bank. There is an improper interest in Chefeng. Due to the “stock disaster” in 2015, Xiao Jianhua was brought back to the mainland by the Beijing authorities on January 27, 2017 for investigation, which led to the collapse of the pool fish, which made Baoshang Bank suffer. This is also another financial institution that has been taken over by the Anbang Insurance in the financial anti-corruption storm.

Coincidentally, on the evening of May 24, the Bank of Nanjing also issued a notice stating that the directors and presidents of the bank had submitted their resignation reports to the board of directors of the company due to the reasons for the transfer of agricultural work. This is only 5 days from the official release of Liu Shiyu's initiative on the night of May 19. This indirectly confirmed the rumors of Liu Shiyu's falling horse and Nanjing Bank.

Liu Shiyu is from Guanyun County, Lianyungang City, Jiangsu Province. He served in the central bank for a long time, and later served as the chairman of the Agricultural Bank of China. In February 2016, he took the position of the chairman of the China Securities Regulatory Commission, known as the “sitting in the crater”. In 2016, eight commercial banks were listed in the country, and his hometown of Jiangsu had five exclusive shares, and there was a blackout of interest. However, some media also said that Dai Juan, a "debt city one sister" of Nanjing Bank, who was very close to Liu Shiyu, was the fuse of Liu Shiyu's investigation. On February 15 this year, after Dai Juan and others were investigated by the Nanjing Municipal Commission for Discipline Inspection, they issued a number of illegal and illegal information, some of which pointed to Liu Shiyu.

At the beginning of the year, the Central Commission for Discipline Inspection also proposed to resolutely cut off the interest chain of the relationship between “financial crocodile” and “financial ghost”. From April 2017, former Chairman of the China Insurance Regulatory Commission Xiang Junbo was dismissed, and in May 2017, the former Chairman of the China Banking Regulatory Commission, Yang Jiacai, was investigated. In April 2018, Huarong Lai Xiaomin’s “New China Financial Corruption First Case”, and now Liu Shiyu’s initiative Investing in the case, financial anti-corruption has gradually entered a climax.

Liu Shiyu, who was "caught in the demon" and was "caught", was offended by many of the top vested interests of the CCP because of the strong supervision storm that he set up during his time at the China Securities Regulatory Commission. "I can imagine how many people will report it. In this case, Any problem with your own is precarious." It can be seen that the infighting of the CCP's privileged interest groups has reached the level of enthusiasm for your life. With the continuous deepening of the financial anti-corruption storm, more and more “financial ghosts” will be disintegrated, resulting in many banks and financial institutions being taken over.

Will the banks that have been relying on the state of the country go bankrupt?

On May 9th, the news of a “Taihang Village Bank Bank Run” in Jiaocheng County, Shanxi Province suddenly began to pass. After seeing this news, local depositors gathered in the bank to withdraw money from the day to the night. Subsequently, the president disappeared, the county magistrate rumored on the scene, and the rumors were detained.

However, there have been two real bank failures in the mainland. One was during the Asian financial crisis in 1998, because the Hainan Development Bank actually paid the depositors interest at the benchmark interest rate because of high interest rates, which led to a large-scale run-off, exhausting its deposit reserve and the country. After the rescue fund of 100 million yuan, it finally declared bankruptcy. This is also the first commercial bank in the background of the provincial government in China's financial history, which was closed for 49 years after the payment crisis. Since the deposit insurance system has not been introduced since the bank collapsed, the money of many depositors has not yet been honored, and there is no clear statement.

The other time was in 2012, the Shangcun Rural Credit Cooperative in Suning County, Hebei Province was approved for bankruptcy due to insolvency, which was also the first bank in China to officially enter the judicial process and declare bankruptcy. From the closure of the debt crisis in 2001 to the approval of the bankruptcy process in 2010, this process has allowed savers to wait for nearly a decade.

In the past, in the impression of mainlanders, bank savings deposits were the safest, and the state would never let banks go bankrupt. The poor Chinese people used to have no social pension insurance, so many people struggled to save money, and there was a meager interest income in the bank.

On May 1, 2015, the deposit insurance system was officially implemented. In 2016, Zhang Tao, the deputy governor of the central bank, spoke out: What is a stable financial order? Not every institution that protects the financial industry does not fail, and there is no risk; instead, financial institutions that have operational risks or failed operations must be allowed to go bankrupt and achieve the survival of the fittest in the market. Recently, the China Banking Regulatory Commission issued an announcement that the “Regulations on the Bankruptcy Risk Disposal of Commercial Banks” has been included in the legislative project. All this means that the myth that banks do not fall is about to become a thing of the past. Many people find that it is not absolutely reliable to deposit money into banks.

Not long ago, the China Banking Association also issued a "China Banker Survey Report (2018)", 69.3% of bankers believe that "the bank will close in the next three years." On April 2, the National Audit Office issued the audit result of No. 1 of 2019, which showed that some local financial institutions in seven provinces (regions) had high non-performing loan ratio, low provision coverage ratio, low capital adequacy ratio, and cover up. Problems such as non-performing assets.

In the past, the local joint-stock commercial banks that relied on barbaric growth and demolished the east wall to make up the Western Wall, especially in the context of the current downward pressure on the economy and the escalating trade war between the United States and China, it is very likely that there will be a run-up tide. Forced to close the door.

Will depositors' deposits be cashed after the bank closes?

If the bank goes bankrupt, who will protect the money of the people? According to the current deposit insurance system, if the bank goes bankrupt, deposits below 500,000 yuan can be paid in full. As for the more than 500,000, it depends on how much money can be left after the bank's bankruptcy liquidation. It may be possible to get it back, or it may not have one point.

In other words, the deposit insurance is subject to a limit payment, and the maximum payment limit is RMB 500,000. If the principal and interest of all the deposit accounts of the same depositor in the same bank add up to less than 500,000 yuan, the full amount shall be paid; the part exceeding 500,000 yuan shall be compensated from the liquidation property of the deposit bank. In other words, the state no longer saves deposits for depositors in commercial banks, allowing banks to go bankrupt. Once a bank goes bankrupt, depositors' deposits will be compensated by deposit insurance agencies, but compensation has a certain limit. The maximum amount of deposits for depositors in a single bank will be 500,000 yuan, and the deposit portion exceeding this limit will not be compensated.

In addition, if the bank goes bankrupt, your wealth management products at this bank, no matter how much, will not be paid in full. In the event of a loss of deposits, a loss in the principal of bank wealth management products, and a redemption crisis in bank-sending wealth management products, the bank does not accompany a penny.

So, where is the safest place for our money? The sage tells us: "Jun, minister, rich, and noble are born from morality, no virtue, no morals, and no morals." Only by getting rid of the control of communist evil spirits, seeing their lies and deceiving, no longer hold any Fantasy, while returning to traditional morality and paying attention to goodness, will receive God's blessing, richness and virtue, thus preserving the dual wealth of material and spiritual.

They Don't Have Enough Reserves: PBoC Intervenes to Defend Yuan

Bloomberg: PBOC’s Presence Seen to Prevent Yuan From Deeper Plunge

China is unlikely to let the plunge in the yuan get out of control, according to Macquarie Securities Ltd.

The People’s Bank of China will want to keep the currency stronger than 7 per dollar -- a level not reached since the financial crisis -- as a break past that may lead to a "vicious cycle" of capital outflows and sharper depreciation, said Larry Hu, head of Chinese economics at Macquarie.

The central bank can stabilize the exchange rate by setting strong fixings and selling the dollar directly in the spot market, he said. "Also, China doesn’t want the currency to be too weak as that will make negotiations with the U.S. tougher."

I suspect an attack on the yuan won't begin until after reserves suffer a meaningful decline. At this point, that might be $30 to $50 billion yuan, enough to signal the capital controls have failed or that defending the yuan is getting expensive. A collapse in the yuan isn't inevitable, but it's getting a heck of a lot more likely if this cyclical downturn doesn't stop soon. USDCNY is very close to 7.0, DXY is within striking distance of 100 and an escalating trade war will start curbing dollar flows into China this summer. The risk of a "multi-sigma" event is increasing, with the possibility for follow on events such as Hong Kong abandoning the dollar peg.

iFeng: 央行离岸出手稳汇率！又在香港布局大动作，吊打空头
Central bank moves offshore to stabilize exchange rate! In Hong Kong, they also made big moves to play short positions

The central bank is stabilizing the exchange rate offshore again!

On May 15, the central bank issued a message that it successfully issued two issues of RMB central bank bills in Hong Kong on the same day, of which three-month and one-year central bank bills each amounted to 10 billion yuan, with bid-winning interest rates of 3.00% and 3.10% respectively. The total bidding volume for this issue exceeded 100 billion yuan, with the main subscribers including commercial banks, funds, investment banks, central banks, international financial organizations and other offshore market investors.

The news seems bland, but considering the special timing of the central bank's issuance of central votes in Hong Kong, its policy intention is well established. Since issuing central bills in Hong Kong can recover the liquidity of offshore RMB, raise the interest rate in the offshore market and raise the cost of shorting RMB, thus achieving the goal of stabilizing the exchange rate. Combined with the rapidly rising market changes in the expectation of RMB devaluation in recent days, it can be seen that the central bank has obviously intended to stabilize the exchange rate by issuing central bank votes at this time.

In fact, except that the offshore RMB exchange rate suffered a heavy blow on Monday, with a drop of 600 basis points during the day, the RMB exchange rate both yesterday and today has a trend of correction. Some analysis points out that there is no lack of central bank stabilizing the exchange rate behind this. As of 13:15 on May 15, the onshore RMB exchange rate was 6.8761, with a devaluation of only 93 basis points. The offshore RMB exchange rate was 6.9053, up 9 basis points from yesterday.

Many analysts pointed out that the probability of RMB exchange rate falling below 7 in the short term is not very high until there is no further negative news about Sino-US trade friction. More importantly, the current trend of RMB exchange rate is event-driven and multi-empty. For enterprises and individuals, instead of blindly betting on unilateral appreciation or devaluation, it is better to stick to the concept of financial neutrality and manage exchange rate risks through hedging tools, otherwise they will be easily beaten.

China can intervene in Hong Kong to prop up CNH, but it costs money:

"CNH usually better reflects the market's expectation of RMB exchange rate than CNY, but the central bank has strong control over the offshore market. In the past, people usually observed some operations (such as forward foreign exchange purchase, foreign exchange swap, etc.) of the branches of major Chinese banks in Hong Kong in the offshore market to fathom the policy intentions of the monetary authorities behind them. " A Hong Kong foreign exchange trader told a Chinese reporter from a securities firm, but if the central bank issues central bank tickets in Hong Kong, it is equivalent to directly facing the participants in the offshore market and openly communicating its own policy stance. In fact, it increases policy transparency, strengthens communication with the market and is conducive to stabilizing market expectations.

CNH is the real exchange rate and everyone in China and outside of China knows it. If the PBoC tries to set a high fixing, speculators can force them to spend mightily to defend it.

Undeniably, the trigger factor for this round of sharp decline of RMB is the Sino-US trade dispute, but the real trigger for the sharp devaluation of the exchange rate for many consecutive days is short selling by overseas institutions.

Senior foreign exchange expert Han Renyu told Chinese reporters at the securities firm that the driving factor for the recent rapid devaluation of the exchange rate is not the market supply and demand (i.e. the customers dominated by enterprises and residents), but speculation (mainly the transactions of financial institutions). The dollar soared ahead in the offshore market and followed closely in the onshore market, which usually means that institutional speculation is likely to be the main factor in the devaluation.

Speculative attacks can go on for months. Flashback to 2012: PBOC can't buy a buck; talk of depleted reserves is not alarmist

[Tan Yaling] says there was a recent article stating that if the only way China can stimulate the economy is through investment, then China's $3 trillion in foreign exchange reserves will be exhausted within 5 years.

She says speculation is the greatest threat to China's development and this speculation could exhaust China's reserves. Although China has $3.2 trillion in reserves, it isn't enough to protect it from hot money, not when the global forex market trades $5-6 trillion each day. If there is no long-term strategy to defend the reserves, they could be rapidly exhausted.

Below I will post the Sogou translation of the full article. Back to the iFeng article, it paints an air of calm in the foreign exchange market:

"The direct consequence of the soaring offshore dollar is to widen the foreign exchange gap between China and overseas. There is no doubt that a space of several hundred basis points will excite cross-border arbitrageurs, and the result of arbitrage is that the onshore dollar will definitely soar rapidly. This is not the first time that such a situation has occurred. Generally, there is room for cross-border arbitrage if the domestic foreign exchange difference is more than 100 basis points. " Han Hui said.

However, since this Tuesday, the exchange rate has started to recover, which may include the central bank stabilizing the exchange rate and "beating" bears. There are two interesting phenomena that are meaningful: on the one hand, the central parity rate of RMB against the U.S. dollar was 6.8365 on Tuesday, down 411 points, significantly lower than the closing price of 6.8721 on Monday, which indicates that the counter-cyclical factors in the central parity pricing mechanism may have played a role; On the other hand, on Tuesday, the offshore RMB exchange rate against the U.S. dollar had a strong short-term rise of 150 points, once recovering the 6.90 mark.

The special timing of the central bank's issuance of central bank votes in Hong Kong on Wednesday is a manifestation of the policy intention of stabilizing the exchange rate.

So, does the central bank's move to stabilize the exchange rate at this time mean that the RMB will be protected at "7"? Some analysts pointed out that the central bank's choice of when to stabilize the exchange rate has nothing to do with the specific position of the exchange rate. The key is to observe the settlement and sale of foreign exchange in the market.

"The exchange rate is never the most important point. The monetary authority first considers the pressure of capital flow. If the macro-prudential management of cross-border capital flow is effective and the deficit in foreign exchange settlement and sale is not large, it does not matter whether it breaks 7." South Korea stationed said that if there is another serious imbalance in the foreign exchange settlement and sale market, the invisible hand will act. Even if the RMB reaches around 7 against the US dollar, if the foreign exchange settlement and sale market is calm, then the 7 break will be broken, which is not a big deal. However, if the exchange rate has just reached 6.95 and there is a tide of buying foreign exchange, then basically don't expect to break 7.

Defending the yuan from USDCNY 7.00 is a really loud signal that says otherwise.

Therefore, from the perspective of stabilizing the expectation of RMB exchange rate, many analysts pointed out that there is no possibility of a sharp devaluation of RMB. UBS China Adjusts Exchange Rate Forecast of RMB to USD to 7 at End 2019. Wang Tao, chief economist of UBS China, said that this was mainly because the government might allow the RMB to depreciate slightly in view of the worsening current account balance and the greater downward market pressure on the exchange rate. If the United States imposes a 25% tariff on all Chinese exports, the pressure of RMB devaluation will increase dramatically.

"Nevertheless, the central bank may still try its best to avoid a sharp devaluation of the exchange rate, so it is expected that the RMB exchange rate against the US dollar will only moderate to 7.2 in 2019. If the tariff increases continue to take effect, the RMB exchange rate may further depreciate in 2020. " Wang Tao said.

Yu Yongding, a member of the Faculty of Social Sciences, also told the Chinese reporter of the securities firm that as Yi Gang, governor of the Central Bank, said earlier, we will never use the exchange rate for the purpose of competition, nor will we use the exchange rate to increase China's exports, or to consider trade friction tools. We can promise that we will never do this. As for how the exchange rate will change, it is determined by the relationship between market supply and demand. The exchange rate must be flexible.

I agree 100 percent with Yu Yongding. China will not devalue for competitive reasons. It will devalue because it will exhaust its reserves, because it will be unable to contain capital flight or stop an unfolding deflationary credit crisis without massively increasing domestic credit supply, which in turn necessitates inflating the yuan far beyond the constraints of the current exchange rate. As is often said about gold, China has more than enough dollars to fund its economy. The problem is the price of those dollars is set too low.

Sogou translation of Tan Yaling 2012 article: It is not alarmist talk to say that foreign exchange will run out

High-level viewpoint

Tan Yaling, President of China Foreign Exchange Investment Research Institute

Not long ago, an article pointed out that China's foreign exchange reserves of over 3 trillion US dollars could not provide shelter for China's economy. In the future, if China can only continue to promote investment and has no other way to maintain economic growth, China's foreign exchange reserves will be exhausted within five years. This advice deserves attention.

First of all, this "alarmist talk" has sounded the alarm bell for the current stability of China's economy. At present, speculative arbitrage is very serious in our country's market. This speculative state is not only not conducive to development, but will consume the accumulation in the past, waste reserve resources, and make it possible for China's foreign exchange reserves to shrink and run out. Because the market is highly concentrated in speculative arbitrage rather than in the development of entities and industries, coupled with regulatory deficiencies, hot money has provided a space for speculation and a platform for building momentum. As a result, this kind of speculative arbitrage is used by hot money, making hard-won foreign exchange reserves consumed by their own blind obedience.

Therefore, although our foreign exchange reserves are strong, they are not large enough to withstand international hedging risks. At present, we have 3.2 trillion US dollars in foreign exchange reserves, while the international foreign exchange market trades 5-6 trillion US dollars a day. Our scale cannot stop speculative speculation of hot money. Without its own development strategy, risk discrimination and comprehensive and long-term strategic planning, foreign exchange reserves will soon be spent, destroyed and eventually exhausted.

Secondly, the strategy of collecting money from the people is still struggling. The topic of foreign exchange reserves in China has been going on for more than 10 years, but so far the focus is still at the origin: there are too many foreign exchange reserves and the efficiency is insufficient. Although China has the largest foreign exchange reserves in the world, it is a smaller foreign exchange market in the world, and even the foreign exchange market has not been fully opened.

At present, China's financial reform and development are at an important juncture. On the one hand, we have huge foreign exchange reserves, and the symbol of national wealth has attracted the attention of the world and the pursuit of speculators. On the other hand, China's central bank's hedging costs have increased, and the fear of shrinking the price and value of foreign exchange assets is increasing. Refusal or reduction of US dollar assets has become a trend and trend. Such too short-term and simple cognition and demand from the private sector and society will directly affect the implementation and process of China's strategy of collecting foreign exchange from the people. Under the background of the unprecedented financial crisis, this way of thinking is the greatest resistance to the loss of our strategy of hiding money from the people.

It can be seen that this kind of "alarmist talk" actually warns us that the problem of China's foreign exchange reserves is manifested in three aspects: first, it pays more attention to quantity than efficiency; Second, there are too many short-term prices and not enough long-term systems. Third, there are too many short-term countermeasures and the actual effect is not good. As a result, the huge foreign exchange reserves have become a simple burden and burden for our country and have not fully played their role in promoting our reform, construction and development. Therefore, we should refer to the countermeasures we have already taken to reduce market investment and prevent hot money intrusion in response to our reform and development needs through capital injection, investment and special financial policy tools. At the same time, we can consider the convergence mechanism between foreign exchange and RMB, break the passive situation of being restrained by dogmatism of foreign exchange reserves, and solve our own economic and financial problems flexibly and effectively.

RRR Cut Widely Expected This Weekend

Chinese investors expect an RRR cut is coming and that it will boost the stock market. Unlike the April 2018 RRR cut that didn't boost A-shares and immediately ignited a broad U.S. dollar rally that spread to CNY in June.

iFeng: 券商盘前紧急辟谣！央行即将抉择，到底降不降准？

Thus far, the only loud noise is coming from the rumor mills:

The call for an RRR cut in April has been around for a long time. But so far, only the stairs are echoing, no one is coming down.

Analysts see a need for an RRR cut soon though:

Faced with the apparent gap in funding and supply in mid-April, the central bank has to make a choice, probably in the coming week. If the drop is not down, the answer will be revealed soon!

However, analysts said that the current stage of RRR cuts may not determine the direction of A shares. The key to the so-called "April Decision" is still fundamental. After the valuation is repaired, the further rise of the stock market requires fundamental support.

The article goes through various broker reports. If you believe expectations are right when the odds become overwhelming, then it looks like a clear green light for an RRR cut:

The report mentioned, "We expect the central bank to put funds to fill the gap before the expiration of the M$366.5 billion MLF on April 17," and "the central bank will continue to reduce the deposit reserve ratio 1-2 times in the credit expansion process in 2019." "We believe that it is more likely that in addition to the general RRR cut, the deposits formed by small and micro enterprise loans will be targeted."

RRR cut expectations keep rising:

In fact, analysts basically don't do that, especially when the central bank has just ridiculed the "downgrade rumors."

However, the rumors of the RRR cuts have been one after another, and even the central bank’s “dispelling” can’t stand it. What does this mean?

This shows that the market expects a strong RRR cut.

The expectations are so strong that many believe the cut will be announced this weekend:

Analysts believe that the central bank does need to make a choice of RRR. This time point may be "within five trading days."

Let us first look at what the central bank has made before.

The central bank has stamped out rumors that cuts were coming/made, but it refuted "fake news," it did not say anything about upcoming policy:

The central bank’s emergency rumors late at night showed that monetary policy has attracted much attention from the market, especially now.

On April 2, the Central Bank’s Weibo’s “Chengfang Street Review: To Awaken the Detectives in the Financial Market” mentioned:

"On the evening of March 29 (Friday), a rumor of the "Return of the April 1st" issued by a counterfeit Xinhua News Agency was circulated on the WeChat group. Later, the General Office of the People's Bank of China immediately clarified that The news was untrue, and the rumors were smothered in time to prevent the rumors from continuing to spread widely. The central bank has also officially sent a letter to the public security organs on this matter, so please investigate and punish the publication of false information according to law."

However, the central bank’s rumor that “the RRR has been lowered since April 1st” means that it will not be lowered in the future.

The central bank did not say that "it will not be lowered in the future!"

So, may it be lowered in April?

At least for now, the market's expectations for RRR cuts remain strong. Because there is a huge gap in liquidity supply and demand in mid-April:

Odds of an RRR cut are large because the central bank itself said there is room for more cuts. (Related from Reuters Analysts expect China to cut bank reserve ratios soon and Bloomberg China Has Less Room for Reserve Ratio Cuts, PBOC's Yi Says
)

As to the liquidity gap:

The first is fiscal tax collection. April is a traditional tax month. From the data of the past five years, the general tax revenue in April is about 1.35 trillion yuan. Next week (around April 18) will be the peak period for the collection and payment of taxes and fees this month.

Second, the MLF expires. In April, there will be 367.5 billion yuan of medium-term loan facilities (MLF) will expire, the maturity date is April 17, coincides with the peak of the tax period.

Third, there are also many government bond issuances. In the middle of the month, when the local government bonds are issued the most, the government bond issuance payment will also increase the fiscal bank and consume liquidity.

In the case that foreign exchange reserves are not expected, this gap can only be filled by the central bank. Therefore, before the peak of the April tax season (around April 18) and the expiration of the MLF (April 17), the central bank has no suspense to restart the liquidity.

The question is, what way will the central bank adopt liquidity?

Among the many means by which the central bank puts liquidity, the RRR cut is still an option and the most demanding option. Because the liquidity of the RRR release is “large” and “excellent”, it can not only stabilize liquidity, but also help to lower market interest rates. If it is coordinated with policy guidance and incentives, such as targeted RRR reduction, it will also help ease SMEs. Financing is difficult to finance.

Of course, if the RRR is not lowered, the central bank may also adopt a mix of reverse repurchase and various “powder” practices. For example, reverse repurchase plus "Spicy Powder" (MLF), reverse repurchase plus "Special Spicy Powder" (TMLF), or reverse repurchase plus "Spicy Powder" plus "Special Spicy Powder".

Compared with the RRR cut, the latter schemes can also play a role in stabilizing liquidity, but it may cause “expected difference” to the market and prompt the market to adjust monetary policy expectations. This is the key.

In short, if the drop is not down, the answer may be announced in the coming week. The next week is an important period of monetary policy observation.

April and May are seasonal turning points for A-shares in recent years:

Looking back from 2011 to the present, A-shares tend to choose direction in April. In 2011, 2014, 2016, 2017, and April 2018, the stock market turned to decline. After the stock market rose in April 2012, it fell in May. In April 2013 and 2015, the stock market rose further.

Global investors may want to pay attention to A-shares if Haitong Securities is correct in believing the April turn is mainly caused by fundamental factors, because the macro data sends a clearer signal about the economy:

Haitong Securities said in the April 4th April Decision:

“The fundamental data before April is not clear. The market is often affected by policies or events. At the beginning of the year, liquidity is usually abundant and investors have high risk appetite. Therefore, spring incitement often occurs.

After April, the macro data of March was gradually announced. The annual report and the quarterly report of the micro-enterprise also began to be disclosed. After the spring, the fundamentals gradually became clear. After the important meeting was over, the macro-policy situation was also clearer. Therefore, investors can be in April. Make a clearer judgment on the market. ”

For the A-share market, which currently relies on “valuation repair”, when the 3,200 points are faltering, the choice of the central bank is obviously very important. If it is a RRR cut, the release of low-cost liquidity will boost the market's risk appetite in the short term.

However, some analysts said that the current stage of RRR cuts may not determine the direction of A shares. The key to the so-called "April Decision" is still fundamental. After the valuation is repaired, the further rise of A shares requires fundamental support.

“The Shanghai Composite Index has been the first stage of the bull market since 2440. The increase is due to the valuation restoration. The risk premium and the stock price index show that the current stock market risk-to-income ratio is not obvious. The second stage of the market entering the bull market needs to confirm the basics. At the end of the day, April is a clear period, and it is inferred from the bottoming time of leading indicators that it takes time to see the simultaneous indicators." Haitong Securities said.

In other words, the current biggest impact on the A-share trend may not be liquidity, but fundamentals.

Therefore, March economic and financial data is a point that the stock market should pay more attention to.

Latest PBoC Rate a Precision Strike On Housing Market, Housing the Worst Investment of 2017

The PBoC hiked before Spring Festival and followed with another hike on February 3. This has been dubbed a "precision strike" on the housing market because it wipes out the bank's incentive to offer mortgage discount, pushing the interest rate on discounted mortgages below the market rate for similar debt.

iFeng: 央行之后：一夜之间 楼市又传来两大消息！

Open market operating rate of interest rates in response to pre-holiday MLF operating interest rate changes corresponding to further clarify the neutral attitude of monetary policy to guide the rational growth of monetary credit and short-term leverage to fall further.

This is a precision strike on the housing market.

The central bank confirmed that the money market rate hike results, in fact, means there is a substantial increase in mortgage interest rate risk, the current benchmark lending rate of 4.9% over 5 years, which means that in accordance with the reasonable level of 5.5%, all the discount mortgages will be extinct, otherwise the bank is better off buying bonds.

And after 16 years of an abnormally prosperous real estate market, in the future there is no demographic support, have to rely on mortgage credit support, if in the future mortgage interest rates continue upward, superimposed on the government efforts to limit speculative purchases and credit in first- and second-tier cities, real estate sales will continue down, the property market's severe winter will arrive.

There were two big changes in the housing market as well.

First, Chongqing moved to slow the velocity of money in the housing market by making it impossible to lend against pre-sold units. Some developers would list a home for pre-sale, but if they didn't sell, they would use the unsold inventory for mortgage collateral. Under the new rules, the developers cannot lend against these units.

Therefore, this move in Chongqing, for developers, especially small developers, I am afraid we must cry. For them, no longer with empty hand play games, must be put in real money, build the house in order to get the pre-sale permit, to get the pre-sale permit, go out to sell, but once you start selling, it is necessary to sell to the end, if you don't sell, you can not recover your capital.

Second, the government released a new land policy designed to drive down top-tier population and push people into surrounding cities:

Yesterday's other major event is the State Council issued a national land outline, the most important point is that the Beijing-Tianjin-Hebei, the Yangtze River Delta, the Pearl River Delta and other regions into a world-influential urban agglomeration to revitalize the stock of land-based , Strictly control the construction of new land, on the ground and underground space, and guide the central city population to the surrounding area orderly transfer.

Simple explanation, this is to continue to use the current land system, big cities do not put the land, and attempt to drive everyone with high prices to the surrounding cities, thus forming the concept of urban agglomeration. The main consideration is the limited carrying capacity of large cities, so no longer expand the size of large cities, rational allocation of national resources, can not let some cities Chengsi even let some cities starve to death. To the interests of both James, balanced development. Theoretically and subjectively to make the first-line population out to three or four lines, the first-line house prices fell, three or four lines up to go to inventory.

This leads to the conclusion that property is the worst investment in 2017:

Fourth, in 2017, the property market will be the worst investment.

...From the time the rate hike lasts, the liquidity tightness cycle in the past suggests that for at least a year to a year and a half, if from 2016 August date, will continue until at least 2017. Money shortage from 2010 to 2013, then money shortage in 2016, roughly a three year cycle, tight liquidity cycle caused by tight regulation: the economic downturn - monetary money - to stimulate real estate, housing prices - currency Real estate investment to bottom out, short-term stabilization of the economy - to tighten macro-control, anti-risk to deleverage - money shortage, debt disaster, stock market crash, devaluation, a chicken feather drops and the economy down again, monetary policy eases and the economy heats up. 2016-2017 early devaluation of the exchange rate, capital outflow, soaring house prices after the regulation, money shortage, debt and so on are liquidity elastic cycle caused by the impact.

...By the real estate regulation and the impact of the Spring Festival holiday, the second half of January a sharp decline in commercial housing turnover. By the 17-year purchase tax incentives and the impact of the Spring Festival holiday, passenger car wholesale and retail sales growth slowed. During the Spring Festival, China's consumption structure changes, in addition to the traditional New Year and gold jewelry hot, green smart goods and Internet consumption has become a new trend. Tourism and film consumption record high. During the Spring Festival, industrial production slowed down, compared with January last year, the 6 major power generation coal consumption fell 7.7 percentage points. January steel prices up 67.4% year on year, down from 76.5% in December. Cement prices remained stable. Oil prices, non-ferrous trend differentiation, the growth rate of copper prices and aluminum zinc growth rate has been a pullback. Before and after the Spring Festival fruits and vegetables prices and meat prices rose significantly. The US dollar weaker, the RMB exchange rate short-term stability.

The Secret to Soaring Home Prices in China

Haitong Securities Chief Economist Jiang Chao has a new report on the real estate market. He says national real estate prices are not rising faster than nominal GDP growth and therefore does not constitute a bubble. Rapidly rising local prices are a bubble though, and he says the rise in home prices since 2015 is a clear monetary phenomena driven by interbank deposits being counted as ordinary deposits starting in 2015, a way of boosting bank capital to increase lending. This is the secret behind the soaring prices in cities such as Beijing, Shanghai and Shenzhen, where financial companies congregate. Like all bubbles, this one will eventually burst too, and the air may already be coming out as deposit growth collapses. Luckily, he says, this is a structural (localized) bubble, not a comprehensive one, and warns the government to curtail liquidity before it becomes a national problem.

He's erring on the optimistic side. As Ni Pengfei of CASS recently warned (see: CASS: Sharp Housing Correction Coming in September, Concentrated in Hot Cities), the top-tier cities act as market barometers. A sharp decline in Beijing, Shanghai and Shenzhen will have a psychological impact on the national housing market. The surge in mortgage lending and land sales is also responsible for stronger GDP growth in 2016. If this support fades, tighter monetary conditions and another ratchet down in GDP growth is on the way.

PBOC Cuts Interest Rates, Rate Cutting Cycle Still in Early Phase

The PBOC cut interest rates by 25 basis points, lowering the one-year loan rate from 5.60% to 5.35%. The deposit rate falls from 2.75% to 2.5%. However, the PBOC increased the deposit band to 130% of the official rate, up from 120%. Banks could pay 3.30% interest on deposits before the cut, today it is 3.25%. This ends up being a rate cut across the board, unlike in November, when deposit rates were allowed to go up.

Liu Shan, deputy editor of the China Business Times, discusses the reasons for rate cut. He notes that deflationary forces in the economy and a monetary phenomena and lists the causes, which include

...the failure of the transmission mechanism of commercial banks. On the one hand is the lack of bank credit, mainly reflected a drop in demand in the real economy of credit, banks are more cautious lending, securities companies and banks to use the "two financial" business to put money into the stock market; the other is debtors are using new credit to repay old credit, not to support new investment. These two reasons lead to central bank liquidity not effectively flowing into the real economy, inflation will not be able to support prices.

Followed by contraction of the money supply base money growth. This is a consequence of the outflow of funds, recently the phenomenon of foreign exchange decreased significantly, while creating the conditions for the normalization of the deposit reserve ratio, but the money supply growth rate declined, no doubt suppressed the general price level rose.

In front of the complex world economic situation, China's macroeconomic authorities presumably deflation problem is getting a headache, because the long-term economic recession would lower prices, thereby affecting employment.

How to deal with deflation footsteps getting closer, is the central problem of the urgent need to face.

In terms of housing, the new rate cuts will save a borrower 144 yuan per month on a ￥1 million, 20-year mortgage. (央行再次重磅降息 百万月供减少144元楼市迎利好) Combined with the November cut, borrowers can save 378 yuan per month. This article is also optimistic about the rate cut boosting the real estate market, even in fourth-tier cities, which seems like a stretch. They are correct in expecting further rate cuts though.

Pressure on the yuan will increase as both devaluation and interest rate cut expectations harden.

ZeroHedge has further coverage of the rate cuts, including Goldman's take: China Cuts Interest Rates, Takes Number Of Central Banks Easing In 2015 To 21. The post has this chart showing the housing decline in China thus far is worse than the initial decline in the U.S.

PBOC To Widen Yuan Trading Band?

WSJ: China’s Yuan Tests Lower Limits

As Beijing makes efforts to lift the economy—on Wednesday China’s central bank said it would lower its reserve requirement ratio for banks by 0.5 percentage point, effective Thursday, which will boost liquidity--there is building speculation that it is getting ready to widen the yuan’s trading band.

The recent trading pattern signals a shift, as typically traders don’t move the currency far from where the central bank sets its daily reference rate, the point at which it allows the yuan to trade 2% above or below.

Bloomberg: Is China Preparing for Currency War?

At the same time, something else is afoot in Beijing could have even greater global impact. The central bank is cooking up measures to widen the band in which its currency trades. People’s Bank of China officials say it's about limiting volatility as capital zooms in and out of the economy. Let's call it what it really is: the first step toward yuan depreciation and currency war.

Chinese opinion takes the opposite position. They think the PBOC doesn't want to weaken too much, and therefore a widening of trading band is less likely (or may be delayed).

QQ Finance:人民币贬值压力大 短期内汇率波动区间难以扩大

Monday, the People's Daily commented that the recent decline is mainly due to the dollar being too strong, China should make full use of the trading band to suppress the downward trend yuan .

In other words, the devaluation pressure on the yuan is a result of excessive dollar strength which will eventually reverse. Weakening the yuan would leave it excessively weak one the dollar corrects.

China's history from the Asian Crisis and the 2008 crisis shows that it opts for stability during a crisis. Conditions have changed due to slower economic growth and an increase in debt, but the institutional bias for a stable currency remains. Markets will have to overwhelm the PBOC if there's to be a serious devaluation in the yuan.

Chinese QE Proceeds Gradually

The latest injection is 50 billion yuan: China Injects $8 Billion Into Banking System

The People’s Bank of China offered 50 billion yuan ($8 billion) of seven-day reverse repos, a short-term lending facility to commercial banks, in its open-market operation Thursday. It last used these in January of 2014, and it was the first net addition of funds since mid-December.

The injection of funds into the country’s money markets came after the central bank said Wednesday that it rolled over three-month loans of 269.5 billion yuan ($43.5 billion) and offered 50 billion yuan of medium-term loans to designated commercial banks.

This is the medium-term lending facility (MLF).


21st CBH: 央行证实注入3195亿MLF 货币宽松渐行渐远 (Central Bank Confirms 319.5B Liquidity Injection, QE Proceeds Gradually)

Loan Demand Slumps in Q3

No surprise given the weak credit numbers, but the PBOC business survey reflects the weakness. Overall demand for business loans (according to bankers surveyed) was down to 66.6% (chart below). Broken down further, the demand from large, medium and small enterprises was as follows: 55.3%, 62% and 70.8%. No surprise there either as small firms still have a harder time accessing credit.

Here's the entrepreneurs' macroeconomic temperature (green) and economic confidence (red).

Here's the survey numbers for the bankers. Survey results are at their worst since Q3 2012.

Depositors are also surveyed. Here's their feelings on current wages (blue) and expected wages (red). Optimism is still there even though the trend is down.

The desire to spend more (dark blue), save more (light blue), invest more (red).

All data from the PBOC.

Niu Wenxin Wants More Money Printing

Niu Wenxin, who famously called Alibaba's Yu E Bao a vampire, has a new article out blaming high real estate prices on policy, rather than money printing. He criticizes the rising RMB policy, showing how it hasn't reduced China's trade gap with the United States, as this chart shows.

He says high interest rates are choking industry, which is why Chinese companies are now fleeing to America to help with its re-industrialization (see Ni Hao Y'all). While these industrialists flow out, hot money flows in to chase the high interest rates. The U.S. forces the renminbi higher, but it doesn't help close the trade gap, it only helps hijack wealth (presumably via the hot money flows). Debt levels are also at an extreme and the country cannot continue adding more debt at these rates to finance growth. So, isn't the right policy to have a counter-cyclical cut in the RRR and lower interest rates?

He then discusses a theory that the housing bubble in the U.S. was not caused by low interest rates, but by financial innovation. In China, he says land finance caused the system to push prices higher, not inflation. He closes by calling on the central bank to clearly state its monetary policy.

Niu Wenxin is the managing editor of CCTV's stock information channel and a popular commentator.

He makes some interesting points, but inflation of money and credit is the cause of the housing bubbles in China and the U.S. Inflation isn't spread evenly across the economy. Where it flows is based on the economic conditions at the time and the underlying system. If it wasn't housing, it would have been something else, but in the case of the U.S. and China, it ended up being housing.

钮文新：高房价因货币超发论忽悠百姓 绑架政府

This year, the central bank twice directed down accurate, current economic opinion is full of strange sounds, they are the "RRR" simply interpreted as a "rescue", even Jinglian Mr. Gangster level characters are so clear, the reasons for rising prices that money over. For a time, public opinion atmosphere like in 2010 four years before. At that time, the currency 4000000000000 formed government investment will lead to massive inflation over hair, negative interest rates on bank deposits, so a series of monetary tightening to curb price argument, see now, in the end what are the objectives? I believe that these allegations are nothing more than people to kidnap government by Fudge, in order to achieve monetary tightening, promote appreciation of the renminbi Bale.

We look at these economic phenomena is not true?

First, the high level of interest rates has made China the real economy asphyxia, resulting in a large number of recent industrial capital flight, as the United States, "re-industrialization" service. If the Chinese government does not allow drive down interest rates mean that China further flight of capital and wealth?

Second, high interest rates resulting in a large arbitrage "hot money" flowing into China, these arbitrage "hot money" is not supported by Chinese production, does not support the Chinese consumer, there is no contribution to wealth creation in China, but they are set to go, but the huge Chinese wealth. Because they can fully zoom lever outside, to China arbitrage.

Third, the U.S. forced appreciation of the renminbi, the implication is to Chinese monetary tightening, the purpose is to achieve the above wealth hijacking, but not for the U.S. trade balance. By 2006 and 2013 China Import and Export Trade and the RMB exchange rate movements can be seen, the RMB appreciation can not change the Sino-US trade imbalance.

Fourth, the Chinese economy is facing a "financial shock" dilemma. From the perspective of debt financing, whether it is business or local government, the scale of Chinese debt and debt ratio have reached the extreme, prices also have reached the extreme, continue to rely on debt to expand promote China's economic restructuring, upgrading, innovation is not only ineffective, but will the Chinese economy instantly into crisis; From the perspective of equity financing, high interest rates have devastated the Chinese equity capital pricing, stock market slump, seriously affecting corporate equity financing is an example. If the two paths of all the financial blockage, that the fate of the Chinese economy will be what?

Under the combined effect of the above factors, the Chinese economy is not constantly showing downward pressure? Is not the initiative, more endogenous economic growth momentum weak? If this is true, then the central bank through "RRR" and other means of macroeconomic implementation of the "counter-cyclical" adjustment right? I believe that of course is not only understandable, but also had some late, some passive.

Monetary tightening will lead to the loss of the Chinese people of wealth

Tight money, RMB appreciation, but prices rose ever stopped? Ever stopped rising prices? Not only crunch "in the name of the target," not achieved, and in turn to see the "big four economic phenomenon" is not described in this article are based on the opening of monetary tightening and the emergence of deadly economic problem? China has so many people can realize capital flight, arbitrage is actually flourishing wealth of the Chinese people lost? We must understand one truth: the current Chinese prices are rising, it is the loss of wealth in China, and people looted the specific representation.

There are two reasons: First, capital fled the bank is bound to leave behind bad debt, many private owners of reform and opening up 30 years of nurturing, when high interest rates make it unsustainable operations, the companies pledged to the bank, after the name of the variety of cash exports to foreign capital, while domestic banks lost control of its capital flows, which is not bad debts? If yes, who is going to bear the bad debt? Will ultimately bear to stay in the country by all citizens. How bear? Prices. Second, a lot of money in arbitrage between banks and enterprises, financial costs arising from higher interest rates eventually will become the loan production costs, the costs eventually will be transmitted to people's daily necessities, it is inevitable that economic laws .

Therefore, China's inflation should not be called inflation, but the phenomenon has been developed economies after the robbery. If it is a typical inflation, and that China's domestic economy should be very prosperous, people have plenty of money for investment and consumption, but the domestic economic scene is this it? Obviously not, but just the opposite.

High prices roots in the real estate policy, rather than monetary policy

Prices are the same. Recent led by China's central bank, Ba Mr. hosted translated a book - "financial nature." The book order is made ​​according to former Federal Reserve Chairman Ben Bernanke's first lecture recordings. The book, with plenty of proven Bernanke, U.S. housing estate bubble is not primarily the result of low interest rate monetary policy. He said that many people think that after the Internet bubble burst, the Fed's low interest rate policy adopted is the main cause of the housing bubble, but not in his view it. Mainly from the U.S. housing bubble and the financial supervision of financial self-serious vulnerabilities. After 2000, financial institutions, real estate credit based on excessive "innovation", while at the same time continue to relax financial regulation, with the U.S. government and want to solve the housing problem in the context of the Americans. During this period, a lot of people get far with loan conditions of the housing loans, and these bad assets has been "innovative" out of the insurance package colors, making lenders more regardless of the mortgage asset quality, while creating a vicious cycle. Eventually formed a huge bubble.

Bernanke believes that the level of interest rates, the central bank should mainly consider two factors: economic stability and financial stability. After the Internet bubble burst, the Fed's low interest rate policy is mainly based on economic stability considerations, and certainly not for the real estate. So, to solve the problem of the real estate bubble also from the direction of the real estate market and financial regulation to start, but by no means the monetary policy. Because the total amount of monetary policy as it is for the whole economy, but real estate is only part of the economy. If the interest rate with the means to solve the real estate problem, is bound to make the entire economy was depressed, this is not the right choice of monetary policy.

Bernanke's words should not provoke us to rethink the real estate question? In fact, the key to China's real estate problem lie? Land finance local governments. The answer can basically get a national consensus. We have repeatedly stressed that the Chinese prices are too high, the local government land auction for "both cis and expensive" and tolerate or deliberately by the inevitable result. So the root of the real estate policy rather than monetary policy. At least not primarily caused by super-currency.

Back to these strange economic opinion. Now, shouting "water", is "inflation", prices people want to continue to tie the hands of China's monetary policy? Do you want to prevent the central bank "counter-cyclical" and let the Chinese economy to adjust hopeless? Its intentions are "good" or "evil"? Please judge for themselves. At least I believe that the current Chinese economy, the market is far from normal speech - the right policy can not get the correct interpretation.

The author hopes that the agency unequivocally, came forward to speak, in order to set the record straight. Bernanke told us that whenever the introduction of monetary policy decisions, he told his colleagues, "I have to explain the Fed's policy," the purpose is to communicate and market effectively to avoid misunderstanding. Bernanke can, why can not we? We need positive solutions while suppressing noise, but the central bank to the market needs to correct expectations.

China Money Supply and TSF for May 2014

It is a mixed picture in May. Money supply was up, but Total social financing (TSF) five month cumulative through May 2015 is down 6% from 2013 Jan-May. For May alone, the year-on-year increase was 18.6%.

This increase is clearly seen in this monthly chart. Last year's cash crunch was kicking off in May and TSF for the May-July period was very low, which makes for easy yoy comparisons going forward.

Sub-categories declined nearly across the board; in essence the spike in bank loans rescued TSF from coming close to last May's total. Entrusted loans was the only other increased flow. Bulls can look to May loans as evidence of a pickup; bears can look to everything else and write off a possible blip in loans.

It is hard to see on the chart since bank loans distorts the scale, but foreign currency loans were actually negative ￥16.2 billion. That is the first contraction in this category since July and August 2013, when it fell ￥115.7 billion and ￥3.6 billion, respectively.

Also down were trust loans. They fell to just ￥11.6 billion, that is the lowest since a ￥3.7 billion increase in April 2012. The decline in the sector is clear. Even though bank loans increased in May, they likely didn't flow to the types of high risk borrowers serviced by the trust market.

Money supply growth ticked up as well and back in line with PBOC targets for 13% growth in M2 this year.

PBOC's Zhou Xiaochuan: No Major Policy Changes Coming

周小川回应降准：不会采取大规模刺激 (Zhou Xiaochuan Answers Calls to Lower RRR: No Large Scale Stimulus)

Central bank governor Zhou Xiaochuan said in Beijing, although the economic situation has changed, determining the economic situation requires more precision, short-term data does not necessarily indicate a problem.

Zhou Xiaochuan said the above at the Tsinghua University Wudaokou Financial Forum.

As for rumors that the central bank will cut the RRR, Zhou said, determining the economic situation requires more precision, although the economic situation is changing, we must be prudent in reaching a verdict, the short-term data does not necessarily indicate a problem.

Zhou said the central bank's counter-cyclical policy is all fine tuning, from the current situation, the State Council stressed that macro-control should be stable and will not carry out a large scale stimulus.

Moving The System Into Reverse

China's monetary and development policy has been unchanged for many years. Reserve assets are accumulated, which fuels expansionary monetary policy, which fuels asset price increases, which attracts hot money that adds to reserve accumulation. Local government led investment is fueled by land sales, which fuels more real estate development and higher land prices.

Now that is changing. Reforms over the next 5 to 10 years, if successful, will guarantee that China doesn't work this way anymore. That's a good thing in the long-run, but the odds that nothing goes wrong is unlikely. It would be great if that were the case, but I wouldn't bet on it. People are accustomed to things working in a certain way and when it changes, it takes time for people to adjust. If they all adjust at the same time, it results in a volatile change in the market.

As Zhang Mo Nan says in the article below, bursting asset bubbles often complete the transition process— and even if they don't complete the process, they advance the ball a long way. This is why governments that do not intervene in market panics see their economies experience V shaped recessions: the transition is rapid. Governments that prevent rebalancing see L shaped depressions because they fight the market and preserve the dysfunctional system that led to the crisis in the first place.

China is already on the path to reform. The leadership is moving slowly because they don't want a disorderly transition. They want the growth from new markets to offset the slowdown in old markets, but there is a crisis of any size, it will accelerate reform, not derail it— assuming the leadership has consolidated power and squelched opposition.


张茉楠：货币扩张环境发生趋势性改变 Zhang Mo Nan: Monetary Expansion Trend Changing

Our money creation mechanism may be changing, future monetary policy is not only possible to enter "when fine-tuning" may also be necessary to make an inventory of the stock and currency adjustments. All along, China's monetary creation depends on the external surplus. In an open economy, foreign exchange reserves and the movements is not only a link between a country's domestic and foreign financial policies, but also reflects an important factor in the effectiveness of monetary policy and constraints. Caused by rising foreign exchange reserves will change the delivery of base money, enhance endogenous money supply.

From the central bank balance sheet perspective, the main asset is the central bank's foreign exchange reserves, IMF latest data show that the central bank's total assets up 31.7 trillion yuan (U.S. $ 5.1 trillion), of which the proportion of foreign currency reserve assets of the People's Bank's total assets at 83 %, respectively, 1.3 times the United States, Britain, Japan and the European Central Bank assets, 8.1-fold, 2-fold and 1.2-fold. From In this sense, the process is essentially the foreign exchange reserves increased by the People's Bank assets increased and the increase in base money in the process, which also led to foreign exchange earnings generated by external money creation to become the main channel.

However, two-way fluctuations in the RMB exchange rate, balanced two-way capital flows will become the norm, under the capital account deficit may occur in the background, based on the currency exchange rate mechanism will be put in a fundamental change, which is a traditional central bank money creation mechanism will be a new challenge. This year, the devaluation trend is more obvious, according to a report the Bank for International Settlements (BIS) released the latest, March RMB real effective exchange rate (REER), decreased 2.7% to 117.45, for the second consecutive monthly decline, a record in October 2013 Since the lowest level. Nominal effective exchange rate index for March was 112.64, also hit its lowest level since October last year, a decline of 1.8%. In mid-February to mid-March month, the RMB against the U.S. dollar fell 2.6%.

More and more facts indicate that the expansion of RMB assets and monetary trends in the internal and external environment is undergoing changes. According to estimates, currently with the U.S. interest rate, the forward exchange rate of RMB spot estimates of risk-free arbitrage narrowed significantly, foreign exchange continued to decline. February new foreign exchange from financial institutions of 437.366 billion yuan in January plunged to 128.246 billion yuan, a decrease of approximately 71% qoq, the highest since September last year lows. By FX channel functions are transformed into water leakage function. Particularly in light of the Fed's global "central bank" status, the Fed gradually withdraw monetary policy changes will affect the changes triggered by QE, including China, the global monetary and financial cycle.

On the one hand, due to the increase in the private sector to buy foreign assets, the central bank passively withdraw RMB liquidity, resulting in some degree of monetary tightening; the other hand, once formed devaluation expectations, reducing the non-governmental sector increased by U.S. $ RMB assets in the domestic asset allocation is Monetary assets to increase performance and reduce the risk of asset allocation, therefore, increased demand for liquidity, foreign exchange as a mechanism for the creation of base money will be weakened.

From a longer period, the growth rate of China's currency will inevitably stepped decline. First, determine the growth rate of the money supply is the most fundamental factor of economic growth, economic growth declined, the money supply growth rate will decline. Conditions of sustained high growth, long-term structural factors and macroeconomic situation is undergoing major changes, the future potential growth hub down, the appreciation of the RMB-way track changes and external liquidity pressure drop will be a long-term trend, coupled with the risk facing long-term decline in the valuation of assets and to bubble pressure stage of monetary expansion is also facing an inflection point.

Secondly, from a global rebalancing of the environment, the U.S. economy, "and then industrialization" and "rebalancing" may appear stronger than anticipated positive factors. U.S. aims to "to enhance the real economy can trade level" rebalancing strategy will lead to its economy increasingly clear long-term rate of return is expected to rise, while attracting global capital return to the U.S., or will gradually change over the past decade global capital the direction of flow.

Based on the above consideration of many factors, changes in foreign exchange could be a long-term change in the economic structure of a comprehensive reflection. Over the past decade, due to changes in the age structure of our population and the rural surplus labor to urban areas, rising savings rate, reflected in the balance of payments, the performance of the trade surplus continues to expand; reflected in the monetary environment is the rapid growth of foreign exchange , resulting in a lot of pressure of monetary expansion, and the future is likely to change this pattern.

All along, the high savings rate means faster asset or wealth accumulation, the rapid growth of wealth and rapid growth also requires liquid assets, money is the main form of liquid assets. However, the future with the acceleration of the process of population aging, high domestic savings will have a fundamental change in the situation, which will make the original "savings - surplus - monetary expansion," the cycle is reversed, the source of monetary expansion, which led to the disappearance.

Long period of evolution of the monetary and financial policy makers biggest implication is that to avoid asset bubbles out of control, strengthen financial stability mechanisms and measures. From the world experience, several major monetary and financial cycles are based on asset bubble burst, even in the form of the financial crisis to complete the transition.

Thus, with the trend of the future incremental foreign exchange decreased, the situation as the main channel of money creation will change occurs, the central bank deposit rate by reducing the need to enhance the money multiplier, which also means more money creation will depend on domestic credit growth, and was originally used to "sterilize" the foreign exchange deposit reserve ratio is likely to be money "anti-sterilize" the primary way in the coming period to improve M2 through this way. In addition, you can adjust the commercial banks and financial institutions excess reserves and the excess reserve rate impact of interest rate and liquidity, either through bonds or bond market, create a "bond pool" to hedge against the risk of falling water "currency pool."