Suzhou Planning Digital RMB Airdrop

Suzhou will be the first city after Shenzhen to test the digital renminbi with a lotto airdrop. Second digital yuan lottery to launch in Suzhou: report 36kr: 继深圳之后 苏州数字人民币红包也来了 数字货币进程加速

According to the person familiar with the matter, many businesses in the relevant urban area of ​​Suzhou have installed NFC ( Near Field Communication) QR codes, but the payment carrier is still in the hands of testers. At present, testers have experienced digital renminbi payment and can use "offline" And the "touch" function. This is the difference from Shenzhen, where the “offline” and “touch” functions could not be used in the Shenzhen pilot. In fact, this is one of the biggest differences between the digital renminbi and Alipay and WeChat payment. The digital currency project initiated by the central bank is also called "DC/EP", which means digital currency and electronic payment tools. It is a digital form of the paper renminbi, and the price is linked to the renminbi and has high currency stability. Prior to this, Shenzhen launched a digital RMB pilot program, and the central bank distributed 10 million red envelopes in cash. On the evening of October 8th, the Shenzhen branch of the Central Bank and the Shenzhen branch of the four major banks of China Construction Industry and Agriculture Corporation issued the "Lixiang Luohu" promotion activity through WeChat public account. The digital renminbi was formally used for pilot projects in consumer coupon scenarios.　　

The currency will be launched on the "Double 12" shopping holiday (a sequel to the "Double 11" online shopping holiday), December 12.

China and the USA Have the Same Core Economic Policy

Both China and the USA (along with most of the developed world) operate a bank-run economy that relies on perpetual debt creation to lift asset prices.

ZH: The Fed Guarantees No Recession For 10 Years, Permanent Uptrend For Stocks & Housing

Those who own stocks and housing now will continue getting richer, those who don't will be priced out of these markets.

A classified Federal Reserve memo sheds new light on the Fed's confidence in its control of the economy and the stock and housing markets. In effect, the Fed is guaranteeing that there will be no recession for another 10 years, and that stocks and housing will remain in a permanent uptrend.

Paraphrasing the memo, we have the tools to insure that stocks and housing do not just remain at a permanently high plateau but continue to move higher in a permanent uptrend.

...There is one fly in the ointment the memo mentions: the Fed is powerless to push wages and earned income higher along with stocks and housing. So while stocks and housing soar to the moon, wages will continue stagnating or losing ground as rising prices for healthcare, rent, childcare, college tuition, etc., continue chipping away at the purchasing power of earned income.

Those who own stocks and housing now will continue getting richer, those who don't will be priced out of these markets. In other words, the Fed's policy of making the rich richer and the Devil take the hindmost is permanent...

The average Chinese laborer is in the same position as the American laborer, worried about being forever priced out of the housing market. To varying degrees they also both worry about being priced out of "good neighborhoods," college education, medical care, etc. Wage growth is higher in China, but consumer goods cost more and inflation is higher.

Obviously the two countries have different cultures and political systems, but at the most fundamental level, they're operating the same economic policy. It is creating similar distortions and similar threats. China will not allow home prices to fall, otherwise the economy sinks into recession and local governments cannot repay debts, and this causes a further decline in economic activity. The U.S. will not allow stock prices to fall, otherwise the economy sinks into recession and local governments cannot pay pensions, and this causes a further decline in economic activity.

One or Two More RRR Cuts in 2018

21st Century Herald: 央行再次创新性定向降准，年内或仍有1-2次降准

In addition, there is still a general view that there are still downgrade operations in the future. Wen Bin, chief researcher of Minsheng Bank, said that there is still room and direction for the directional downgrade in the next phase, and there may still be 1-2 directional downsizing operations by the end of the year.

There are still 1-2 drops in the year or
Along with this orientation, the orientation of monetary policy has been discussed. One of the discussions is whether monetary policy has been loosened.

This argument is not without a basis. First, the official expression of current liquidity has changed. On June 20, the executive meeting of the State Council stated that it was "reasonably adequate". Before that, it was "reasonable and stable," and earlier it was "basically stable." Secondly, from the perspective of the central bank’s operation, the current RRR cut is the third time in the year. In addition, MLF collateral can be expanded in May and the central bank overran MLF in June.

However, a number of respondents believe that the tone of a stable and neutral monetary policy has not changed, but changes in the structure and margins. Even Lian Ping said that last year was running in the tight direction of the DPRK, but now it is in the loose direction. “From the results, under strong supervision and de-leveraging, liquidity is not reasonable and moderate, but it is tight. If we do not adjust for biased direction, the actual state of monetary policy will be tight.”

"Monetary policy needs to make some adjustments according to the economic situation. Now that entity financing is relatively difficult, trade frictions are still heating up, and economic growth is facing greater downward pressure, so under the sound and neutral tone, it is necessary to fine tune monetary policy. Xu Gao said.

Wang Qing, deputy general manager of the Oriental Jincheng Research and Development Department, believes that during the year the central bank’s policy and rhythm will be fine-tuned by the camera, or it will continue to be reduced by 0.5-1.5 percentage points, which is equivalent to one or two reductions. “The future still needs to be reduced. Now under the strong regulatory environment, the off-balance-sheet transfers have more bank credit than banks’ capital funds. In this case, it is necessary to reduce the bank’s interest rate to allow banks to have more lending capacity.

This will weaken the yuan and indicates "strong" dollar, deflationary pressure remains a serious concern. None of these anticipated RRR cuts are easing, but instead designed to offset the tightening caused by the deleveraging efforts.

China's ace in the trade war isn't devaluation because it is a weapon against America, but because it is a tool for rebooting the Chinese economy and deleverages the economy in one fell swoop. Along with the trade war, it would force a rebalancing of China's economy.

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

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

21st Century: 货币政策松紧争议升温，破解“紧信用”是关键

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

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

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

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

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

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

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

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

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

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

Fragile.

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

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

This is how bear markets begin.

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

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

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

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

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

As for reflexivity:

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

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

Banks don't want to lend:

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

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

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

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

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

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

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

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

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

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

China Spins the Dollar Wheel of Suffering, Cuts RRR Again

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

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

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

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

The pain is worse than understood by financial markets.

Xinhua: China cuts RRR by 50 basis points

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

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

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

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

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

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

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

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

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

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

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

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.

Money Creation and Currency Collapse in China

FT Alphaville: Pettis on the tragedy of China’s common private central banks

At the extreme, he pointed out, much of the short-term paper issued in China was, in the eyes of investors, a lot like PBoC bills. They were liquid, short-term money substitutes with little to no credit risk. Did it make sense, he wondered, to think of China as an economy with potentially thousands of mini-central banks, all issuing nearmoney instruments, and if so, how might we model the monetary and economic impact?

Is this substantially different from the situation in the U.S. with FDIC insured bank deposits and implicit backing of Fannie and Freddie, or today, the explicit/implicit backing of student loan debt?

The private economy creates new money in the form of credit and it circulates as money until the crisis hits, and like Cinderella's carriage turning back into a pumpkin, it turns into debt. The central bank steps in and buys up the debt, placing it on the central bank's balance sheet, turning it back into money. Hence QE1, QE2, and QE3, and exploding Fed balance sheet and near zero inflation.

The post, which relies heavily on a note by Michael Pettis, focuses on moral hazard and removing it. This is not really the main problem though. It doesn't matter if there is moral hazard or not, except for answering the question of how big does the credit bubble get before it bursts? In a country with no moral hazard, zero implicit guarantees and even private credit insurance is banned, credit growth will be restrained. In an economy with not only an implicit guarantee from the central government and central bank (USA), but also an actively interventionist government working to ensure not even a slip-up in credit growth (PRC), credit growth can reach enormous proportions.

If this revaluation occurred very quickly and forcefully, and if it happened in such a way that investors found it difficult to distinguish between borrowers that might continue to be covered by moral hazard and those that weren’t, they might dump debt as rapidly as possible in favor of credible money, except for debt issued by borrowers whose solvency and liquidity is fully credible (which might only be the PBoC).

Except the PBoC isn't fully solvent, liquid or credible. Only the Federal Reserve is fully solvent, liquid and credible because only the Federal Reserve prints the reserve currency, to which the PBoC has pegged the value of its circulating medium.

The PBoC can choose to buy up the bad debt, devalue the currency and restart the credit system. Or the defaults will begin and Chinese will race down Exeter's pyramid. In which case, US dollars and gold are superior to Chinese renminbi.

China Reserves vs M2 Worse Than 1997 Asian Crisis

Balding: End of Week Thoughts on a Big Week

With $3.6 trillion in reserves, China will have no problem defending the RMB and imposing its preferred value on the market.

Yes and no but more no than people think. One of the most common mistakes people make looking at Chinese data is distinguishing between absolute and relative data. $3.6 trillion is a large amount of reserves in absolute terms but much smaller in relative terms. According to my calculations, reserves relative to nominal GDP for 1997-8 Asian tigers is 23% compared to China’s current 34.7%. However, if you compare reserves to M2 money supply the picture is much different. By that measure, China only has reserves equal to 17% of M2 versus 28% in 1997-8 Asian tigers. Given the large demand to move assets out of China, primarily by Chinese firms and individuals it should be noted, the $3.6 trillion in reserve assets looks much smaller against the enormity of its wealth and asset base. If Chinese investors and individuals start to feel significant concern about the RMB, the demand for foreign assets could turn into a flood rapidly if the PBOC fails to arrest the decline. $3.6 trillion is a large number but in the world second largest economy with 1.3 billion, that should be thought of as a small $3.6 trillion.

Here's a chart of Asian currency reserves to M2 back in the late 1990s:

Here's the chart for China. For 2011, see Home buyers in Shanghai angry at massive price drops, smash offices and Yuan hits limit low for fifth straight day. For the 2008 drop in the yuan, see ZH: Intraday USDCNY Unchanged Since 2006. The PBOC successfully averted depreciation pressure in 2008 and 2011/2012. The chart below shows it may be impossible now.

This is a chart of China's M2 divided by reserves, showing how many yuan of M2 exist for each dollar of reserves.

Chinese State Banks Are Politically Connected

Stop indulging China’s banks or risk another crisis

But it is politically difficult for Chinese banks suddenly to acknowledge a much higher level of bad debt, let alone to write them off. In any case, the tax men will not allow it.

The banking sector is the country’s biggest taxpayer, accounting for more than 60 per cent of all revenues. If the banks admit to holding a much higher percentage of bad debts and write them off, their net profit will collapse and so will their ability to pay their taxes.

The only realistic way to contain the Chinese credit bubble is to starve the banks of new capital. Here are three proposals for how to achieve this.

Reminds me of this: Wen Jiabao: With common purpose, the central government will smash the banking monopoly

The banks are politically connected and it goes well beyond the taxes they bring it. The banks are the competitive advantage used by many state owned companies. To refuse to indulge the banks is really to refuse to indulge the party members who benefit from them.

Stars Aligning For A March Cash Crunch as PBOC Drains Liquidity

First some English language coverage of the trust situation from Bloomberg:
China Banks Show Too-Connected-to-Fail Link to Loans

Du Ronghai received an urgent phone call from his private banker at Industrial & Commercial Bank of China Ltd. about an investment opportunity promising a 10 percent annual return. Only for the privileged few, he was told.

Du, who owns an apparel manufacturer in southern China, said he hopped on a plane the next morning for a four-hour flight from his home city of Harbin. That afternoon, at an ICBC office in Guangzhou, he looked at the sales contract he was required to read in person and invested 3 million yuan ($488,000), his first foray into the high-yield world of shadow banking. The employee kept telling him the product, called a trust, was so good that bank staff were pooling money to buy it, he said.

“I knew nothing about it, but the return was very, very tantalizing, and the way they presented it was like if I don’t buy it now, someone else will grab it in seconds,” said Du, who at the time, about two years ago, had almost 30 million yuan parked at Beijing-based ICBC in deposits earning less than 3 percent annual interest. “I was thinking, if I can’t trust ICBC, who else can I trust?”

High pressure sales tactics and a total trust in the financial institution. Not a good mix. Turns out Mr. Du invested in the infamous "Credit Equals Gold" trust.

That figure is equal to more than 80 percent of banks’ shareholder capital and has increased 65 percent annually for the past three years, Werner wrote in a Jan. 22 note.

The figure referred to is the total amount of shadow banking assets.

The top three shareholders of Beijing-based China Credit Trust are state-owned enterprises, including People’s Insurance Company (Group) of China Ltd., which owns a 33 percent stake and is the trust’s biggest investor.

This is why yuan depreciation is the most likely course of action: the central government is already intimately involved in the financial system.

“China needs a default, but not now,” said Xu Gao, Beijing-based chief economist at Everbright Securities Co. “A default would lead to an exodus of capital from similar financial assets, followed by a bank run, as liquidity is quickly drained in the financial system. Nobody will be willing to lend to each other -- just like what happened when Lehman went bankrupt. This is simply unaffordable to the government which has repeatedly vowed to avoid systemic risks.”

Default never comes when you want it. When times are good, bad debts can be serviced. It is when the economy sours that a default can cleanse the system. Repeated bailouts teach the financial sector that they will never be responsible for their bad decisions.

China has a record of bailing out banks in distress. In the late 1990s, it injected 270 billion yuan of capital into the four largest lenders, which were then on the brink of bankruptcy, and carved out 1.4 trillion yuan of nonperforming loans from their books. Since 2003, the government has spent $79 billion recapitalizing the firms and wiped away another 1.4 trillion yuan of bad loans.

A bailout might not be as easy this time around. China’s nebulous world of shadow banking, which includes trusts and wealth-management products, as well as guarantor and underground financing, accounted for 84 percent of GDP in September 2013, rising from 70 percent at the beginning of that year, according to JPMorgan.

The bailout in the late 1990s was a simple matter. The country was growing fast and accumulating reserves. Now, reserves have stopped growing rapidly and in fact are likely to start winding down soon, having already peaked as a percentage of GDP.

For Du, the roller coaster of Credit Equals Gold didn’t stop him from putting more of his savings into trusts. He said he has recently bought similar products from other banks, including China Minsheng Banking Corp. (1988) and Shanghai Pudong Development Bank Co. (600000), and will continue to invest.

“The risk is not with trusts, it’s about which bank you plan to partner with,” said Du. “I’m totally done with ICBC and now going with the smaller ones because they are more willing to honor what they said.”

Fool me once, shame on you. Fool me twice......

China Central Bank Guides Short-Term Rates Higher

China's money market interest rates jumped on Tuesday after the nation's central bank withdrew more liquidity from the financial system, signaling that it intends to continue its efforts to rein in risky lending and facilitate economic restructuring by guiding rates higher.

A benchmark cost of short-term loans among banks, the weighted average of the seven-day repurchase agreement rate, rose to 3.52% from 2.82% at Monday's close.

Heading for another cash crunch.....

However, analysts said they expect the PBOC to be less aggressive in guiding money market rates higher in the coming months than it was last year, given recent signs that the nation's economy is slowing.

To help curb risky lending, the Chinese central bank has engineered four cash crunches in the financial system since June, pushing the benchmark borrowing cost to around 4%-5%, compared with 2%-3% before the summer funding squeeze.

Engineered is too strong of a word. The Chinese central bank has, except for September, allowed the market to panic briefly before bailing everyone out. It's true that borrowers and lenders across the economy are behaving more cautiously, a result of the well publicized default of "Credit Equals Gold" in January. Whether the PBOC is able to put enough scare into everyone is another question. Mr. Du clearly hasn't learned his lesson. But engineered assumes the PBOC created the situation. It didn't.

There is a real scarcity of real capital in the Chinese economy. Interest rate liberalization has quickly led to the growth of products such as Yu E Bao, which soaked up billions in assets and offer much higher interest rates. Rates are high because money supply growth (inflation) is high, but real capital is constrained by the financial system, while malinvestment is high due to savings being allocated based on politics, not profits. If the central bank did nothing, there would be widespread bankruptcies and defaults across the entire financial system. Instead, the central bank let's everyone get close to the edge and the pulls back.

This strategy can work if the economy stays strong, but if it weakens, the central bank will run out of good options.

Western Banks Exposed to Chinese Banking System as Shadow Banking System Collapses; China Trust Industry Says Systematic Crisis Impossible

Evidence coming in continues to point to a great contraction in the trust market. 信托月报：新设信托数量规模环比腰斩 收益率下行至8.43%. Trust fundraising fell 50% in January, slightly better than the 60% drop reported last week. The word they use to describe to number of new products translates as "cut in half," but in Chinese this colorful term refers to a method of execution employed by Chinese emperors which involved cutting the body in half at the waist. The word is more appropriate here than the headline writer may realize because if this level of contraction holds up, death indeed may be the ultimate result for many in the trust sector. However, as 50% is better than the 60% drop initially reported, the trend for the trust industry looks to be improving—though we'll know more once February estimates start rolling out.

This chart shows the number of new trusts broken down by type (bars, left axis) and assets (line, right axis). Note the collapse in financial products, the purple bar.

China's Banking Regulatory Commission is building a registration system for trusts: 金融：信托产品登记系统筹建 信托流动性桎梏有望打破. This is expected to help break the liquidity crunch currently facing the industry. A big problem for companies is their guarantee to repay investors. Now that trust failures are beyond the ability of companies to repay, the guarantee is worthless and results in an opaque system where investors have no idea of the trust's true value. It is hoped that the registration system can develop the industry and allow for risk-sharing and intermediary services. At this point this may only serve to uncover the depth of the emerging crisis.

The trust industry itself says a systematic crisis is impossible: 中国金融：信托业协会称信托资产质量优良，不可能发生系统性风险. That's as good as their other guarantees. The article repeats the words of the trust industry: bad assets were only 0.268% of assets in 2012 (no mention of 2013) and there are ￥9 billion in reserves against ￥20 billion in bad assets (based on 2012 figure of ￥7.4 trillion in assets, or 45% of the total. Additionally, the trust industry has ￥255 billion in capital, more than 12 times the problem assets.

The industry wants to focus on the positive. The negative way to view the numbers is as follows: the industry was levered 30 to 1 at the end of 2012. If bad assets grew to 3%, it would consume all of industry's equity. In 2013, the problem got worse because the system became even more highly leveraged. The Chinese banking system has seen non-performing loans much higher than 3%. One must believe the trust industry, which is making bridge loans to real estate developers and highly indebted coal mines, is safer than the Chinese banking system as a whole, which only a few years ago still had NPLs in the high single digits—to say nothing of rates in the double digits during a crisis. A systematic crisis isn't impossible, it is more likely inevitable.

When a crisis does finally erupt, Western banks will not escape the fallout

In Western Banks and China: ‘Interesting Times’ Are Coming, Peter Tenebrarum lays out the risk:

The total exposure of Western banks thus amounts to $709 billion. Australia's banks were a bit late to the game, but sure did their best to catch up quickly, as the 230% increase in their claims since 2011 shows.

In other words, we now have additional evidence of the growing vulnerability of Australia specifically. As we already pointed out in our musings about how “financial contagion” might spread from China in spite of its closed capital account, Australia is a pivotal region. Australia's economy greatly depends on China's commodity imports, and its banks have financed an enormous real estate bubble on the back of the commodities boom.

Moreover, Australia's banking system itself is highly dependent on foreign short term funding sources. Although the chart above doesn't tell us anything about the maturities of the claims on China, we would not be surprised if many or even most of the loans to China had much longer maturities than the foreign funding Australian banks get from (mainly) Europe. The main point is though that we have yet another source of potential trouble for Australia here – the exposure of Australian banks to China amounts to 9% of Australia's GDP at this point.

......In the course of this year, some $800bn. of debt issued by 'wealth management products' is coming due in China, and Mr. Darby notes in this context that the potential knock-on effects on Western banks from an increase in non-performing loans in China are probably not properly appreciated at this juncture.

Especially UK banks with a huge $193 bn. in total exposure, as well as Hong Kong banks (approximately $150 bn. in net claims) and Australia's 'big four' banks seem to be in the line of fire here.

Moreover, we must expect that in the event of a shadow banking crisis in China – a highly probable event given what is known about the practices of the sector and the amount of debt coming due in the near future – will have considerable effects on numerous emerging market economies, especially if China should eventually decide to devalue the yuan (currently the yuan seems quite overvalued actually). In that event, both commodity exporters and exporters of semi-finished and final goods that compete with China would feel the pinch.

This would in turn mean that Western banks would not only have to grapple with a possible rise of NPLs in China itself, but also with an even bigger currency and debt crisis in a number of emerging markets. Since many Western banks remain in weak condition following the 2008 crisis and the euro area debt crisis, they will then be inclined to further reduce their lending in their home countries as well, so as to preserve capital. A vicious cycle could easily be triggered.

See the whole article for a breakdown of country exposure. Western Banks and China: ‘Interesting Times’ Are Coming

I was early in looking for the yuan to devalue; it recently hit new highs near 6 to $1.

Chinese Yuan Could Devalue 50% Or More
Yuan collapse goes mainstream as Financial Times discovers the yuan can drop; exchange rate hyperinflation cometh?

In another post I had linked to an article that no longer exists, but here was the quote I pulled:

Everbright Securities macroeconomic analyst He Yuanyuan found in the fourth quarter of last year and April this year, the central bank bought yuan and dumped foreign currency (expressed as a reduction in the total of foreign currency assets). This shows that China's central bank is in the market to support the RMB exchange rate, to prevent it from excessive devaluation. This shows from another perspective, the pressure of RMB devaluation.

At the end of 2011 and again in April that year, China's foreign reserves dipped slightly and the result was a decline in the value of the yuan.

In Chinese Yuan Could Devalue 50% Or More, a chart of intraday price movements shows that traders have tried taking the yuan lower at other times, but were thwarted by the central bank raising the value of the renminbi (traders can only trade within a band around the fixing). The takeaway is that there has been pressure on the yuan before and even a minuscule drop in reserves led to yuan selling. The central bank has eased control over the currency; moving dollars out of China is possible and there's the offshore renminbi market in Hong Kong. If there is a crisis and China's reserves sink in order to pay for a bailout, the yuan will slide sharply overseas. The reaction of Chinese citizens will be to pull dollars out of China and sell them in Hong Kong (or simply hoard them). As we saw last spring when Fake Exports Caused The Yuan Rally, Chinese have many creative ways of getting around capital controls.

The obvious solution for export juggernaut China, with an overvalued property market and a credit bubble, is for the currency to devalue. This will help exporters, deflate the property market (in terms of real value) and solve any credit contraction. It was used by nations to get out of the Depression—the U.S. devalued the dollar by 40% against gold in 1934 (gold gained 75% against the dollar). And at the time, the U.S. had huge reserves, much as China does today, yet it still went through a major devaluation.

Source: Central Bank Gold Reserves: An historical perspective since 1845

Chinese Reverse Repos Mature This Week

Chinese monetary policy is on pace to auto-tighten this week as reverse repos mature.

China Money Rate Rises Before Reverse Repos Mature; Swap Steady

A total of 450 billion yuan ($74 billion) of 14- and 21-day reverse repos will fall due next week, according to data compiled by Bloomberg.

This article is from last week; next week is now.

This article (Google Translated) discusses analyst opinion in China. Will the PBOC tighten further in the Year of the Horse, or move towards neutral? 央行首周“静默”：马年延续偏紧信号？
(Central Bank of the first week, "silent": Horse continuation of tight signal?)

Tuesday is the first day after the central bank open market operations, the Chinese New Year Year of the Horse, but the face of the huge reverse repurchase expires, the central bank did not rush to start a new round of reverse repurchase fill the gap, but chose to let the natural return of capital.

Market analysts generally believe the central bank to take monetary policy signals the release of this year - still continued tight policy steady in 2013.

450000000000 reverse repo maturity

Wind Information Statistics show that on February 7 to 14 week as of now there are 450 billion central bank reverse repo operations expires in mid treasury deposit another $ 30 billion will expire on February 15 (Saturday , postponed to February 17) will face the reserve in back. The above circumstances will directly reduce the inter-bank market liquidity.

However, since the first week after the holiday is also the beginning, not the demand for funds, the central bank's "omission" does not cause excessive reaction of the market on Tuesday, the short-term repo rate is still down. Moreover, on the previous trading day inter-bank market each period repo rate also showed a downward trend shock, indicating short-term inter-bank liquidity is relatively abundant.

"This is the first week after the holiday less about funding needs, but given this week to tighten liquidity factor overlay, is expected to be slightly this week, the central bank's reverse repo operations." A fixed-income analyst at brokerage accept the "first Financial Daily "reporters, said an interview.

The face of 450 billion yuan reverse repo operations expires, senior analyst at Bank of Dongguan Financial Markets Chen expectations: "The central bank will conduct a short-term or 2 times the reverse repo operations, the total size or 150 billion to 2000 billion yuan In return some liquidity to calm markets, while psychological and emotional to smooth market volatility. "

Every Tuesday, Thursday the central bank open market operations window of time, if you want to open operation, conducted on Monday and Tuesday the central bank will exercise the amount of major financial institutions. However, from the current situation, this week's operating window only next Thursday, but the current market funds face and do not support large-scale reverse repurchase operations on Thursday might.

The central bank to release tight signal?

Emerging markets affected by the current economic chaos and weak Chinese data, there are institutions began to prophesy policy the central bank might adjust its tight neutral.

Haitong Securities analyst Jiang Chao macroeconomic policies of this analysis, "the central bank stressed that 'forward-looking' again, contact its emphasis SLF's routine, or indicate a neutral policy orientation has been transferred from tight to prevent systemic financial risks. "

Standard Chartered Bank in its 2014 Investment Outlook report, "if the economy weakens significantly, would be expected to loosen fiscal and monetary policy at the same time as needed to avoid a hard landing."

But on Tuesday the central bank is still facing a huge amount of reverse repurchase expires window closes its open market operations are considered to adhere to some extent the central bank to release tight monetary policy signals to the market.

Solid closing a brokerage analyst on the "First Financial Daily" reporters, said face massive reverse repurchase expires, the central bank did not restart the central bank may help reverse repo market is relatively calm period of tight release signal to the market.

Dongguan bank liquidity report also predicted a few days ago: "fallout effect late last year put the focus on fiscal deposits, 2.77 trillion yuan more than the incremental foreign exchange market is tight and the expectations and the central bank requires commercial banks to take the initiative to improve under the allowance ratios such short-term liquidity of commercial banks is relatively abundant, so the central bank more reason to have tight operating base return efforts. "

China Merchants Bank senior analyst Liu Dongliang said, "the central bank to ease monetary policy should not hold too high expectations."

Dong-Liang Liu believes that the current central bank did not achieve their full social debt limit excessive risk expansionary monetary policy goals, but did not alleviate the current funding, and the economic downturn of the funds used to increase the real economy, local government financing to maintain growth momentum is strong, In this case, once the easing of monetary policy, credit expansion will continue; another current economic downturn, although the consensus, but there is no difference to the situation and the central bank shots.

A leading domestic fund companies also said that "the central bank's concerns about the economy deepened last year's fourth quarter, easing slightly to tighten attitude, but by no means the central bank should be substantially relaxed.

Chinese Credit Contraction: Fundraising for Chinese Trust Products Drops 62% in January (Updated); Deposit Insurance Savior or Death Knell?

The link below takes you to the Google Translated article, but it screws up the numbers, so here they are:

52 firms issued 228 products in January. The amount collected fell 65% from December levels (mtm) and and 55% from prior year January (yoy). The average size of the individual trusts fell 18% mtm and 21% yoy. Raw numbers: ￥42 billion down from ￥120 billion January 2013.

55 firms established 245 new trusts in Janaury. The total amount was down 77% mtm and the average size was down 38%. Year on year, the size was down 62%. Raw numbers: ￥28 billion down from ￥122 billion in December and ￥74 billion in January 2013.

The average yield on trusts issued/created in January is 8.65%, down from 8.81% in December and 9.08% in January 2013.

Of the trust products themselves, real estate was the largest with 37% of the market by yuan value across 55 products, along with the longest maturity at 2 years and the highest yield at 9.66%. Industrial and commercial firms were 19% of the market by yuan value across 45 products and an average yield of 8.53%. Basic industry trusts accounted for 16% of the market across 29 products, with an average yield of 9.52%.

Trusts comprised of project loans made up 33% of the market with average yield of 9.07%. Other investment projects offered 7.77% yields; equity trusts offer 8.89% yields; while trusts with equity shares are 16% of the market and offered the highest yield at 9.69%.

Economic data is going to take a major hit in February and March if this contraction in credit does not rebound or is not offset by bank loans. If I went only by this data, I would expect the February PMI to be far lower than expected.

Collection of the first month of fund-raising amount of trust to drop 62%

A story that could have an impact on whether the government allows trust products to fail or not is deposit insurance. In today's news (Google Translated): The establishment of a deposit insurance system're just "finishing touches". In short, deposit insurance is still set to launch this year.

English coverage here (from December): China Pushes Ahead on Deposit-Insurance Plan

Key part:

China is signaling that it is close to insuring a big chunk of its roughly $17 trillion in bank deposits, a key move toward opening up its financial system but one that carries risks for lenders big and small.

The aim is to reassure depositors that their money is safe as the nation moves to allow more competition in the financial system. That could be bad news for China's big state-run banks, which already enjoy the implicit backing of Beijing but would have to pay for it under a new deposit-insurance program.

The seen effect of deposit insurance is that it makes depositors feel safer, but Chinese already assumed a government guarantee even for risky trust products. The unseen risk is two fold (leaving aside the argument that deposit insurance leads to risk taking). First, the government may allow trust products to fail because they assume the deposit insurance will shore up the system, but deposit insurance does nothing to address the current problems with shadow banking. Second, (but maybe first in order of events), depositors previously viewed deposits and trusts as guaranteed. The default in January shattered that idea, but after there is explicit insurance on bank deposits, but not trusts, it will again highlight the difference. The marginal investor concerned about risk will move out of trusts and into bank deposits in the wake of deposit insurance, which is contractionary (deflationary) for total credit.

Update: Still no coverage in the English press on the drop in fundraising. I noticed this post on FTAlphaville when searching for news though, a counterpoint to the negativity on trust defaults: More China trust defaults likely but beware hype

The higher risk activity of trust companies is concentrated in a small portion of assets under management – around Rmb2.36tn ($390bn), not the Rmb10tn that is often claimed.

One thing I didn't include above were the raw numbers from the article, which I have now added. The numbers are very substantial relative to the size of market, considering that in January 2013, trusts had raised or established trusts worth nearly ￥200 billion (from the article), but in January 2014 they raised ￥70 billion. Annualized, that is the difference of ￥2.4 trillion versus ￥850 billion. Even if this drop off were solely in the smaller riskier portion of the market, the implications for the most marginal borrowers would be the same. Subprime was "contained" in the words of Ben Bernanke.

Also from the comments on that FTAlphaville post:

The chart shows late 2013 growth in WMPs (a separate product from trusts as explained below) was driven by higher risk products, a feature of late stage credit bubbles.

Q. What exactly is a Chinese “trust” and how is it structured?

A trust is essentially a private placement of debt. Investors in the trust must meet certain wealth requirements (several million RMB in assets would not be unusual, so the investors are either high net worth individuals or corporates) and investments have a minimum size (e.g. RMB 1mn). The appeal is a much higher yield than can be obtained through conventional bank deposits, in many cases 10% or higher, versus regulated multiyear bank term deposit rates in the low single digits. Trusts invest in a variety of sectors, including various industrial and commercial enterprises, local government infrastructure projects (via LGFVs), and real estate.

As our banks team noted, 29% of trust assets are invested in higher-risk industrial or commercial sectors.

A trust is not to be confused with a “wealth management product” (WMP). WMPs are available to a broader group of individuals, with much smaller minimum investments. They are typically sold through and managed by banks or securities brokers, with or without a guarantee of the payment of interest or principal (WMPs featuring explicit guarantees are booked on banks’ balance sheets; for other non-principal guaranteed products, implicit guarantees may be assumed by some investors). Funds from WMPs may be invested in a range of products including corporate bonds, trust loans, interbank assets, securitized loans, and discounted bills—so WMPs are best thought of as a “money market fund” or pool for other financial products.

I also managed to find some charts showing the growth slowdown in Chinese wealth products, as of January 26. New data may not be out for another week since the country shut down on January 31 and went back to work on February 7.

This chart shows the past 10 weeks of activity. The red bars are newly issued trusts estimated value and the blue line is the number.

This is the same chart, but for newly established trusts.

Latest from press on CCT and ICBC Trust Failure

No big developments, but here are three of the latest stories (all Google Translated) in the Chinese press.

China Credit Trust Crisis: Investors Want Answers From ICBC Private Banking Unit中诚信托兑付危机：投资者拟向工行私人银行讨说法

I highlighted a passage in this article, here it is in case you skip this article:

However, most industry insiders interviewed still relatively optimistic. They believe that although this year is cashing peak, but overall risk is not great, mainly due to the maturity of the project is the highest proportion of real estate investment trust, as long as house prices and land prices does not appear obvious decline, it will not dispose of assets will be very difficult. Even if the risk appears cashing, just liquidity risk.

Article in full:

January 31, 2014, is China's first lunar month, but for the CCT is concerned, it is destined to be a sad mark. A 3 billion yuan of the company's mineral trust scheme expires on this day, and the related trust account balance is only 5.6694 million yuan, the company's actual controller of the financing behind bars, scheduled debt almost impossible. There is no doubt that this event will test the "rigid honor" unwritten convention Chinese trust industry has always been.

Securities Times reporter was informed that some investors to buy these products is considering rushed ICBC Private Banking and Credit Trust headquarters, communication payment issues. At the same time, they express their anger on the horizon, such as online forums.

As CCT channel side, is full to avoid becoming rigid honor those who break and items recommended side and agency side ICBC will have been very calm, which caused the impasse continues to ferment.

This is not a rigid rule for the first time tested payment, it is difficult to be the last. After Hurricane Mengjin trust industry over the past two years, and crossed the threshold of 10 trillion, the rapid growth of sequelae gradually.

Prudential sounding the alarm event

CCT did not think, as a channel fee three years ago to make their own cash into the storm, but did not expect this honor this year's financial crisis even be considered a default "first shot" insiders.

January 31, 2010, Credit Trust launched the "honest to open the 1st set of gold trust scheme" management for a period of 36 months. After twice raising, raising the total size of the product was 30.3 billion yuan, mainly used for coal prices in Shanxi Energy Group Limited amplitudes equity investment.

However, in the May 11, 2012, on suspicion of amplitudes Group Vice Chairman Wang Pingyan crime of illegal deposits from the public, in filing the same day jingfangxingju. CCT immediately released an interim report, and caused an uproar.

Late last year, announced that the Credit Trust to investors, these plans can not be cashed current income trust based on the expected value. And its latest management report admitted that the product of the trust property realized there is uncertainty before the liquidation, does not rule out walking proceedings.

According to informed sources, China Credit Trust and funding of this project are from ICBC, China Credit Trust which played only "channel" effect, the money the bank is about to detour into its selected projects, thereby helping it to avoid the credit control . Thus, only a few channels to earn fees Credit Trust think they should not be held to settle the obligation.

However, from a legal perspective, ICBC as the consignment of the product line is not liable for losses; CCT Although there is no legal obligation to honor rigidity, but it does not want to be the destroyer of industry rules, both sides caught in the game deadlock.

"This event has attracted regulatory attention, the regulatory authorities have been involved in the coordination, the final result should be treated not break the rigidity of payment, is likely to be funded both sides to reveal all the details, but disclosed may be another way." An Sources close to the regulators, said the incident clarify responsibility for collective trust channel business model stakeholders have meaning.

Prudential predicament event also reflects the aftermath of the Trust channel business. Over the past few years, the trust industry by virtue of a license contract a lot of the advantages of channel-type business. McKinsey has estimated that the channel business model contributed 39% of 2012 total revenues of the trust industry.

More than ten thousand one hundred million yuan coming due

In fact, the event also sincere trust industry will usher in the year of payment tide raised the alarm.

In general, the term trust products between 1.5 years to 2 years, that the issue of the amount of trust a lag of about seven quarters will be converted to the amount due. Haitong Securities series of case studies of credit risk report shows the trust expires in 2014 corresponds to the 2012 second quarter - the first quarter of 2013, the Trust issued 5.3 trillion in volume. This means that the amount of the trust expires in 2014 compared with 2013 growth of more than 50% in May is the peak of maturity, up to 1.7 trillion yuan.

In fact, these 5.3 trillion trust fund as a single product in the majority of the trust. Since a single counterparty as a major trust banks or institutional investors, trust does not need to be rigid payment, the more the market is worried about the rigidity of payment are mostly related to the collection of trust.

Reporter According to statistics disclosed Trust Industry Association, which has 5.3 trillion trust products Capital Trust 5782 models, involving funding of up to 1.05 trillion yuan.

The report directed at small and medium real estate investment trust, or will become a high default risk areas. According to incomplete statistics, since August 2012, at least 16 projects are under pressure into the trust, of which 10 projects related to real estate, small scale enterprises someone's private enterprises, mainly in the Bohai Sea and the long Triangle.

Real estate loans have been risk areas need attention in the trust industry, 2013 was the peak of the real estate trust payment has been exposed in the event of payment risk, real estate trust account for the majority, not including disk access is by way of trust "rigid payment" problem products.

"Trust in the past has been the product of rigid honor the unspoken rules, but in recent years a large expansion of the industry, asset size has the ability to trust management beyond the rigid payment." Jiang Chao, chief macroeconomic analyst at Haitong Securities case considered.

But the reality is often more brutal. Once there is a single occurrence of a material breach of trust products, is likely to lead to a chain reaction. Moment, each Trust are keen to avoid becoming rigid honor those who break the unspoken rules.

"A lot of trust coming due on the trust is indeed a big challenge, do not rule out the excess trust affordable range which could have a ripple effect, resulting in investors' perception of trust changes, Regulators may also impose more stringent regulatory standards. "said Lee Trust with interest, principal analyst Yang.

Trust against payment

Many trust company executives confirmed to reporters that the regulatory authorities have repeatedly stressed in internal speech, 2014 will usher in a wave of cashing peak, trust Always prepare for in advance.

According to the reporter, some trust requires trust manager "keep an eye" on historical items, beware of flaws; Meanwhile, trust companies also pay more attention to education and disclosure of information to investors.

"Now some trust managers do all day staring at the last big project for fear of an accident, did not have time to read the new project." Beijing Trust senior manager of a large trust company admits.

It seems that in the middle of a trust company executives, trust must make a choice between future earnings and reputation. Under the status quo, more trust will still choose reveal all the details, to fill a hole through a variety of channels, but if too much money involved, trust companies also consider fallback costs.

However, most industry insiders interviewed still relatively optimistic. They believe that although this year is cashing peak, but overall risk is not great, mainly due to the maturity of the project is the highest proportion of real estate investment trust, as long as house prices and land prices does not appear obvious decline, it will not dispose of assets will be very difficult. Even if the risk appears cashing, just liquidity risk.

"And in this case Prudential Mineral Trust is different, the ultimate real estate projects through financial maneuvers and trust asset disposal, basically can cover the principal and interest, so in the unlikely event of mass detonate Cheng risk unless there is systemic risk, it is not just is the trust industry, I am afraid that all financial institutions could not carry. "Trust in the prefix of a trust manager, said.

Who does not want to be the last disk access. After a series of events to honor the frequent occurrence, whether regulators, or trust company itself, are more focused on risk control and information disclosure, and strive to avoid the products in question from the source.

North of a trust to sources, the company significantly increased the risk control requirements, such as due diligence requirements while trust managers and risk control manager to the scene. In addition, the company financing parties involved in the case of private lending and more attention, usually with the financing of financial institutions domiciled repeatedly verified.

At the same time, some companies have realized the importance of timely disclosure of project risks. Li Yang believes that trust should inform the sales of products in investor risk, product risk should also be subject to timely disclosure, but not always clutching, until only allow investors aware of the crisis, so investors will have an acceptable process .

More importantly, through the Prudential event, some industry insiders began to reflect on the system of regulation and credit risk throughout the financial system.

"We should not focus only on this project can be cashed in sincerity, but should focus on the credit risk of the entire financial system, not just against the risk of pressure in the trust only him, honesty and trust in this industry is not fair." Foregoing North consider the case of a trust company executives.

Many respondents trust industry executives said that in the era of large information management, although various financial institutions business liberalized, but the scale of regulation, but there is a big difference. Many projects do even trust, brokerage fund subsidiary also dare to take, just flower drum pass of the game, the risk can only be pressed gourd dipper float, the proposed introduction of a unified regulatory agency regulatory standards.

This next article discusses the central bank's actions and the impact on the market. It led to a drop in short positions on gold.

央行“放水”缓和期指“悲情” Central bank "rescue" eases the "sadness"

Four index futures contract rose 21 across the board, mainly by central bank liquidity drain brought positive boost. Budding main contract closed at 2206.4 points IF1402, the previous day's settlement price rose 22.2 points, or 1.02 percent, and the remaining three contracts rose more in the vicinity of 0.9%. The CSI 300 stock index rose considerably, up 0.99% to close at 2187.41 points. Total open interest fell to 117,073 contracts four hands. Market participants pointed out that although the central bank is difficult to facilitate drainage of disposable means to reverse the weak, but the market pessimism eased short-term or limited downside.

Pessimism eased

Compared to affect the IPO IPO restart tide, the central bank released significantly positive liquidity prevailed yesterday, the index rose across the board.

21 is the new shares after the IPO resumption intensive market day. In this regard, Shanghai interim senior analyst Tao Qin Ying respect, the recent stock stumble endlessly fuse is issuing new shares, in addition to the pressure diversion of funds outside the IPO occurred during the fight against the larger issue of market confidence.

However, yesterday the listing does not affect a large influx of new shares, and the market reacted positively to the central bank's actions. Guotai Junan Futures senior researcher Jiang to Hu pointed out, the term refers to quantify the probability-weighted index signal big bull pointing direction of the central bank's reverse repo scale than expected pushing the stock up. On the trend of the day, despite the bulls still somewhat cautious, but undoubtedly the market pessimism can be soothing.

Tao Qin Ying further analysis, refer to Changes in the position of the House yesterday, there are two inspirations: one bull enthusiasm to do more limited upside in the vicinity of the main contract and 10-day moving average, positions gradually decline, accompanied by the index trend callback, indicating that the bulls the firm does not do more confident, less alone a massive drain the central bank to reverse the pattern of the index vulnerable possibility; Second, the 2200-point line fierce, the afternoon of the main contract refers basically run around the 2200 shock, positions fluctuation is small, and more The two sides did not appear empty one obvious advantage, indicating that the point near the market more cautious attitude.

It is noteworthy that, the index closing of positions have come down, pulled slightly increased during the late period refers to premium rate. Tao Qin Ying opinion, this display is extremely pessimistic market sentiment after easing. GF Futures researcher Hu shore also consider the futures market pessimism eased.

Short-term downside is limited

21 on the position data published by China Gold, shorts are to be cautious, with a drop in net shorts. Market participants expect the short-term downside is limited.

Positions on the main seat of the data published in the gold, the front month contract IF1402 20 seats more than 732 hand single reduction, reduction of 1209 empty one hand, the front month contract IF1403 20 seats more than a single reduction of 437 hands, empty single reduction 822 hand held. Summary three positions before the contract before the main contract IF1402 20 847 members to reduce the clearance one hand to hand 7157, 20 members of the first three contracts net short positions to reduce the 1343 hand to hand as 14,628.

GF Futures researcher shore Hu pointed out that the positions change, the long and short sides yesterday, mostly small-scale operation of the main holdings, including the reduction of the intensity of the short side on the strong side. Three cumulative net short contracts despite somewhat lower but still at a high level, which seats short main card, Huatai Great Wall were reduced pay more space to display short power continued to accumulate. In her view, the bulls Gangster Guotai Junan three seats in total holdings of more than a single contract 7 hand, indicating that the bull market confidence is insufficient, limited upside momentum. Hu shore is expected to continue to fall sharply in the index space is very limited.

However, Jiang to Hu is more cautious. He pointed out that although single clearance decreased, but still remained at a high level, in the short-term funding pressures ease premise, short hedging positions choose to wait and see. He warned that financial pressures facing the index or only short-term relief

Countdown to Maturity Final Games For China Cerdit and ICBC (诚至金开1号兑付倒计时 工行与中诚信托最后博弈)

This article translates very badly in Google and goes into legal issues. Here's my summary mixed with my own commentary:

The fund plans to pay out 600 million yuan in profits on January 31. Obviously this is far short of expectations. One insider explained how it might unfold. The most gentle approach (for investors) will be for CCT and ICBC to use their own funds and advance pay the principal and interest to investors, then use assets held by CCT, such as the 49% stock in Zhenfu, to get back the money. But an insider of CCT pointed out that getting back the funds will not be easy due to the complicated case (and there are other creditors of Zhenfu) and the amount of money they'd have to front would not be small. Another person speculated they could create a new trust with a third party and use the funds to payback investors, in essence a third party bailout. Another would be to sell the creditor's rights at a discount, but coming so close to the end the discount would need to be huge and CCT and ICBC may still need to kick in some funds to get a deal done.

Finally, if there's no third party deal and they refuse to use their own capital, they can delay the payout. However, CCT's rights are for stock in the companies, not mining rights, so their value is very small.

I have no inside knowledge of what is happening, but given that more trust failures are likely, CCT and ICBC are unlikely to step in with cash. Some experts say a default would be a good thing as well.

PBOC Intervenes to Halt Rate Increase in Advance of Holiday

June 2013: Inject ￥300 billion in one month
September 2013: Inject ￥290 billion in one day
December 2013: Inject ￥300 billion over three days
January 2014: Inject ￥255 billion in one day

Today's injection was on par with the one made last year around the time of Chinese New Year. Usually the PBOC waited longer to intervene. If the trust failure and cash crunch hangover from December are real issues, the PBOC will need to step in again before this month is out or early in February when business kicks off again.

PBOC injects RM123.2 billion through open market after rate spike

China's central bank will inject 255 billion yuan (RM123.2 billion) into the money markets through seven- and 21-day reverse bond repurchase agreements today, traders said, the largest single-day injection since February 2013.

The biggest was in September, but that move went down the memory hole because it came in advance of a potential cash crunch.

SHIBOR Spikes Again Ahead of Spring Festival

I recently had two posts on the risk of an early cash crunch at the end of Janaury. See More on Cash Crunch Risks Ahead of Spring Festival and
Spring Festival Cash Crunch.

Based on history, I expect another cash crunch in March at the end of the quarter. However, Chinese New Year is a cash intensive holiday and banks always see an outflow of money at this time. As reported in the links above, some banks are still attracting depositors with high interest rates.

In the days ahead of Spring Festival, SHIBOR typically spikes. Here are two posts from 2012:
Inter-bank liquidity extremely tight ahead of Spring Festival
SHIBOR drops towards normal levels thanks to massive PBOC intervention

Here is SHIBOR today, followed by a chart of the 1 Week SHIBOR rate.

If you click through the links from 2012, you can see that SHIBOR started spiking about the same time in relation to Spring Festival. Chinese New Year fell on January 23 that year and rates moved about just under two weeks before. It is less than two weeks until Spring Festival this year and rates are moving up again. There's reason to expect rates will continue to drift higher ahead of the holiday unless the PBOC intervenes. With the default of a trust product looming at the end of the month as well, fireworks may start early this year.

More on Cash Crunch Risks Ahead of Spring Festival

Cash crunch signals policy dilemma for China's reformist central bank

China's central bank looks set to risk another cash crunch at the end of January, barely a month after the last market squeeze, as policymakers press ahead with a crackdown on shadow financing and other risky bank lending.

The People's Bank of China (PBOC) is attempting a delicate balancing act to keep economic growth on track while avoiding a debt-induced financial crisis.

Periodic cash squeezes as banks scramble for fresh funds highlight the policy dilemma the PBOC faces in 2014, as it pushes financial reforms to help rebalance the world's second biggest economy away from the investment- and exports-led model that powered its rapid rise.

Spikes in June and December in the interest rates at which banks lend to each other signaled the central bank's determination to reduce alarming levels of debt. But it must try to do so without hurting growth by braking too hard on credit.

(As I noted here, the PBOC intervened in September ahead of a cash crunch, which is why rates didn't spike. The situation then was the same as it was in June and December.) Yesterday, I posted Spring Festival Cash Crunch.

Fed Official: Diversify Into Asian Currencies, Euro

Can you read the writing on the wall?
Economists Are Thrilled To Hear Stanley Fischer Will Be Joining The Fed

Stanley Fischer was officially nominated Friday as a Governor and Vice Chairman of the Federal Reserve, the job Janet Yellen is vacating as she becomes Chairwoman.
While Yellen is incredibly qualified, it's exciting to have Fischer beside her.

He's a legend in central banking and economics circles, and for good reason. Fischer's a highly accomplished monetary economist, and excelled as Israel's central banker.

Policymakers see dollar losing reserve currency allure

"I'm more optimistic about the euro gaining strength as a potential reserve currency," Bank of Israel Governor Stanley Fischer said during a panel discussion at the annual World Economic Forum in Davos, Switzerland.

"We ourselves are diversifying into currencies which we would never have put in the reserves before, including the Australian dollar and so forth," he added. "I think people will diversify their reserves."

Too bad those Asian currencies are dependent on the Chinese economy in the short-run. Though if one owned gold, it would mitigate a lot of that risk. In sum: central bank heads say to diversify into Asian currencies that are dependent on the Chinese economy. The Chinese central bank is buying gold because it knows no one is going to trust its currency in a crisis. Solution: cut out the middle men and buy gold.

SHIBOR Declines on Second PBOC Intervention

Chinese Deposit Wars Back On; Banks Refuse To Move Deposits and Poach Depositors With Enticing Rates

Back in September, there were worries of another quarter end cash crunch. Banks were actively buying deposits from other banks to avoid fines of ￥10 million. As one banker said, why not spend ￥8 million and save ￥2 million in the process? See Chinese Cash Crunch Could Return in September; Why Not Spend ￥8 million to Avoid a ￥10 million Fine?

Chinese banks are at it again.

年末钱贵：银行贴息6‰“买”资金冲量 (Year End Expensive Money: Banks Discount Bills 6% to Buy Capital)

Deposit war season is back on. Banks are refusing to move large amounts out of their banks, while other banks are offering huge discounts on very short-term deposits. Banks sell bills priced at a discount. Rates have spiked from 3% to 4.5% up to 4.5% to 6%, with time extended to about 10 days.

Banks have also told agents that they won't move large deposits after December 27, to stop their own deposits from being drained as the cash crunch accelerates into year end. Whereas banks typically move money instantly, now they are limited withdrawals and telling customers it may take 1 to 3 days to settle a transfer.

Agents need a couple of days to open accounts. They collect a minimum of ￥50,000 from individuals or small companies and group it into ￥100 million or more (bigger banks want ￥500 million to ￥2 billion), then move it into the target bank on the 29th. On the 1st of January, they move the money out.

Here's an English article from December 12, before this crunch began, that explains the deposit wars.

Deposits Race in China Raises Fears

Chinese banks currently offer an annualized interest rate of between 4% and 6% on WMPs that mature in one to six months. On traditional deposits, the rates they can offer are limited by a central-bank benchmark—which right now means they top out at 2.86% on three-month deposits and 3.08% on six-month deposits.

According to the above Chinese article, investors can now capture this annualized interest rate for very short-term deposits.

These high interest rate products aren't safe though. While there's no deposit insurance in any Chinese bank, these products lend money to distressed borrowers and those with impaired credit.

The main concern among regulators is banks' ability to make good on the principal and interest owed to investors in WMPs, whose risks are often poorly disclosed to investors. Some of the money going into these products has been used to make high-interest loans to risky private businesses shunned by the banks themselves, a phenomenon critics say could exaggerate loan and investment losses in China's financial system if an economic slowdown led to widespread defaults.

Such fears have been exacerbated by the recent collapse of a 140 million yuan WMP offered through a Shanghai branch of Huaxia Bank Co. 600015.SH +0.39% , which ranks 13th among China's commercial banks by assets. Proceeds were invested by a third-party private-equity firm in four businesses in the inland province of Henan, including a pawn shop.

Investors were promised returns of between 11% and 13%, but when the one-year product matured late last month, they weren't paid back—triggering days of protests by dozens of investors and an intervention by Shanghai authorities. The bank is now negotiating with investors to try to reach a "reasonable solution," said people with direct knowledge of the matter.

This leads to a situation where many depositors are chasing high yields:

One of the investors who bought is Zhong Tao, a 62-year-old retiree who said that after years of having savings accounts she withdrew all her money and now rolls it out of one WMP and into another.

"With deposit rates so low and inflation so high," Ms. Zhong said, "I would be stupid not to do this."

Until the music stops.

Back in June banks were taking similar actions, see Chinese bank offers 6% return up front for ￥1 million 1-Yr CD. No doubt there will be similar stories coming out in the next few days.

The central bank has also done a reverse repo worth ￥29 billion, likely no enough to make a dent. And as ZeroHedge points out, the big banks are sucking up the cash, even though the cash crunch is occurring at the small and medium sized banks. See China Folds, "Un-Tapers"; But Repo Rates Remain Elevated

The big banks have direct access to the central bank's easy money, where have we seen that before? And if you think the smaller banks have it bad, imagine what it's like for the small and medium private businesses who are borrowers at these banks.