When Hollywood brought “The Big Short” to the big screen, author Michael Lewis was as surprised as anyone. A film about debt going bad? Seriously? But in filmmaking, as with investing, timing is everything. What makes the movie so timely is its role as primer for what’s afoot in China.
There’s little about China in Lewis’s 2010 bestseller. And, frankly, the Brad Pitt-starring screen version can feel dated given the cacophony of world events since Wall Street’s 2008 drama. That is, until you consider the $23 billion dilemma now facing Beijing, and, by extension, the hedge-fund dynamics Lewis chronicled.
This column has examined China’s $28 trillion problem, which relates to its post-Lehman Brothers credit explosion. A more immediate one is the roughly $23 billion of offshore debt rated just one small step away from junk by major credit-rating companies. The second-biggest economy has a devilish assortment of so-called fallen angels. Any sudden rash of downgrades could trigger the next bout of turmoil in global markets.
Hence the big Chinese short amongst global hedge funds. It’s no coincidence that one of the stars of 2008, Kyle Bass of Hayman Capital Management, is now shorting the yuan, Hong Kong dollar and other Asian currencies. While Bass did less well with his bet against Japanese government bonds, he made $500 million from the U.S. subprime-mortgage crash. Another JGB shorter, Greenlight Capital’s David Einhorn, is betting on a depreciating yuan.
These trades irk President Xi Jinping’s government to no end, as recent attacks on George Soros indicate. Admittedly, it’s a highly sensitive moment for Beijing. As Xi’s team works to accelerate a transition to consumer-led growth and rein in a heavily-indebted financial system, the last thing it needs is speculative attention. Yet Bass, Einhorn and others are highlighting risks that could spill over into markets and gross domestic product trends around the world. The yuan is on the front lines of negative Chinese sentiment.
Kyle Bass, founder of hedge fund Hayman Capital Management, made the case for why his firm is making a big wager against the yuan.
“Very few people have looked at kind of what the cause of the problem is [in China] and I believe the cause of the problem is No. 1, the real effective exchange rate since 2005 has appreciated 60%,” explained Bass during an interview on CNBC Wednesday.
Bass’s bet against Beijing’s currency is worth noting, given some of his successful trades. The hedge-fund manager was one of the few investors whose prescience resulted in him making billions during the heart of the U.S. subprime mortgage crisis.
Bass’s main point is that the share of bad loans at China’s banks is growing and has the potential to roil the world’s second-largest economy. Bass questions whether China’s banks have enough capital on hand to weather tough times, particularly as its economy shows signs of slowing.
“This isn’t an aberration. This isn’t a speed bump. This is China’s excess — let’s call it misallocation of capital — coming home to roost,” Bass said.
Europe’s biggest lender HSBC will no longer provide mortgages to some Chinese nationals who buy real estate in the United States, a policy change that comes as Beijing is battling to stem a swelling crowd of citizens trying to get money out of China.
An HSBC spokesman in New York told Reuters on Wednesday that the new policy went into effect last week, roughly a month after China suspended Standard Chartered and DBS Group Holdings Ltd from conducting some foreign exchange business and as authorities try to limit capital outflows.
Realtors of luxury property in cities like New York, Los Angeles, and Vancouver, said more than 80 percent of wealthy Chinese buyers have ties to China.
Luxury homes news website Mansion Global, which first reported the HSBC policy change, said it would affect Chinese nationals holding temporary visitor ‘B’ visas if the majority of their income and assets are maintained in China.
Chinese state lender Postal Savings Bank of China Co. tapped five investment banks to lead its initial public offering aimed at raising as much as $10 billion, which is expected to be the largest such deal in Hong Kong this year, according to people with knowledge of the matter.
China’s sixth-largest lender by assets has picked Bank of America Merrill LynchBAC, +0.38% , China International Capital Corp. 3908, +1.93% , Goldman Sachs Group Inc. GS, -0.47% , J.P. Morgan Chase & Co. JPM, -0.07% and Morgan Stanley MS, +0.12% to lead the IPO, the people said. UBS Group AG UBS, -1.10% , which is an investor in Postal Savings Bank, will serve as a financial adviser on the deal, they said.
China’s stock exchanges closed at 9:59 a.m. local time, just 29 minutes after markets opened, as the CSI 300 Index fell more than 7 percent. Trading was halted for half that time after a 5 percent drop triggered an earlier suspension. China’s markets are normally open from 9:30 a.m. to 3 p.m., with a 90 minute break in the middle.
Charlene Chu from Fitch said credit growth is running at a brisk 20pc, including off-book lending. She said the output generated by each extra yuan of lending has fallen from 0.75 to 0.30 this year, a sign that credit-driven growth is nearing exhaustion.
Zhiwei Ziang from Nomura said the central bank is worried about shadow banking excesses and is likely to impose curbs early, keeping the economy on a short leash.“Financial risks in the trust loan sector are mounting and the regulators will probably have to tighten controls. We would expect growth momentum to weaken,” he said.
Translated in English:
“The American politicians, whatever their party, should consider the development of China objectively and rationally and act more in favor of a Sino-US mutual trust “ , said Hong Lei, spokesman of the Ministry Chinese Foreign Affairs , Tuesday, Oct. 23.“Like it or not, whether Democrat or Republican, the next president of the United States will be forced to soften its rhetoric going into the war on China, adopted throughout the country “ , said Tuesday in a comment the official New China. The winner of the U.S. presidential election will “‘s attack to the inability of the country to sclerosing accept the inevitable rise of China “ , the agency said.
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h/t to Zerohedge.com:
Today, however, courtesy of AsiaFinanceNews we get a report as close as possible to the most comprehensive overview of what may soon be (especially if rumors of tumbling Chinese municipal dominoes are correct) the most talked about subject in the financial world: China’s Shadow Banking empire.
From Chinese Shadow Banking System
China presently has five state-controlled megabanks operating within the supervision of the central government, of which the government is a majority shareholder, and seventeen additional “shareholder banks.” Because China’s state banking sector operates as a direct subsidyfunding channel for state-owned enterprises (as opposed to acting in the capacity of risk analytics based credit institutions), the largest state-owned banks have required periodic recapitalization every decade over the past sixty years as the constant generation and cumulative exposure to non-performing loans exceeds the banks’ total equity. The circumstances comprising the present situation, however, will include monetary exposure by international asset management firms which have acquired both direct equity-stakes in the banks as well as exposure to Hong Kong-listed shares.
State Control and Politically Mandated Loans
The banking system is generally considered to represent the weakest link in China’s political economy. Loans are typically a form of direct subsidy by the central government to the various state-owned enterprises. According to Victor Shih, a professor at Northwestern University who specializes in China’s political economy and is considered an expert on China’s banking system, prior to 1997 there had been no comprehensive audits, nor general ledgers, nor any capital stock at any of the five largest banks, as such was considered unnecessary. The central government, which controls 98% of China’s financial sector, maintains control over the banks in order to finance various political and socio-economic policy objectives, maintain capital controls and set fixed interest rates, comprising in effect a self-referential sector, resulting in inefficient capital allocation which deprives China’s small and medium-sized enterprises (“SMEs”) of access to credit through the supervised banking system
Rejection of Western Credit Practices: Global Financial Crisis Doomed Reforms
The government halted and subsequently reversed reforms, and began moving away from western banking practices in late 2008 in response to the global credit crisis, ordering banks to originate loans to both local and centrally-planned investment projects in order to prevent a rapid slowdown in growth. The credit expansion undertaken by banks in 2009 at the direction of Chinese president Hu Jintao resulted in approximately $3.1 trillion in new loans created by the end of 2010.5 The National Development and Reform Commission (“NDRC”) fast-tracked and granted approval of virtually 100% of all fixed-asset investment projects submitted for funding by local governments. The NDRC was created to address the response to a survey by the central government asking local government officials to identify those projects for they had been unable to obtain credit financing. The role of the NDRC is to approve the projects rejected by the banks, thus in essence having approved the worst projects for financing in 2009 and continuing to approve such projects through the present
Read on below (full pdf):
BEIJING (AP) — Just a few years after Chinese companies lined up to sell shares on Wall Street, a growing number are reversing course and pulling out of U.S. exchanges.
This week, Focus Media Holding Ltd., announced its chairman and private equity firms want to buy back its U.S.-traded shares and take the Shanghai-based advertising company private. The deal would value Focus Media at $3.5 billion, according to financial information firm Dealogic.
Smaller companies also are withdrawing from U.S. exchanges. In a sign of official encouragement, a Chinese business magazine said a state bank has provided $1 billion in loans to help companies with listings abroad move them to domestic exchanges.
The withdrawals follow accusations of improper accounting by some companies and a deadlock between Beijing and Washington over whether U.S. regulators can oversee their China-based auditors.
Some Chinese companies say they are pulling out of U.S. markets because a low share price fails to reflect the strength of their business. Withdrawing also eliminates the cost of complying with American financial reporting rules.
Focus Media “has been seriously undervalued on U.S. stock markets” and being taken private will help to promote its “long-term strategic development,” said a company spokeswoman, Lu Jing.
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