Tuesday, March 25, 2014

Pressure on the shadow banking system in China beginning to become visible ? Nervous depositors aren't waiting around to find out at small banks ........What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors !

China's Yuan Drops Most In A Week As Property Developers Tumble

Tyler Durden's picture

When we left China last night, it was all shits and giggles that bad news is great news and a Chinese stimulus plan will be here any minute to save the day. Having realized the sad fact that is not going to happen (as we explained here most recently) and the specter of banks runs looming, this evening's session has seenproperty developer stocks tumble - retracing all of last night's losses - the Yuan plunges by the most in a week back above 6.2150. Copper is holding in for now at the magic $300 level but corporate bond prices are falling once again (worst run in 4 months).

The Yuan is dumping at its fastest rate in a week...erasing all the hope-strewn gains from yesterday

Property Developers are taking it on the chin...

And it's no wonder, as Bloomberg notes...
Chinese developers' gross margins declined by a weighted average 294 bps last year.

Most developers have forecast a recovery. Further declines in prices could present a threat.


Chinese developers that have reported 2013 results have set an average 2014 sales growth target of 16%, about half last year's 30% rate. This is likely recognition of a need for better inventory management and of a more challenging sales environment. Developers will also probably curb construction because of slowdowns in some tier two and three cities.


Longfor Properties summed up the attitude among major Chinese and Hong Kong property developers in its company filings... ."In 2014, the Group's key operating focus will be inventory clearance and cost control... For the coming 6-12 months period, we wil strive to reduce the leve of unsold inventory, hereby gradually improving our sale through rate."
But apart from that... China's fixed and the world economy will be back to normal as soon as the US weather clears up...


China Corruption Reporting Becoming Impossible; JPMorgan Banker In China Resigns Amidst Probe

By:  Tuesday March 25, 2014 11:18 am

National Emblem of the People's Republic of China.svg
As the world watches Ukraine, the US establishment press pumps out pieces on the horrors of contemporary Russia. Meanwhile, the perilous situation for press freedom in China degenerates further. Unlike Russia, China has gone head first into neoliberalism making partnerships with many prominent Wall Street firms like JPMorgan, which apparently has dissipated the more venomous criticism from the US media establishment.

In 2012 China blocked access to the New York Times website after the paper ran an expose about Chinese officials and now Bloomberg News is having it’s own crisis over push back from the Chinese government on reporting political corruption in the country. Have you heard about it ?

Ben Richardson has resigned from Bloomberg News after 13 years to protest editors’ handling of an investigative piece reported from China – a story that the bosses feared would get them expelled from the country
Richardson, who was an editor at large for Asia news (he edited the enterprise stories and columns), writes in an email: “I left Bloomberg because of the way the story was mishandled, and because of how the company made misleading statements in the global press and senior executives disparaged the team that worked so hard to execute an incredibly demanding story.”

Richardson says the “threat of legal action” hangs over his head for speaking out about Bloomberg’s capitulation to the Chinese government so he merely affirmed the truth of other stories on the subject and publicly confirmed that the reason he resigned was the treatment of the story on corruption in the Chinese government.

Correspondingly, JPMorgan’s top Chinese Banker, Fang Fang, will be leaving his post thanks to aninvestigation into JPMorgan’s hiring practices in China. The investigation revolves around the charge that JPMorgan is under investigation for participating in the bribery of Chinese government officials.
JPMorgan Chase & Co’s chief executive for China investment banking, Fang Fang, will leave the firm, according to an internal memo – a departure that comes amid a probe of JPMorgan hiring practices in Asia. The Wall Street Journal, which first reported Fang’s departure, said he had emerged as a key figure for U.S. authorities as they investigate whether the investment bank violated bribery laws by improperly hiring the relatives of well-connected Chinese officials
Fang has strong ties to the Chinese government, having been appointed to the Chinese People’s Political Consultative Conference in March 2008 for a five year term. Other firms that have come under scrutiny for their hiring practices in Asia include Citigroup, Goldman Sachs and Morgan Stanley.

That’s a lot of money on the table, for the media too. So it would seem that the Chinese leadership won’t face the same scrutiny as those in Russia. It’s just business.
It seems journalists of all backgrounds have a choice in China – ignore political corruption or report the truth and pack your bags.

What A Bank Run In China Looks Like: Hundreds Rush To Banks Following Solvency Rumors

Tyler Durden's picture

Curious what the real, and not pre-spun for public consumption, sentiment on the ground is in a China (where the housing bubble has already popped and the severe contraction in credit is forcing the ultra wealthy to luxury real estate in places like Hong Kong) from the perspective of the common man? The photo below, which shows hundreds of people rushing today to withdraw money from branches of two small Chinese banks after rumors spread about solvency at one of them, are sufficiently informative about just how jittery ordinary Chinese have become in recent days, and reflect the growing anxiety among investors as regulators signal greater tolerance for credit defaults.
Domestic media reported, and a local official confirmed, that ordinary depositors swarmed a branch of Jiangsu Sheyang Rural Commercial Bank in Yancheng in economically troubled Jiangsu province on Monday. The semi-official China News Service quoted the bank's chairman, Zang Zhengzhi, as saying it would ensure payments to all the depositors. The report did not say how the rumour originated.

Chen Dequn, a resident in Yandong, just outside Yancheng, said she saw a crowd of about 70 to 80 people gathering in a branch of Sheyang Rural Commercial Bank in her town on Tuesday.

"At the moment there are about 70 or 80 people in there. Normally there'd only be about 10," she told Reuters by telephone.

Officials at another small bank, Rural Commercial Bank of Huanghai, said they had faced similar rushes by depositors, triggered by rumours of insolvency at Sheyang. "We will be holding an emergency meeting tonight," an official at the bank's administration office told Reuters, but declined to comment further.

Why Yancheng investors suddenly lost confidence in the security of their bank deposits is not clear, given that the Sheyang bank is subject to formal reserve requirements, loan-to-deposit ratios and other rules to ensure it keeps sufficient cash on hand to meet demand.
Why the jitteriness? Because until now, bank failures in China have been unknown, as Chinese banks are considered to operate under an implicit guarantee from the government. That is changing. Which is why the rumor mill is on overdrive:
"It's true that these rumours exist, but actually (the bank going bankrupt) is impossible. It's a completely different situation from the problem with the cooperatives," said Zhang Chaoyang, an official at the propaganda department of the Communist Party committee in Tinghu district, where the bank branch is located.
And Bear Stearns is fine...
Zhang was referring to an incident that rattled depositors in Yancheng in January, when some rural cooperatives -- which are not subject to the supervision of the bank regulator -- ran out of cash and locked their doors.Local officials say several co-op bosses fled after committing fraud.

China's central bank governor said this month that deposit rates are likely to liberalised in one to two years - the most explicit timeframe to date for what would be the final step in freeing up banks to set their own interest rates.

It is widely expected to introduce a deposit insurance scheme before freeing up deposit rates, to protect savers in case a liberalised market puts major strains on smaller banks and alarms the public. Analysts also expect the controls on deposit rates to be lifted gradually. Is China's debt nightmare a province called Jiangsu?
Why are bank runs like these only set to accelerate? Simple - unlike the US China has zero deposit insurance. Reuters expplains:
The case highlights the urgency of plans to put in place a deposit insurance system to protect investors against bank insolvency, as Chinese grow increasingly nervous about the impact of slowing economic growth on financial institutions.

Regulators have said they will roll out deposit insurance as soon as possible, without giving a firm deadline.
In the meantime, there are always helpful investor relations people willing to explain calmly just what is going on:
When contacted by Reuters by phone on Tuesday, an official at the Jiangsu Sheyang Rural Commercial Bank branch hung up, saying she was busy.
Others were even more helpful:
An official at the administrative office at Jiangsu Sheyang Rural Commercial Bank said the bank would publish a statement shortly. On its website, the bank says it is capitalised at 525 million yuan and had total deposits of 12 billion yuan as of end-February,

Officials at the Jiangsu branch offices of the China Banking Regulatory Commission (CBRC) declined to comment. The Yancheng branch of CBRC and the propaganda offices in Yancheng city and Sheyang county did not answer calls seeking comment.
Busy or not, for now, the banks may have survived following yet more capital infusions from the local government, but what happens when the default wave that has claimed solar, coal, and real estate developers finally impacts a deposit-holding institution? How will China - which has far more total deposits within its banking system than in the US (since the US banks fund themselves mostly using ultra-short term, overnight shadow funding) - survive a nationwide bank run we wonder?


ECONOMY Mar 25, 2014

Beware the debt binge: China may just be the next big bubble to pop

By Vivek Kaul  
In a previous piece had highlighted the economic dangers that the next government is likely to face. All the factors highlighted in the piece were local in nature. But in the world that we live in today, international factors also play a huge role.
An international factor that needs to be taken into account is China. The Chinese yuan has been depreciating against the dollar since the middle of January 2014. This, after it had been appreciating against the dollar since the middle of 2010. In the middle of 2010, one dollar was worth around 6.81-6.82 yuan. Since then, the yuan appreciated against the dollar, at a slow and steady pace. And by January 15, 2014, one dollar was around 6.03 yuan. But since January, the yuan has started to depreciate against the dolllar again. As I write this one dollar is worth 6.18 yuan.
So what is happening here? Why has the yuan suddenly changed course? One explanation is that the Chinese economy is slowing down, but that is not visible in the official data that comes out of China. The famed investor Mark Faber explained this in a recent interview to Bloomberg Television, where he said China is more likely to see 4% economic growth this year than the 7.5% that the Chinese government is targeting.
As Faber said “if you look at the figures of China, exports are still growing. If you look at the trade figures China exports to Taiwan, so China records exports of so and so much. The Taiwan report imports from China at a much lower level. So which figures are more reliable? I think the figures of the trading partners of China are more reliable. And they would suggest that growth has slown down considerably.”
With exports slowing down, it is in the interest of the Chinese central bank to let the yuan to depreciate against the dollar, to ensure that Chinese exporters stay competitive. With the yuan depreciating against the dollar, the Chinese exporters will earn more yuan for every dollar they get paid for their exports. This will ensure that the Chinese exporters stay more competitive in the global market, where several other countries like Japan are rapidly depreciating their currencies against the dollar to get their exports going.
What makes the situation even worse is the fact that China has seen a major credit binge, where Chinese companies have borrowed more and more over the years. As economist Worth Wray of Mauldin Economics writes in a recent report “China’s total debt-to-GDP (including estimates for shadow banks) grew by roughly 20% per year, from just under 150% in 2008 to nearly than 210% at the end of 2012 … and continued rising in 2013. Even more ominous, corporate debt has soared from 92% in 2008 to 150% today against the expectation that China’s government would always backstop defaults. That makes Chinese corporates the most highly levered in the world and more than twice as levered as US corporates.”
Another interesting data point clearly shows how much debt China has managed to take on in the last few years. “By another measure, China has accounted for more than $15 trillion of the $30 trillion in worldwide credit growth over the last five years, bringing Chinese bank assets to roughly $24 trillion,” writes Wray. So China has accounted to close to 50% of the loans made over the last five years.
What has made the debt particularly addictive is the fact that the new debt is less productive. As Wray puts it “China’s incremental capital/output ratio rose from 2.5x in 2007 to almost 5.5x in 2012. That means it takes more than twice as much debt to generate a given improvement in growth as it did before the debt binge began.”
The Chinese central bank, the People's Bank of China, did try to rein in this debt binge in 2012, but that immediately led to an economic slowdown. The government stepped in and in July 2013, it ordered the central bank to go easy on things. As George Soros wrote in a January 2014 column “Aware of the dangers, the People’s Bank of China took steps starting in 2012 to curb the growth of debt; but when the slowdown started to cause real distress in the economy, the Party asserted its supremacy. In July 2013, the leadership ordered the steel industry to restart the furnaces and the PBOC to ease credit. The economy turned around on a dime.”
But that seems to be changing now. One reason is the fact that the government and the central bank are looking to rein in the shadow banking sector, which has been a huge source of loans for the Chinese property companies. China is in the midst of a huge property bubble, which has been on for a while. As The Economist reports in a recent article “Prices are still rising in 69 of the 70 cities tracked by the official statistics (Wenzhou in Zhejiang province is the exception).”
The Chinese banks have been staying away from lending to the Chinese property sector. But the property companies have managed to continue raising money through the “cash for copper” scheme. I had explained this in a previous piece, but let me recount it here in brief.
The way this works is as follows. A Chinese speculator manages to raise money in dollars. These dollars he then uses to buy copper. He then sells the copper and gets Chinese yuan in return. He then invests the Chinese yuan in wealth management products, which promise huge returns. The money invested in wealth management products is typically lent to borrowers like property developers to whom the banks are reluctant to lend.
And this has kept the property prices high and property bubble going. The cash for copper scheme works as long as the the Chinese yuan remains stable against the dollar or appreciates. A depreciating yuan makes the cash for copper scheme unviable simply because the speculators need more yuan in order to repay their dollar loan. Also, what has not helped is the fact that the price of copper has been falling. This is another reason why the Chinese government and the central bank have allowed the yuan to depreciate against the dollar. They want to squeeze out the shadow banking sector.
A country like China could easily do with more houses for its huge population. But the trouble, as it is in India, the homes that are being for speculators instead of the masses who need homes to live in. As The Economist writes “One fear is that China’s developers are building houses for the wrong people (speculators) in the wrong places (backwaters). Instead of accommodating China’s overcrowded urban masses, too many houses stand empty, serving as stores of value for people dissatisfied with bank deposits and distrustful of the stockmarket.”
This is something that the Chinese government needs to set right, if they want to continue to stay relevant in the eyes of people. Ultimately, it is worth remembering that China is a capitalistic economy being run by a communist party (which is also the government).
Experts believe that the current government is moving in the direction of popping the domestic debt bubble in China. As Wray writes “China’s ruling elite doesn’t appear to be in denial about its debt problem, as we have come to expect from the United States and the Japan of old. In fact, it seems the new government under President Xi Jinping is intent on popping the domestic debt bubble and allowing widespread defaults rather than continuing to leverage the system into an unmanageable crisis or a Japanese-style stagnation.”
As and when this were to happen (given that predicting when a bubble will pop is next to impossible) it will mean huge problems all over the world, particularly emerging economies. As Faber put it in the Bloomberg TV interview “investors are not sufficiently aware that the Chinese economy is far more important for other emerging economies than the United States because China is a large importer of resources. In other words, iron ore, copper, zinc. And at the same time, they are a huge exporter to commodity producers of their own manufactured goods.”
And this formula won't work anymore. “So if the Chinese economy slows down, commodity prices – industrial commodity prices are likely to remain under pressure. They already come down a lot. They remain under pressure and the resource producers have less money. In other words,...Brazil goes into recession. The Middle East does not grow as much as before. Central Asia, Africa and so forth all contract, and then they buy less from China and you have a vicious cycle on the downside.”
What this also means is that Indian exports will take a huge hit and that in turn will have some impact on economic growth. Also, if China grows at 4%, as predicted by Faber, then what is the Indian economic growth likely to be?


China’s trillion dollar mobile payments industry is under attack

Things aren’t looking great for Chinese firms working in the world of mobile payments. The fast-growing trillion dollar industry—which includes online investment funds, virtual credit cards, and e-commerce–is facing new pressure from Chinese regulators and state-owned banks.

This week, China’s central bank said it is considering placing limits on how much cellphone users can spend via their smartphones. The regulator is also considering requiring online money market funds, like Alibaba’s Yu’e Bao, to begin holding minimum reserves on the deposits they collect. Over the past few weeks, China’s top four banks, all of them state-owned, have set limits (paywall) on transfers to mobile financial products. And earlier this month, China halted the use of virtual credit cards and QR codes, used for online shopping.

The crackdown is threatening to impinge on one of the country’s most dynamic business sectors. Last year, about 1.67 billion financial transactions were made via mobile phones, for a total turnover of 9.64 trillion yuan ($1.6 trillion). That was a 213% increase in volume and 317% increase in terms of the value of transaction.

As we’ve pointed out, the battle for China’s millions of middle-class internet users is shifting. The rise of mobile payment products, ranging from wealth management funds to crowdsourced cancer insurance, has pitted internet giants like Tencent or Baidu and e-commerce firms like Alibaba against each other. But these companies are increasingly competing with state-owned Chinese banks and mobile carriers.

The latest bunch of pushback from regulators suggests that the state-owned companies may be getting the upper hand. Chinese regulators say the new scrutiny come out of concern for information security, but at least some internet executives believe it’s politically motivated. ”Let the users decide who wins the game, not monopoly and power,” Jack Ma, founder and current chairman of Alibaba said in a comment on Alibaba’s messaging app Laiwang. “Sometimes you’re not defeated by technology; sometimes it’s a document.”

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