February 26 – March 4, 2016

Evergreening of debt in China. Japan becomes second country to sell negative 10-year bonds. Structural changes in global trade.

Three articles that stood out this week are 1) Alex Frangos’ “How China’s Big Lending Push Comes Up Short” in The Wall Street Journal, 2) Lew Lewis and Dan McCrum’s “Japan sells negative yield 10-year bonds for first time” in the Financial Times, and 3) is Shawn Donnan’s “Global trade: structural shifts” in the Financial Times.

Other items that are worth a mention (a way for me to highlight a few more articles – with less content):

    • “Late Monday, the People’s Bank of China lowered the amount of deposits that banks must hold in reserve by 0.5 percentage points, freeing up an estimated 700 billion yuan ($107bn) in funds for banks to make loans.”
    • “The timing of the easing measure, just after China assured Group of 20 finance chiefs it wouldn’t deliberately weaken the yuan, quickly raised eyebrows.”
    • However, a liquidity shortage is of greater concern to the central bank than the yuan stability. “The first sign of a cash squeeze came late last week, when China’s overnight money-market rates, a key gauge of liquidity, surged and caused Chinese stocks to plunge.”
    • As an indication of the outflows, China’s foreign-exchange reserves plunged by $99.5bn in January, to $3.23tn.
    • “As for the Malaysian attorney general’s conclusion that the $681 million deposited to Mr. Najib’s account was a Saudi royal-family donation, the international investigators have found no evidence any of this came from Saudi Arabia, according to those familiar with their probes.
    • A person familiar with 1MDB’s dealings also said the deposit didn’t come from Saudi Arabia. A Saudi official said in January the kingdom’s ministries of finance and foreign affairs had no knowledge of such a donation to Mr. Najib.

WSJ_1MDB money trail_2-29-16

    • “Since peaking at $19.6 billion in 2013, fundraising among public, non-listed REITs has dropped significantly in the past two years. In 2014, fundraising fell to $15.6 billion, followed by another sharp decline last year to $10.0 billion, according to data from Robert Stanger & Co., an investment banking and financial advisory firm. The company is forecasting another dip this year to between $7.0 billion and $8.0 billion.”

Non Traded REITs Battle Fundraising Woes_3-2-16

    • “Aside from the negative press, there are some big regulatory changes ahead for the sector. A new rule set to go into effect in April will require non-traded REIT funds to report the investment balance-net of fees-on customer statements. Non-traded REITs, for the most part, have a heavy burden of front-end fees of 10 to 12 percent.

Side note: for those that have been reading my posts via LinkedIn, first, thank you, and second, it just came to my attention that the WordPress connection with LinkedIn had been disconnected.  My apologies.  There have been a few weeks of posts that you have missed.  You can check out the posts at www.thejanusobserver.com and while there you may consider signing up for the email – you’ll have the posts sent directly to your email when they’re made, that way there won’t be any further mix ups.

*Note: bold emphasis is mine, italic sections are from the articles.

How China’s Big Lending Push Comes Up Short Alex Frangos. The Wall Street Journal. 29 Feb. 2016.

This article follows on the note in the top section about measures to increase banks loans into the economy.

“The problem is that China has reached an inflection point. A substantial chunk of new debt is increasingly going to pay old debt, creating less activity in the real economy aside from bankers’ fees and commissions.”

“A measurable effect is the so-called evergreening of credit, where lenders essentially roll loan maturities or provide credit simply to pay off old debt.”

“The result is a massive shortfall in the debt service compared with the sources of cash, to the tune of about 10% of corporate debt last year. That gap is filled with more borrowing.”

WSJ_China's Evergreening of Debt_2-29-16

As the saying goes, “borrow a million dollars and it’s my problem, borrow a billion and it’s yours.”


Japan sells negative yield 10-year bonds for first time. Leo Lewis and Dan McCrum. Financial Times. 1 Mar. 2016.

“Japan crossed a ‘financial rubicon’ on Tuesday as the country sold new 10-year bonds with a yield below zero for the first time at a government auction.”

FT_Japanese Govt Bond Yield_3-1-16

“The European Central Bank is expected to announce further monetary easing next week, and 10-year Bunds yield only 13 basis points.

Japan is the second country to sell 10-year bonds at a negative yield, after Switzerland became the first to do so in April last year.

The auction, of Y2.2tn ($19.4bn) in 10-year paper, at an average yield of minus 0.024%, means investors have paid a fee to lend money for a decade to the government, the most indebted G7 nation (gross debt/GDP ratio of 250%).

“The buying appears to have been almost entirely dealers and speculators looking to hold the paper for a brief time or covering short sales accumulated in expectation of the yield dropping into negative territory.”

Large pension funds have stayed away; however “they cannot stay away from the auctions forever if their mandates include following particular bond indices.”


Global trade: structural shifts. Shawn Donnan. Financial Times. 2 Mar. 2016.

“Last year say the biggest collapse in the value of goods traded around the world since 2009.”

“Barring a spectacular turnaround in the global economy, the subpar performance is likely to be repeated in 2016, making it the fifth straight year of lackluster growth in global trade, a pattern not seen since the doldrums of the 1970s.”

“Some economists note that the plateau in worldwide trade in goods and capital has coincided with a surge in data flows – an indicator, they say, that the digital economy of the 21st century is starting to overturn the old order.”

The silver lining.

“Even as flows of finance, goods and services have slowed – falling from a peak of 53% of global output in 2007 to 39% in 2014 – the world has seen a surge in cross-border data. The flow of digital information around the world more than doubled between 2013 and 2015 alone, to an estimated 290 terabytes per second, McKinsey says. That figure will grow by a third again this year, meaning that by the end of 2016 companies and individuals around the world will send 20 times more data across borders than they did in 2008.

“General Electric, which is using 3D printers to make fuel nozzles for jet engines and expects its aviation unit to be manufacturing 100,000 parts using the technology by 2020.”

“By its (McKinsey’s) calculations cross-border flows of capital, goods, services and data added an extra $7.8tn to the global economy in 2014. The added value of data flows alone accounted for $2.8tn of that total, slightly more than the $2.7tn attributed to the global trade in goods.”

Simultaneously global supply chains have shortened. As highlighted by the IMF and World Bank in a 2014 report, “as much as half the post-crisis slowdown in global trade could be attributed to “structural” rather than cyclical reasons.” I.E. decisions by countries and companies to bring production of component parts close to home.

Other Interesting Articles

Bloomberg Businessweek


FT – Share prices of big private equity houses point to pain 2/25

FT – Chinese house prices continue recovery 2/25

FT – Private equity taps into M&A insurance 2/25

FT – Hanergy Thin Film warns on 2015 profits 2/27

FT – Saudi Arabia seeks US investment to plug gap in oil revenues 2/28

FT – China tycoons fear ‘Cultural Revolution-type’ censure 2/28

FT – Former BoE chief King predicts collapse of the eurozone 2/29

FT – Argentina strikes deal with holdouts 2/29

FT – ExxonMobil sells $12bn of bonds amid rise in borrowings 2/29

FT – China data signal deepening slowdown 2/29

FT – Australia’s Great Barrier Reef hit by coral bleaching 2/29

FT – The fear and despair of Spain’s young jobseekers 3/1

FT – Hotel industry braced for demand crunch 3/1

FT – Moody’s warns on possible China downgrade 3/1

FT – US life insurers shaken by rock-bottom rates 3/2

FT – Oil crash takes heavy toll on midstream energy companies 3/3

Hotel News Now – Hoteliers, the party is over; act now 3/1

Project Syndicate – 2008 Revisited? (Nouriel Roubini) 3/2

WSJ – Hilton to Spin Off Hotels Into REIT, Separate Timeshare Business 2/26

WSJ – Bond Markets Reach a Tipping Point on Yields 2/26

WSJ – China Easing: Where Has All The Money Gone? 3/1

WSJ – Giant Chinese Developer Evergrande Real Estate Goes Out on Banking Limb 3/1

WSJ – Indicted Ex-Chesapeake Energy CEO Aubrey McClendon Dies in Car Crash 3/2

Yahoo Finance – U.S. incomes are finally growing 2/29



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