June 3 – June 9, 2016 – the janus observer

The volume of Chinese wealth-management products is becoming unwieldy. Banks have had enough of this negative interest rate nonsense.

Headlines

WSJ – ‘Niger Delta Avengers’ Sabotage Oil Output 6/5. Bottom line, these guys are messing things up in Nigeria by seeking to bring Nigerian oil output to zero – which of course is pushing the country toward recession and is helping push up global oil prices.
FT – Argentina set to tumble 22 places on global wealth list 5/27. Turns out the data was being manipulated so much that the GDP per head in Argentina should actually be below China, Brazil, Mexico, St. Lucia, Grenada and others.
Economist – Why airlines are abandoning Venezuela 6/7. Air Canada, American Airlines, Alitalia, and Gol have all scaled back or suspended service to the country and now Lufthansa has suspended service to Caracas as of May 28 and LATAM (Latin America’s largest airline group) will cut all services after August 1.
WSJ – A Bearish George Soros Is Trading Again 6/8. Basically the savvy billionaire investor is putting his money where his mouth is.

Briefs

Howard French highlighted in The Atlantic the upcoming challenges that China faces due to its demographics and conversely the tailwind that the U.S. has going for it.

“China today boasts roughly five workers for every retiree. By 2040, this highly desirable ratio will have collapsed to about 1.6 to 1.”
“At the same time, the number of Chinese older than 65 is expected to rise from roughly 100 million in 2005 to more than 329 million in 2050 – more than the combined populations of Germany, Japan, France, and Britain.”
“With the number of working-age Chinese men already declining – China’s working-age population shrank by 4.87 million people last year – labor is in short supply.”
“By hastening and amplifying the effects of this decline, the one-child policy is likely to go down as one of history’s great blunders.”
“As a result, by 2020, China is projected to have 30 million more bachelors than single women of similar age.”
“By the end of the century, China’s population is projected to dip below 1 billion for the first time since 1980. At the same time, America’s population is expected to hit 450 million.”

Bloomberg News pointed out one big problem with the debt solution to China’s non-performing loans, basically it doesn’t work when the NPLs are just shuffled between banks.

A May 26 auction of non-performing loans (NPLs) was met with tepid reception and was primarily an event of banks shuffling bad debt between each other.
Thing is, if this strategy doesn’t catch on with private sector investors, “a failure to purge lenders of their NPLs may fuel expectations for a government-led bailout, which Standard Chartered Plc estimates could cost as much as $1.5 trillion.”
According to Bloomberg Intelligence, “China has about $2.4 trillion of corporate debt at risk of default.”
Hopefully the debt products being sold become more transparent and easier to asses from a risk perspective so that the private sector can reasonably jump in.

Special Reports

Graphics

FT – Argentina set to tumble 22 places on global wealth list – Steve Johnson 5/27

Featured

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

Long Shadow Hangs Over China’s Banks. Anjani Trivedi. Wall Street Journal. 6 Jun. 2016.

“The growth of off-balance sheet WMPs (Wealth Management Products) is exploding, with issuance rising 7.3 trillion yuan ($1.1 trillion) last year, up nearly three-quarters from the previous year, according to Charlene Chu of Autonomous Research. That is equivalent to nearly 40% of China’s 19 trillion yuan credit growth in 2015, including debt issuance under a local government bond-swap program. And while customers are told most WMPs aren’t principal guaranteed, that distinction may be shaky in China’s financial system rich with moral hazard.”

While this isn’t the first time that debt issuance has surged from WMPs; however, “the structures this time around are increasingly complex. Investors in China’s interbank market – including banks – took up almost a third of WMP buying last year, up from 2% the previous year. Most of that is from WMPs essentially buying other WMPs, creating an opaque layering of obligations, Ms. Chu said, echoing the collateralized debt obligations made famous during the U.S. housing bust.”

“Then there is duration risk. Over three quarters of these investment products mature within six months, putting constant repayment pressure on banks. To meet these products’ yield demands, WMPs have been heavy buyers in China’s rip-roaring bond market. A sustained reversal of the bond market could trigger pain on WMPs.”

Negative rates stir bank mutiny. James Shotter and Claire Jones. Financial Times. 8 Jun. 2016.

“Lenders in Europe and Japan are rebelling against their central banks’ negative interest rate policies, with one big German group going so far as to weigh storing excess deposits in vaults.”

“The central bank policies have hit bank profitability in both regions and German banks have been vocal in criticizing Mario Draghi, European Central Bank president, accusing him of punishing savers and undermining their business models. The policy cost German banks €248m last year, according to the Bundesbank.”

“Japanese banks have been more muted but Bank of Tokyo Mitsubishi UEJ has become the first leading lender to break ranks, confirming it is considering giving up its primary dealership status for sales of Japanese government bonds.”

“The more central banks think that they can violate the zero-bound, the more likely it is that banks will look at ways to limit their costs. And that means they will hold more cash if they can find efficient means to do so.” – Adalbert Winkler, professor at the Frankfurt School of Finance and Management.

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bisnow – WeWork to Halt Hiring, Make Major Cuts to Staff 6/6

FT – Crisis-era tremors shake property funds 6/2

FT – Emerging markets to slow as convergence theory takes hold 6/2

FT – The period of maximum danger for bond investors is yet to come 6/6

FT – Saudi Arabia considers income tax for foreign residents 6/7

FT – Bank of Korea unexpectedly cuts rates to 1.25% 6/8

FT – Bill Gross warns over $10tn negative-yield bond pile 6/9

NYT – Toxic Fish in Vietnam Idle a Local Industry and Challenge the State 6/8

WSJ – Bank loans: Why it Feels Like 2008 All Over Again in Asia 6/6