The insurance industry in China has been good business – too good. What is the magic number for China’s foreign exchange reserves? What gives – why haven’t the share buybacks by US corporates juiced returns (passive investing)?
Headlines
FT – Samsung heir Lee Jae-yong charged with bribery 2/28. Lee Jae-young is actually looking at jail time.
FT – China capital crackdown threatens wave of overseas buyouts 2/27. Dalian Wanda’s $1bn acquisition of Dick Clark Productions is in question even though the argument can be made that it is strategic to its cinema business (AMC, Carmike Cinemas, Odeon & UCI theatres, Legendary Entertainment) and even though it is being made by one of China’s most connected and richest individuals.
WSJ – London’s ‘Cheesegrater’ Sold to Chinese Firm for $1.4 Billion 3/1. Hong Kong property tycoon Cheung Chung Kiu’s CC Land Holdings just stumped £1.15bn up for the Leadenhall Building in London – recently appraised at £915m at the end of September. Well, the office yields in London at around 4.6% are near double the 2.6% in Hong Kong and the yuan is up 12% on sterling since the Brexit vote.
Special Reports / Opinion Pieces
- FT – Russia mobilizes an elite band of cyber warriors – Sam Jones 2/23
- FT – Erdogan sews up Turkey’s ‘second revolution’ – Mehul Srivastava 2/27
- NYT – The Big Question for the U.S. Economy: How Much Room Is There to Grow? – Neil Irwin 2/24
- Project Syndicate – From Bad to Worse for Puerto Rico – Joseph Stiglitz and Martin Guzman 2/28
- Realtor.com – The Misleading Math Behind the Rent vs. Buy Calculation – Jonathan Smoke 2/17
- “While studies simulating the financial returns to owning and renting find that renting is often more likely to be beneficial, in practice renters rarely accumulate any wealth. In no small part this seems traceable to the difficulties households face in trying to save absent either a clear goal or an automatic savings mechanism.”
- WSJ – The World’s Most Radical Experiment in Monetary Policy Isn’t Working – John Lyons and Miho Inada 2/26
Briefs
- Robin Harding and Elaine Moore of the Financial Times covered that the Bank of Japan has telegraphed to the world that it plans to keep buying bonds to keep yields at 0%.
- “The Bank of Japan published detailed schedules of planned asset purchases for the first time on Tuesday as it seeks to prove its commitment to a zero per cent cap on 10-year government bond yields.”
- “Japan’s central bank said it will buy a minimum of ¥1.375tn and a maximum of ¥2.175tn of government bonds during March, giving a series of dates and estimated sizes for its planned bond auctions at different maturities.”
- “The BoJ gave a strong hint that its announcement is meant to signal a minimum plan for purchases, rather than a maximum, saying it ‘may increase the frequency as needed.'”
- “Japan’s 10-year yield is currently trading at 0.04%, having reached 0.11% at one point earlier this month before the BoJ stepped in and offered to buy in unlimited quantity to prevent it from rising any higher.”
- Bottom line, the BoJ is all-in on maintaining 0% yields and the market can be assured of that.
Graphics
WSJ – Daily Shot: US Total Oil Exports 2/23
WSJ – Daily Shot: China – WMP Product Investment Categories 2/23
- “…Pressure on corporate bonds poses risks to Wealth Management Products (WMPs). One could argue that these offerings are a form of Ponzi scheme because when investors redeem their holdings, managers rely on other money to come into the product. If more people redeem than invest, the managers will be forced to liquidate and it’s not clear there will be enough to repay the last guys out.”
WSJ – Daily Shot: Chinese Bank WMP Deposit Percentage 2/23
WSJ – Daily Shot: FRED – US Home Price Index v Avg. Hourly Earnings 2/23
Economist – Longevity in rich countries – The Data Team 2/23
WSJ – Daily Shot: Snap Value Progression 3/1
WSJ – Daily Shot: Maptitude – Largest coffee chains by US County 3/1
Featured
*Note: bold emphasis is mine, italic sections are from the articles.
China bans fourth richest man from insurance sector for 10 years. Gabriel Wildau. Financial Times. 24 Feb. 2017.
“China’s fourth richest man [Yao Zhenhua, chairman of Baoneng Group] has been banned from the country’s insurance industry for 10 years, in the most aggressive move yet by regulators to tame borrowing and hostile corporate takeovers by insurers.”
“Much of the funding for Baoneng’s…investments came from investments gathered by its life insurance unit, Foresea Life Insurance, which Mr Yao also chairs.”
“Foresea quickly scaled the premium rankings of China’s life insurance industry by selling so-called ‘universal insurance’ products, which are essentially wealth management vehicles with a small protection component.”
“Insurers are able to offer higher yields than those available on comparable vehicles from banks and other fund managers because they have the freedom to invest in a wider range of assets. Anbang Insurance Group has also relied on sales of universal insurance products to fund a high-profile global shopping spree.”
“But analysts have warned against the strategy. Such products essentially force insurers to seek out risky, high-yielding assets in order to meet future payouts. Analysts are also concerned by a liquidity risk when short-duration products are matched to long-term illiquid assets such as real estate or large equity stakes.”
“Rarely seen in public, Mr Yao was China’s fourth richest man in 2016 with a fortune of $17bn, up more than ninefold from a year earlier, according to the Hurun Report. Local media say he started as a vegetable seller before making his first fortune as a property developer in the freewheeling city of Shenzhen in the 1990s.”
Previously, the China Insurance Regulatory Commission chairman Xiang Junbo had “warned that insurers cannot be ‘ATM machines’ for corporate raiders.”
“Mr Xiang also promised on Wednesday to curb ‘aggressive’ pricing and ‘unreasonably’ high returns on some insurance products. He said insurers should not interfere with the management of listed companies. Instead, the industry should focus on its core function of providing risk protection.”
China curbs capital outflows to keep renminbi stable. James Kynge. Financial Times. 28 Feb. 2017.
“China successfully curbed the flow of money cascading out of the country in January following the imposition of administrative controls, raising the potential for Beijing to prevail in its efforts to keep the renminbi stable against the US dollar this year, analyst said.”
“In January, capital outflows fell to $30bn from $55bn in December, according to estimates by Goldman Sachs, an investment bank.”
“This represented a considerable reduction on the monthly average in a country that has experienced a leakage of $1.2tn between August 2015 and January this year, yielding a monthly average of $71bn.”
“‘Given the still-large size of China’s reserves, this pace of outflows in unlikely to stop the central bank from pursuing its current exchange-rate policy, which can be sustained for another couple of years,’ said Long Chen, analyst at Gavekal Dragonomics, a research company.”
The reasons for the slow down are varied; however, where there is disagreement is on what would be considered a sufficient amount of foreign exchange reserves.
“China’s foreign exchange reserves fell $12bn in January to below the psychologically important $3tn level to $2.99tn, representing almost a $1tn reduction from its level of July 2014.”
“The issue of China’s reserves adequacy has arisen from applying the International Monetary Fund’s new reserve metric to the country.”
“Under this calculation, the proposed minimum reserves for China is $2.7tn…”
“But Brad Setser, senior fellow at the Council on Foreign Relations (CFR), a New York-based think-tank, said that China had ample room to defend its currency.”
“‘The world would be in a better place if there was a broad recognition that China can burn through another $1tn in reserves and, with $2tn still in reserves, be above nearly all metrics of reserve adequacy,’ Mr. Setser wrote in a CFR blog.”
“Jeremy Stevens, Asia economist at Standard Bank, holds a similar view. ‘It seems fair to argue that in terms of foreign exchange reserves, somewhere between $1.56tn and $2.2tn would be adequate for China’s working capital,’ he said.”
It is to be seen what China itself considers the ‘right’ amount of reserves. Regardless, part of the capital curbs have been aimed at encouraging more discretion by Chinese investors and companies in their foreign acquisitions.
“Pan Gongsheng, head of SAFE [State Administration of Foreign Exchange], was quoted as telling a Chinese newspaper this month that some overseas acquisitions by Chinese companies had been carried out with a ‘strong element of blindness.'”
US share buybacks punch below their weight. Robin Wigglesworth. Financial Times. 1 Mar. 2017.
In questioning whether corporate share buybacks have been on the whole a net positive, there has been a host of views presented. The concerns being that buybacks are short-sighted, returning cash to shareholders rather than pursuing growth initiatives. The implication being that these companies don’t have sufficient growth opportunities. However, in some cases companies simply have too much cash and recognize that they would do their owners a disservice by holding on to all of it.
“But perhaps the most notable thing about the buyback spree – more than $2tn of shares have been purchased in the past five years – is how it has arguably provided only a modest boost to equity prices, at least compared to the scale of the purchases.”
“Indeed, the share price performance of the most generous and consistent buyback companies paint a surprisingly muddied picture.”
“The S&P 500 Buybacks Index has rallied 96% over the past five years, outpacing the broader market’s 73% gain since. This is an outperformance of 2.8% annually. However, next to the sheer scale of the buybacks – the estimated $2tn spent is equal to a tenth of the S&P 500’s current value – it has underwhelmed.”
“Worse, the Nasdaq Buybacks index has even underperformed the broader Nasdaq Composite gauge over the past five years, with the former rising 86.3% and the latter by 90.3% – an annualized undershooting of 1.3%.”
“Goldman Sachs’s chief US equity strategist David Kostin has calculated that buybacks have been the single biggest source of demand for US stocks since the financial crisis, providing a vital pillar of demand at a time when domestic pension funds and foreign investors have largely been selling.”
“For example, last year overseas investors and US pension funds respectively offloaded $148bn and $127bn of American stocks. But US companies snapped up a record $644bn of their own shares, Goldman estimates.”
Further, “Goldman Sachs earlier this year [2017] lifted its forecast for S&P 500 share repurchases from an already lofty $780bn to $800bn.”
So why the muddied outcome… Charles Cara, head of quantitative strategy at Absolute Strategy Research has an “…intriguing reason for what he calls the ‘buyback anomaly’ of share repurchases not proving as big an uplift as the sheer volume would suggest: the rise of passive investing.”
“Passive investment vehicles do not react to share price moves. As equity prices move so do their index weights by an equal amount, provided that the share count remains constant. In other words, if Apple’s shares rise by $10, then an exchange-traded fund need do nothing, as its existing holdings of Apple stock obviously rises by the same amount.”
“Buybacks reduce the numbers of outstanding shares. If those shares rise as a result of the buyback, then an ETF or index-tracking fund – which do not sell to companies buying back their stocks – will find itself overweight compared to its benchmark, and will be forced to sell some of the shares and buy the rest of the stock market to rebalance.”
As Mr. Cara puts it, “buybacks are a prop to the whole stock market, but have a subdued impact on individual stocks because there is a countervailing force from passive investors.”
Other Interesting Articles
The Economist
FT – Chinese manufacturing jobs vanish as robots take over 2/23
FT – China seeks baby boom to counter sluggish birth rates 2/24
FT – Private equity losing out to cash-rich buyers on the big deals 2/26
FT – China economic strength allows shift from stimulus 3/1
FT – SF Express chief shakes up China’s rich list as shares soar 3/1
FT – The private equity party is overcrowded 3/1
Guardian – Scraping by on six figures? Tech workers feel poor in Silicon Valley’s wealth bubble 2/27
NewsMax – Yale’s Robert Shiller: Pull Back Now From Overpriced Bull Stock Market 2/24
NYT – Snapchat Founders’ Grip Tightened After a Spat With an Early Investor 2/23
NYT – What Booming Markets Are Telling Us About the Global Economy 3/1
WSJ – Why Chinese Men Are Dying 2/24
WSJ – How Dangerous Is a Stock Market of Mindless Robots? 2/24
WSJ – Trumpflation vs Negative Rates: The Battle Endures 2/28
WSJ – World’s Most Indebted Developer Keeps Piling It On 2/28
WSJ – The Urban Condo Boom Has Reached Its Final Frontier: Detroit 3/1
WSJ – How Chinese Companies Finance Their Ambitions Abroad 3/2