May 26, 2017

Worthy Insights / Opinion Pieces / Advice

A Teachable Moment – Boom! There Goes Your Pension! – Anthony Isola 5/25

Real Estate

WSJ – Daily Shot: Total Employees at US Department Stores 5/24

WSJ – Daily Shot: Total Employees at US Nonstore Retailers 5/24

Note that the difference between the two is not one-for-one.

Energy

Economist – The markets frustrate OPEC’s efforts to push up oil prices 5/18

China

WSJ – Where the China Credit Crunch Could Really Bite – Nathaniel Taplin 5/25

  • “The downgrade of China by credit-rating firm Moody’s has highlighted the rising risks the government faces from so-called contingent liabilities: poisonous loans to deadbeat state-owned companies that Beijing may eventually need to absorb, potentially by recapitalizing the country’s major banks.”
  • “What Moody’s didn’t explain is that this absorption of hidden liabilities is already under way. Central to the story is what has happened to local-government finances in China in the past two years.”
  • “In early 2015, investment levels in China—still so crucial to the country’s growth—were in a tailspin. One main reason was a double whammy for city governments, normally big drivers of capital spending. Falling land sales, around a third of local revenue, were pummeling budgets just as Beijing had rammed through tough restrictions on cities’ dodgy off-balance-sheet fundraising.”
  • “By March 2015, it was obvious that the clampdown had gone too far. In a policy U-turn, Beijing greenlighted a massive refinancing program for troubled local governments, and the struggling industrial companies they owned, allowing them to directly issue bonds in large amounts for the first time. By doing so, though, Beijing was also implicitly recognizing its ultimate responsibility for these debts.”
  • “The result was a stunning expansion of formal government debt in China as corporate liabilities were refinanced wholesale through provincial bonds: government-bond debt, which had been running around 15% of gross domestic product since the 2008 global financial crisis, nearly doubled to 28% in just two years. As provincial-debt issuance rose from negligible levels in 2014 to a monthly peak of more than one trillion yuan ($140 billion) in April 2016, overall investment in the economy also stabilized.”
  • For now, be mindful.

NYT – China’s Addiction to Debt Now Threatens Its Growth – Keith Bradsher 5/24

  • This article is a good source to give someone an overview of the situation leading up to the Moody’s downgrade; however, since I’ve covered that, I want to point to the coverage on Foresea Life Insurance in this article. By the way, its founder is the fourth wealthiest person in China.
  • “’China’s recent economic growth trajectory has been accompanied by a buildup of imbalances and vulnerabilities that poses risks to its basic economic and financial stability,’ Andrew Fennell, the director of Asian sovereign debt ratings at Fitch Ratings, said.”
  • “Foresea is an extreme example of the manic speculation that hangs over the entire system.”
  • The insurer collected just $40 million in premiums in its first year after it was started five years ago. Last year, the company collected $14.6 billion.
  • “Foresea started to run into problems late last year. Its founder and controlling shareholder, Yao Zhenhua, made a hostile bid for Vanke, one of the country’s largest real estate buyers, with plans to fund the deal in large part with insurance premiums.”
  • “Zhou Xiaochuan, the governor of the central bank, said the same month: ‘Every enterprise, especially those with too high a rate of leverage, should be controlled.’”
  • “Foresea was among the first to be pinched.”
  • “The China Insurance Regulatory Commission in December banned Foresea from offering new products, contending that the company was essentially selling high-yield debt even though it had permission to issue relatively low-risk life insurance. Two months later, the regulator accused the company of misleading authorities.”
  • “’The fact that Foresea Life made up and provided fake material is clear,’ the commission said. ‘It is a serious circumstance that should be punished according to the law.'”
  • “The moves have spooked customers. Revenues from newly issued policies plummeted 99.8% in the first quarter from the same period last year, to just $11.4 million. Investors also became wary, demanding their money back.”

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