If you were to read only one thing…

Bloomberg News – Shoppers Can Buy Bad Debt on China’s Equivalent of Ebay – 7/11

• “Used by millions of Chinese to buy everything from clothes to food and electronics, the platform (Taobao), known for its bargains, typically markets more than 1 billion yuan of soured assets a day, according to Bloomberg calculations. Recent listings include a portfolio of 118 non-performing loans from some companies in Yunnan province, a villa seized by a bank in the southern canal city of Shaoxing, and a property in central Beijing that’s also in default.”
• “China’s embrace of e-retailing is helping it tackle another byproduct of the country’s rapid economic evolution: the rise of bad debt.”
• “Slowing growth and an uptick in corporate defaults has fueled the market, with NPLs at commercial banks more than doubling over the past two years to 1.6 trillion yuan as of the end of March. As Beijing pushes lenders to find market-oriented ways of dealing with soured loans, interest in distressed debt has climbed, spurring banks and asset managers to look beyond traditional venues like auction houses and exchanges to dispose of the assets.”
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• “China Cinda Asset Management Co. — one of the country’s biggest distressed asset managers, and the firm marketing the steel company’s debt — said last month that it’s collaborating with Alibaba to set up a special section on Taobao to auction its wares.”
• “Following Taobao’s lead, more than 50 other websites marketing their services to banks and other sellers of bad loans emerged in China in the first half of last year, according to a March report from PricewaterhouseCoopers LLP. More than 20 financial institutions are listed as partners on Taobao’s auction platform for soured assets, including Shenzhen-based Ping An Bank Co., Beijing’s China Minsheng Banking Corp. and China Citic Bank Corp.”
• “E-commerce platforms provide access to more investors and the lender has garnered interest for assets marketed on Taobao that failed to yield inquiries offline. But while they can bring a level of transparency to bad loan trading, sites like Taobao also attract individual investors who don’t typically have the skills needed to do full due diligence on an NPL deal…”

Perspective

WSJ – Daily Shot: FRED – 2015 Median Household Income Adjusted by RPP 7/11

Bloomberg – America’s Pension Bomb: Illinois Is Just the Start – Laurie Meisler 6/30

• “We’ve been hearing it for years: America’s public pensions are a ticking time bomb. Well, at long last, the state of Illinois is about to expose just how big this blowup could be. As of the 2015 fiscal year, Illinois had promised its employees $199 billion in retirement benefits. Right now, it’s $119.1 billion short. That gap lies at the center of a years-in-the-making fiscal mess that’s threatening to drop the state’s credit rating to junk-bond status. But Illinois is hardly alone. Connecticut and New Jersey—states that, to most of the world, seem like oases of prosperity—are under growing financial strain, too.”
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Worthy Insights / Opinion Pieces / Advice

NYT – How We Are Ruining America – David Brooks 7/11

• “Over the past generation, members of the college-educated class have become amazingly good at making sure their children retain their privileged status. They have also become devastatingly good at making sure the children of other classes have limited chances to join their ranks.”

Bloomberg Businessweek – The Next Job Humans Lose to Robots: Real Estate Appraiser – Joe Light 7/11

• “Advances in big data at Zillow and elsewhere are helping automation creep into knowledge-based professions.”

Silicon Beat – World’s 10 least affordable housing markets include San Jose (least affordable in the US) and SF – Richard Scheinin 7/10

• Using the Median Multiple (median house price / median household income), the Demographia International Housing Affordability Survey (2017) has ranked the following cities as the least affordable in the world.

1. Hong Kong
2. Sydney, Australia
3. Vancouver, Canada
4. Auckland, New Zealand
5. San Jose, USA
6. Melbourne, Australia
7. Honolulu, USA
8. Los Angeles, USA
9. San Francisco, USA
10. Bournemouth and Dorset, UK

Markets / Economy

WSJ – Daily Shot: FRED – US Consumer Credit as Percentage of GDP 7/11

WSJ – Daily Shot: FRED – US Student Loans Owned by Federal Govt 7/11

• “Student loans owned directly by the government now total $1.1 trillion, representing about 30% of the overall consumer credit. Note that this figure does not include student debt that is guaranteed but not directly owned by the federal government.”

WSJ – Daily Shot: FRED – Nonrevolving Consumer Loans owned by Credit Unions 7/11

• “Starting in 2013, credit unions have built up a sizeable auto loan portfolio. This is quite a bet on the US consumer for these small lenders.”

Real Estate

WSJ – Daily Shot: Calculated Risk – Number of Negative Equity Mortgages 7/11

China

FT – China trial paves way for ‘unhackable’ communications network – Yuan Yang 7/10

• “Success of Jinan project points to commercial application for quantum communications.”

WSJ – Here Comes Another Chinese Company on a Buying Binge – Jacky Wong 7/10

• “China wants its biggest, most acquisitive, highly leveraged companies to tone it down — apparently by selling assets to other big, acquisitive highly leveraged companies.”
• Case in point, Sunac’s purchase of 76 hotels and 13 theme parks from Dalian Wanda.
• “But the deal won’t reduce the overall risks in China’s financial system. Sunac has been loading up on debt over the past year as it bought land aggressively. Its net debt, including perpetual securities, had more than tripled in 2016 to $7.8 billion — more than twice its shareholders’ equity.”
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• “Sunac has just enough cash, including restricted cash, to finance the Wanda purchase, but that would more than double its net debt. This seems to defeat the purpose to contain runaway debt within China’s financial system. But unlike Wanda, Sunac has raised all debt to buy domestic land and properties, important drivers for China’s economy, instead of splurging on overseas assets.”
• “Capital outflows, instead of leverage, are Beijing’s real worry.”

WSJ – Dalian Wanda Rides China’s Financial Merry-Go-Round with Latest Deal – Anjani Trivedi and Jacky Wong 7/11

• “When it comes to managing debt burdens, Chinese companies know how to keep it all between friends.”
• “In a maneuver that will reduce the need for external financing, Wanda is lending some 29.6 billion yuan ($4.4 billion) to Sunac to buy its own assets.”
• “The structure of the loan is a typical example of so-called entrusted lending, a common form of shadow banking in China in which one company lends money to another. Because that isn’t strictly legal, such loans are arranged via a bank that acts as a middleman, often earning a cut of the deal for its pains. Entrusted lending has ballooned to account for some 10% of credit in China, led by cash-rich state-owned companies that have branched out to loans as they struggle to find growth in their core businesses.”
• “With the current Sunac-Wanda deal, Sunac should book the loan as debt, although it could bury it in one of its many joint ventures. Wanda will presumably record the loan as an asset, meanwhile. The ultimate effect is that most of Wanda’s debts haven’t been dealt with; they have just been shifted elsewhere within China Inc.”
• “Wanda is lending the cash cheaply too. The three-year loan will be at the benchmark lending rate, now around 5%. Typically such loans are priced at a premium, especially those to indebted borrowers like Sunac, which has an eye-popping net debt-to-equity ratio of over 160%.”
• “Still, if one of your friends is helping you out, it is rude to make them pay over the odds.”

FT – Sunac receives fresh ratings warning after $9.3bn Wanda deal – Nicholas Megaw 7/11