Tag: Wealth Management Products

January 6, 2017January 5, 2017

December 30, 2016 – January 5, 2017

China insurance crackdown – meaningful implications. Fewer and fewer U.S. public companies.

Headlines

FT – India takes stock after first phase of cash crunch 1/1. Despite the chaos of the demonetization, citizens and politicians are giving Indian prime minister Narendra Modi a long leash because they agree with the aims of seeking to clean up the system.
WSJ – Luxury Apartment Boom Looks Set to Fizzle in 2017 1/2. It’s the basic Supply and Demand equilibrium at play – supply has finally gotten to the point of exceeding demand.
WSJ – China Has Too Many Shopping Malls 2017 1/3. I suppose the question is what will become of all the surplus space when the problem is fully acknowledged.
FT – Turkey orders arrest of hundreds of businessmen in Gulenist purge 1/5. Never waist a good coup attempt – whether it was real or not.

Special Reports / Opinion Pieces

FT View – Offer Maduro’s allies a safe exit from Venezuela 12/29
Wired – The Year in Housing: The Middle Class Can’t Afford to Live in Cities Anymore – Emily Dreyfuss 12/31
- “‘It’s very hard to get people to understand that the affordable housing crisis is not for the very poor,’ says lawyer Mechele Dickerson of the University of Texas, an expert in housing and the middle class. It’s for people with good jobs who are not poor enough to qualify for subsidized housing prices. ‘A family that makes $100,000 can’t afford to buy a house in most US cities,’ Dickerson says.”
FT – The political price of Xi Jinping’s anti-corruption campaign 1/3
FT – Cities offer a glimpse of China’s economic future – Gabriel Wildau, Yuan Yang, and Tom Mitchell 1/3

Briefs

Yuan Yang of the Financial Times highlighted recent promises made by Beijing’s mayor that house prices will not rise in 2017.
- So here’s a new approach, with prices haven risen by more than 25% in 2016 “Beijing’s mayor has promised that house prices in the capital will not rise in 2017 in an attempt to ease concerns over the city’s property bubble.”
- Good for people wanting to get in on the action, bad for those that own property.
- “We must be firm in stamping out speculative investment [in property], increase the supply of residential housing, and guarantee that there will be no month-on-month increases in house prices.” – Mayor Cai Qi
- This message is consistent with national policy that “houses are for living in, not for speculating with.”
- The trick though will be to apply the break and the gas in a manner that keeps pricing static and not falling.
Tom Hancock of the Financial Times covered the new NGO regulation in effect in China.
- In a previous post I highlighted Edward Wong’s article on China’s new regulations on Non-Government Organizations (NGOs) requiring each NGO within the country to have an official sponsor. Well the policy is in effect as of January 1, and guess what…
- “China’s Ministry of Public Security (MPS) waited until last week to publish a list of eligible sponsors, meaning that almost none of the thousands of foreign non-profits in China – ranging from charities such as Greenpeace and Oxfam to funds such as the Ford Foundation – will meet the law’s conditions before the January 1 deadline.”
- Oh and there is no grace period.
- As a result organizations are dialing down their operations to shuttling out personnel before December 31.
- At issue is that “the law puts foreign organizations under direct supervision of Chinese police, who in the last two years have detained scores of human rights lawyers and cracked down on local groups advocating for reform via the courts. This month an office of the MPS promoted a video accusing foreign governments of using civil society to promote ‘color revolution’ in China.”
- Bottom line, “the law says: ‘Foreign NGOS carrying out activities within mainland China shall abide by Chinese laws, must not endanger China’s national unity, security or ethnic unity; and must not harm China’s national interests.'”
- As it stands “the MPS has said there are 7,000 foreign NGOs in China, suggesting it has a more expansive definition of the term than foreign experts who put the number closer to 1,000.”
Jacky Wong of The Wall Street Journal illustrated an interesting ploy by China Evergrande to sell equity that acts a lot like debt.
- In a word, shenanigans.
- “China Evergrande Group, the country’s largest developer by assets, said Monday that it has agreed to sell a 13.2% stake in its major subsidiary, Hengda Real Estate, to eight investors for 30 billion yuan ($4.3 billion). This values Hengda, which owns Evergrande’s core property development business, at $33 billion – almost four times the parent’s current market capitalization.”
- So the rest of the company is worth much less than $0?
- “The investment is basically a form of bridge financing in preparation for the company to list Hengda in mainland China, something the developer proposed back in October.”
- Basically, the company is “effectively guaranteeing the investors an average 7.8% yield for the next three years. That is more cash drain for a company that hasn’t had a full year of positive operating cash flow since 2009 and has net debt equal to more than four times its equity, counting perpetuals as debt, among the highest in the sector.”
Dave Gershgorn of Quartz pointed to the automation of Japanese white-collar workers in the insurance industry.
- “One Japanese insurance company, Fukoku Mutual Life Insurance, is reportedly replacing 34 human insurance claim workers with ‘IBM Watson Explorer,’ starting January 2017.”
- “Fukoku Mutual will spend $1.7 million (200 million yen) to install the AI system, and $128,000 per year for maintenance, according to Japan’s The Mainichi. The company saves roughly $1.1 million per year on employee salaries by using the IBM software, meaning it hopes to see a return on investment in less than two years.”
- “Watson AI is expected to improve productivity by 30%, Fukoku Mutual says.”
- “Artificial intelligence systems like IBM’s are poised to upend knowledge-based professions, like insurance and financial services, according to the Harvard Business Review, due to the fact that many jobs can be ‘composed of work that can be codified into standard steps and of decisions based on cleanly formatted data.’ But whether that means augmenting workers’ ability to be productive, or replacing them entirely remains to be seen.”

Graphics

WSJ – Daily Shot: Cities Where Rent Swallows Your Salary 12/29

WSJ – Daily Shot: Selfie-Fatalities 12/29

FT – China/US real estate: safe as houses – Lex 12/30

WSJ – China and the Debt-Refinancing Game in 2017 – Nathaniel Taplin 1/3

WSJ – Luxury Apartment Boom Looks Set to Fizzle in 2017 – Laura Kusisto 1/2

Featured

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

How China’s Insurance Crackdown Spawns More Risks. Anjani Trivedi. The Wall Street Journal. 4 Jan. 2017.

“Following a year in which Chinese insurers aggressively built risky and illiquid portfolios, acquired real estate, companies and stakes in companies at home and across the world, under loose regulation, China’s insurance regulator has taken to severe tightening measures in recent weeks. Regulators have effectively barred insurers from making risking investments and banned certain insurers and insurance products with high cash value and low protection.”

“The repercussions could cause trouble far and wide. Almost 60% of China’s wealth-management products are invested in bond and money-market funds and a growing portion of these products are backed by bonds. And, they account for almost 20% of banking-system deposits.”

“China’s unlisted insurers-infamous among them, Anbang-will now see their wealth-management, product-backed financing platforms squeezed under new rules that bar investing cash raised from investment products. With policyholder deposits accounting for more than 70% of written premiums, more asset-selling may be on the cards.”

Chinese insurers under pressure to rein in overseas deals. Henny Sender. Financial Times. 3 Jan. 2017.

Adding to the WSJ article.

“Regulators now say that any deal with a price tag of more than $5m needs approval; while big strategic acquisitions are likely to receive the nod, acquisitions of noncore assets, such as real estate, are not. Meanwhile, the slide in the renminbi, which makes diversification offshore more attractive, also makes deals increasingly expensive.”

“Until recently, many analysts expected Chinese insurers to increase their offshore activity.”

Further, due to low interest rates worldwide, insurance companies have been seeking higher return investment categories. As Boston-based consultancy Cerulli Associates notes “investments in the ‘others’ category – which includes listed and unlisted long-term equity investments, bank wealth management products, trusts, private equity, venture capital, loans and real estate – rose from 23.7% in 2014 to 34.2% in June 2016.”

“Fitch Ratings, meanwhile, is worried about the overall health of Chinese insurers, which have largely been overlooked amid concerns about the country’s banks. Its analysts noted that ‘the insurers have shifted to investing in riskier assets to sustain investment yields. This make their credit profiles more vulnerable to unfavorable capital market fluctuations and potential credit-quality deteriorations amid an economic slowdown.”

Thus considering these insurers will find it quite difficult purchase overseas assets with capital from China, they will have to already have the cash overseas, have a means to raise cash abroad, or they will need to sell overseas assets to pursue continued investments.

“Anbang, which does not have an offshore equity listing, has not sold any large overseas assets so far. People briefed on its plans said it would probably not proceed with an international bond offer after US ratings agencies suggested that it was likely to receive a non-investment grade rating.”

In fact, “Anbang may also have trouble finding the financing it needs to complete some of the overseas acquisitions it has already agreed (to). That in turn would crimp its ability to buy more.”

“In recent years, bankers with assets to sell have often counted on bidders from China to help push up the price. With commodity prices subdued (hurting SWF liquidity), and the US focused inward, it is not clear who will take their place.”

America’s Roster of Public Companies Is Shrinking Before Our Eyes. Maureen Farrell. The Wall Street Journal. 4 Jan. 2017.

“With interest rates hovering near record lows, big investment funds seeking higher returns are showering private companies with cash. Companies also are leaving the stock market in near-record numbers through mergers and acquisitions.”

“The U.S. is becoming ‘de-equitized,’ putting some of the best investing prospects out of the reach of ordinary Americans.”

“The number of U.S.-listed companies has declined by more than 3,000 since peaking at 9,113 in 1997, according to the University of Chicago’s Center for Research in Security Prices. As of June, there were 5,734 such public companies, little more than in 1982, when the economy was less than half its current size. Meanwhile, the average public company’s valuation has ballooned.”

“In the technology industry, the private fundraising market now dwarfs its public counterpart. There were just 26 U.S.-listed technology IPOs last year, raising $4.3 billion, according to Dealogic. Meanwhile, private U.S. tech companies tapped the late-stage funding market 809 times last year, raising $19 billion, Dow Jones VentureSource’s data show.”

“‘There’s no great advantage of being public,’ says Jerry Davis, a professor at the University of Michigan’s Ross School of Business and author of ‘The Vanishing American Corporation.’ ‘The dangers of being a public company are really evident.'”

“Among them, Mr. Davis and other say: having an investor base that clamors for short-term stock gains and being forced to disclose information that could be useful to competitors.”

“While it is difficult to quantify, there has been an explosion in private investment capital in recent years. Sovereign-wealth funds-pools of capital invested by nations-have roughly $7.4 trillion under management, more than double the $3.5 trillion they held in 2007, according to the Sovereign Wealth Fund Institute, a research and data firm. Assets under management at U.S. private-equity firms totaled $1.4 trillion, an increase of more than 30% since 2007 and nearly four times the tally in 2000, according to the most recent data from PitchBook, a data provider and research unit of Morningstar Inc.”

“Last year, 111 companies went public on U.S. exchanges, raising $24.2 billion, a dollar-volume drop of 33% from the previous year and the lowest dollar volume since 2003, according to Dealogic.”

“Meanwhile, M&A activity targeting U.S. listed companies has risen since 2012 to more than 9,300 transactions a year, on a 10-year rolling average. Before 2012, the average ranged from 8,000 to 9,200.”

“With fewer places for investors to spread their cash and more companies combining, the average size of a public company in the U.S. has swelled, hitting an all-time high of $4.7 billion in 2014… the average public company is more than three times as large as it was in 1997, after adjusting for inflation.”

Unfortunately for investors, it is unlikely that they’re going to be able to invest in a start-up with huge upside potential through the public markets…

Other Interesting Articles

Bloomberg Businessweek

Bloomberg – Wall Street, America’s New Landlord, Kicks Tenants to the Curb 1/3

Bloomberg – Harvard Academic Sees Debt Rout Worse Than 1994 ‘Bond Massacre’ 1/4

FT – French luxury hotels woo daytime lovers 12/29

FT – Chinese government enters storm over domestic filmmaking 12/30

FT – Stalling Chinese box office raises Hollywood fears 12/30

FT – Uber and Airbnb business models come under scrutiny 12/30

FT – Tesla falls short of vehicle delivery target in 2016 1/3

FT – Apple removes New York Times app from its China store 1/4

FT – Apple-SoftBank: noncore bets 1/4

FT – German push for home ownership drives price bubble fears 1/4

NYT – A Peek Inside the Strange World of Fake Academia 12/29

NYT – Uncertainty Over New Chinese Law Rattles Foreign Nonprofits 12/29

NYT – In a Brutal Year in Venezuela, Even Crime Fighters Are Killers 12/30

Visual Capitalist – Infographic: Vancouver Real Estate Mania 6/2/16

WSJ – The Chinese Theme-Park Honey Trap 1/3

WSJ – Shanghai Tower Fails to Meet High Leasing Hopes 1/3

WSJ – Slippery Logic to Russia’s Oil-Cut Claim 1/4

WSJ – Ignore Tesla’s Latest Slip at Your Peril 1/4

July 29, 2016July 28, 2016

July 22 – July 28, 2016

How much spare crude oil is there – hard to tell. Nontraded REIT sales struggling. There are a lot of dangers lurking in the Chinese P2P market, but the yield is just SO GOOD…

Headlines

FT – Singapore vows more ‘intrusive’ bank probes after 1MDB scandal 7/24. Turns out banks in Singapore were used to channel the more than $3.5bn siphoned from the Malaysian state investment fund.
NYT – Is China Stealing Jobs? It May Be Losing Them, Instead 7/22. “If anyone is claiming that China is still enjoying a healthy or robust jobs market, they have no idea what they’re talking about.” – Leland Miller, chief executive of China Beige Book International
NYT – Panama Papers Reveal Wide Use of Shell Companies by African Officials 7/25. Can’t say I’m surprised.
FT – A world map of subsidies for renewable energy and fossil fuels 7/25. Subsidies for “dirty” fuels (fossil fuels) were approx. $490bn in 2014 vs. subsidies for renewables at $112bn and another $23bn on biofuels.
Star-Advertiser – N. Korea: U.S. has crossed red line, declared war 7/28. By putting Kim Jong Un on the list of sanctioned individuals, N. Korea claims the U.S. has crossed the red line and should the U.S. and S. Korea hold its planned war games next month, it’s on like Donkey Kong – according to N. Korea.

Briefs

Financial Times journalist Gabriel Wildau highlighted that China’s insurance regulator has warned insurance companies from using policies as an ‘ATM’ for corporate buyouts.

Chinese wealth management products are looking a lot like the junk bonds used for corporate raiding in the late 1980s rather than the traditional insurance policies they are supposed to be.
“China’s insurance regulator has warned against insurers becoming ‘automatic teller machines’ for activist shareholders, in a veiled reference to the battle for control of China Vanke, China’s largest residential developer, by insurance conglomerate Baoneng Group.”
“We will let those that truly want to do insurance come and do insurance and absolutely not allow companies to become financing platforms and ‘ATMs’ for large shareholders.” – Xiang Junbo, chairman of the China Insurance Regulatory Commission
“There are major regulatory gaps that need to be addressed. These ‘universal’ products have absolutely nothing to do with insurance. Some of them are very risky, but commercial banks are distributing them, and people trust the banks.” – senior financial regulator

John Dizard of the Financial Times called attention to the dangerous precedence that was just set concerning Puerto Rican debt.

With Puerto Rico facing approximately a $2bn interest and principal payments due on its general obligation bonds on July 1 and not being able to make the payments, the U.S. Congress recently passed a law that was meant to give Puerto Rico a temporary reprieve from “legal sanctions by creditors so it could restructure its obligations in an orderly way, and to maintain essential services.”
Well, Puerto Rico took this reprieve to pay about half of the amounts due, only they chose to whom went the payments. “Puerto Rico did not pay any interest or principal on the most senior, or general obligation bonds, but did make payments on more junior bonds. The government also paid its employees’ pension funds $170m more than what was required for this year, despite the pensions supposedly being legally subordinated to bondholders.”
The thing is that US Treasury officials advised on some of this reprioritization… you can see the dangerous precedence this sets for municipal bonds…
“The bonds on which interest payments were made on July 1, such as the Puerto Rico convention center district and the Puerto Rico Highways and Transportation Authority, are disproportionately owned by bondholders on the island. Supposedly more-sophisticated mainland US investors had avoided these lower ranked issues on the misinformed premise that financial and legal analysis should outweigh political calculation.”

The Buttonwood column of The Economist highlighted a rather large potential problem the world is facing: the vanishing of working age adults…
- “The world is about to experience something not seen since the Black Death in the 14th century-lots of countries with shrinking populations. Already, there are around 25 countries with falling headcounts; by the last quarter of this century, projections by the United Nations suggests there may be more than 100.”
- “The big question is whether economic growth and rising debt levels go hand-in-hand, or whether the former can continue without the latter. If it can’t, the future can be very challenging indeed. To generate growth in our ageing world may require a big improvement in productivity, or a sharp jump in labor-force participation among older workers.”
Christian Shepherd of the Financial Times covered that China is now enforcing its ban on original news reporting.
- “A spokesman for Beijing Cyber Administration confirmed that state press reports that said conducting original reporting was a gross violation of the regulations (rule in place since 2005) and brought about ‘extremely nasty effects.’ The reports also said that the companies had been given a fixed period to ‘rectify’ the offending sites.”
- “The trigger for the shutdown, according to media analysts, was coverage of flooding in northern China which – according to the official count – has left 130 dead and racked up damages of more than Rmb16bn ($2.4bn) in Hebei province alone.”
- “The government does not want these platforms to provide their own news. They are only allowed to forward reports by outlets like Xinhua and the People’s Daily.” – Qiao Mu, a journalism professor in Beijing.

Special Reports

Graphics

FT – Renminbi drops to sixth in international payment ranking 7/20

FT – Tough outlook for Hong Kong property – 7/21

Visual Capitalist – The Illusion of Choice in Consumer Brands – 7/21

Bloomberg – Relief for Renters Will Prolong Fed’s Wait to Hit Inflation Goal 7/24

The Daily Shot 7/25

FT – Landscape shifts for pipeline operators – Ed Crooks 7/24

Economist – Buttonwood – Vanishing workers: Can the debt-fueled model of growth cope with ageing population? 7/23

WSJ – Why Pensions’ Last Defense Is Eroding – Timothy W. Martin 7/25

Economist – The Big Mac index: Patty-purchasing parity 7/23

Featured

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

How Much Oil Is in Storage Globally? Take a Guess. Dan Strumpf and Nicole Friedman. Wall Street Journal. 24 Jul. 2016.

“The historic fall in oil prices has created a pileup of inventories, much of it stashed in tanks in the U.S. and other industrialized countries that are committed to disclosing the latest tally, but millions of barrels of oil are flowing to locations outside the scope of industry trackers.”

“At the beginning of July, 23 supertankers capable of holding 43 million barrels of oil were anchored for a month or more in the Singapore straits, according to Thomson Reuters’s vessel-tracking service, up from 15 ships at the start of the year. If they were full, it would be enough to meet the U.S.’s oil needs for more than two days.”

“‘OPEC has stopped being a swing supplier,” said Antoine Halff, director of the oil market program at Columbia University’s Center on Global Energy Policy. ‘Given the uncertainty about whether shale-oil production in the U.S. can take the role of swing supplier, it falls on stocks’ to replace lost barrels in the case of a supply disruption.”

“Uncertainty around storage was highlighted after attacks on Nigerian oil facilities in May and June. Following the assaults, some analysts forecast that Nigerian output would fall, which helped push oil prices above $50 a barrel. But shipping data showed Nigerian exports holding steady above 1.5 million barrels a day, according to data provider Windward.”

“Where did the exports come from?”

“In China, another storage mystery is unfolding. Government data show oil imports rising at a faster rate than refiners are processing it. The figures suggest the country has built a surplus 160 million barrels during the first half of the year, enough to meet its oil needs for about two weeks.”

“Analysts believe those barrels have gone to commercial tanks or to government-owned strategic reserves.”

“The distinction is critical. If most of the oil has gone to strategic reserves, demand could shrink once the tanks reach capacity, which some analysts say could happen this year.”

Nontraded REIT sales fall off a cliff as industry struggles to adapt. Bruce Kelly. InvestmentNews. 24 Jul. 2016.

“Over the first five months of the year, sales of full-commission REITs, which typically carry a 7% payout to the adviser and 3% commission to the broker-dealer the adviser works for, have dropped a staggering 70.5% when compared with the same period a year earlier, according to Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs.”

“Their recent sharp drop in sales is part of a longer cycle. The amount of equity raised, or total sales of nontraded REITs, has been sinking by about $5 billion a year since 2013, when sales hit a high watermark of nearly $20 billion.”

As a result, independent broker-dealer company commissions are down in tandem. “Industry bellwether LPL Financial said in its first-quarter earnings release that commission revenue from alternative investments, the lion’s share of which comes from nontraded REITs, was just $7.8 million, a staggering decline of 86.7% when compared with the first quarter of 2015.”

Four key factors have hit the industry. The blowup of Nicholas Schorsch’s REIT empire, recent FBI raids of United Development Funding (after hedge fund manager Kyle Bass called the company a Ponzi scheme), the Financial Industry Regulatory Authority Inc. rule 15-02, and the new DOL fiduciary rule.

The first two basically have brought the public and regulatory spot light to the industry and has shown the light on the less savory parts of the industry and its excessively high fees.
Finra rule 15-02 basically have caused an increase in transparency in the fees that the industry charges, now making them more accurately reflected on account statements.
And the DOL fiduciary rule “which will be phased in starting April, requires advisers to select investments for retirement accounts that are in the client’s best interest. Investments with high commission structures might not pass that test.” However, this rule also has a flip side, nontraded REITs may now be placed in retirement accounts (also as of April thanks to a Dept. of Labor ruling).

On the plus side, the industry is changing. New T shares are meant to reduce upfront commissions while spreading them over time (still high commissions) and larger financial institutions like Blackstone Group and Cantor Fitzgerald & Co. are looking at getting into the industry. Hence references are made to the evolution of the mutual fund industry that also started out with high commission structures.

As Allan Swaringen, CEO of Jones Lang LaSalle Income Property Trust, put it “nontraded REITs have lived almost exclusively across independent broker-dealer channels. I don’t think that’s a model that will be successful going forward. It has to be sold by a variety of advisers.”

Chinese P2Ps plagued by flaky guarantees (fintech blog). Gabriel Wildau. Financial Times. 25 Jul. 2016.

“‘It’s just too easy to attract investment. That’s why it draws so many scammers,’ says Michael Zhang, chairman of Beijing-based Puhui Finance, a large P2P platform with a clean reputation.”

“Beyond the problem of outright fraud is the thornier issue of raising risk awareness in a culture where debt investments are traditionally seen as carrying an implicit guarantee from issuers who are mainly state-owned institutions.”

“Dianrong.com, one of China’s largest P2P platforms, investment products carry a label that says ‘multiple guarantees.’ While the Chinese term used – baozhang – is distinct from the word for legally binding guarantees, it still translates as ‘guarantee’ or ‘safeguard.’ Many platforms now divert a portion of borrower interest payments into a ‘reserve fund’ used to protect investors from defaults, an arrangement that looks a lot like bank capital.”

“Soul Htite, the co-founder of Dianrong.com who previously co-founded US-based Lending Club, says that in an investing culture where defaults are rare, Chinese investors tend to choose products purely based on yield.”

“In the US we have a very good history of investing and people understand risk. (But) one problem we had in the first couple of years with Chinese investors is, we noticed that when you listed all the loans – this one yields 8% and another one yields 14% – people put all their money on the 14%. And we explained, ‘It’s not guaranteed, it might default.’ Still they put their money there. So that’s when we started forcing diversification on them.” – Soul Htite

Other Interesting Articles

Bloomberg Businessweek

The Economist

Bloomberg – Gasoline Prices Around the World: The Real Cost of Filling Up 7/18

Business Insider – Hong Kong is ‘stuck between a rock and a hard place’ 7/23

FT – Brazil sees strong demand for bonds as market rallies 7/22

FT – Moscow’s building boom belies recession 7/22

FT – Thermal coal bears gripped by Chinese capacity squeeze 7/24

FT – Balance of power tilts from fossil fuels to renewable energy 7/25

FT – Chinese default exposes creditor anger at political interference 7/26

FT – Fossil fuels have had an aeon’s head start 7/26

NYT – Justice Dept. Rejects Account of How Malaysia’s Leader Acquired Millions 7/22

NYT – Uncle Sam Wants You – Or at Least Your Genetic and Lifestyle Information 7/23

NYT – Delusions of Chaos (Paul Krugman) 7/25

June 10, 2016June 10, 2016

June 3 – June 9, 2016

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

WSJ – How to Time a Chinese Banking Tipping Point (2019) 6/7

WSJ – China’s Property Prices Rebound, but Stocks Tell Another Story 6/7

WSJ – Rock-Bottom Bond Yields in Europe Hit All-Time Lows 6/8

WSJ – REIT Surprise: How Real Estate Crushed the Stock Pickers 6/8

Yahoo Finance – JPMorgan: The odds of a recession starting in 12 months has hit a high 6/3

May 6, 2016May 6, 2016

April 29 – May 5, 2016

Beware of ‘investments’ being peddled by Chinese banks. China no longer getting the same bang for the buck. Industry concentration tends to result less money going to employees.

Headlines

FT – Will duration risk rear its head for bond investors? 4/28. “The duration on the Barclays global aggregate bond index hit a record high of 6.8 years this month. At the same time, the yield on the index has crumbled to 1.44% from 4.24% a decade ago.
NYT – China Lending Inflates Real Estate, Stocks, Even Egg Futures 5/1. Bottom line, money finds a home.
FT – Puerto Rico suffers most significant default in debt crisis 5/2. Puerto Rico just declared a moratorium on the Government Development Bank obligations, next up general obligation bond payment due July 1, will they make it?
NYT – American Pharoah Is Already a Champion at the Stud Life, Too 5/3. Some of you may recall the Bloomberg article about the concerns and hope about American Pharoah’s next act, well turns out he’s doing just fine.

Briefs

Lucy Hornby of the Financial Times drew attention to the reality that not all Chinese provinces are posting growth, in fact some are experiencing outright decline.

“The economy in China’s industrial province of Liaoning contracted in the first quarter, making it the first region to register negative growth in seven years as a severe downturn in energy and heavy industry sectors hits hard in the country’s north-east.”
“China’s national growth clocked in at an annual rate of 6.7% in the first quarter, but that headline figure masks sharp discrepancies between provinces reliant on heavy industry, mining or oil, and the southern and eastern regions with more diversified economies.”
“Chinese newspaper 21st Century Business Herald reported this week that Liaoning would book a 1.3% contraction in real GDP for the quarter…”

Daniel Thomas of the Financial Times covered that Global smartphone sales fell for the first time. It was bound to happen eventually.
- “Global smartphone shipments fell for the first time as “iPhone fatigue” dragged down sales for Apple’s once-unstoppable franchise amid a general weakening in the market for new devices.”
- “After close to a decade of stellar growth, analysts say a tipping point in the smartphone market has been reached as most people already have a phone, phablet or tablet device.”
- “Apple popularized the smartphone market with the launch of the first iPhone in 2007. The US group said this week that it had suffered a 16% fall in unit sales in the first quarter and warned that the next quarter could be even worse…”
- “Apple was not totally to blame, however, as global smartphone shipments fell 3% in the first quarter of 2016 to 334.6m, down from 345m units in the same quarter of 2015. The quarter was the ‘first time ever since the modern smartphone market began in 1996 that global shipments have shrunk on an annualized basis.'”
- “As the China market matures, the appetite for smartphones has slowed dramatically as the explosion of uptake has passed its peak.” – IDC, a research firm.
For those of us in Hawaii, we’re quite familiar with the concept of leasehold property, and generally if you can avoid it for your primary residence you do. Well in China all residential property is leasehold and some of those lease terms are rolling over in short order. Lucy Hornby of the Financial Times discusses the angst this is causing.
- “The simmering issue of property rights in China has burst into the open with the upcoming expiry of residential leases in several wealthy cities and a contentious plan to charge homeowners to renew them.”
- When the Communist party entered into power in 1949 property ownership was abolished only to be renewed via a mixed bag of leasehold rights in the 1980s and 1990s. Now these rights are “…in the spotlight with the upcoming expiry of 20-year residential land use rights in Wenzhou in eastern China… Leases granted in the 1990s will also soon come due in Shenzhen and other coastal cities, although the more common tenure of 70 years means most of the current generation of urban homeowners will hand the problem on to their heirs.”
- “Wenzhou has asked homeowners to pay up to a third of their homes’ value to renew their rights, according to a city government document, sparking an outcry across China. The Property Law of 2007 says land-use rights can be renewed but does not specify the criteria for doing so.”
- “Many Chinese bought their homes under the expectations that the long leases would be transformed into full ownership.”
Enough with all this bad news. No really, as Lingling Wei reports in the Wall Street Journal, China is pressing Economists to brighten their outlooks.
- “Securities regulators, media censors and other government officials have issued verbal warnings to commentators whose public remarks on the economy are out of step with the government’s upbeat statements, according to government officials and economic commentators with knowledge of the matter.”
- As Scott Kennedy, a deputy director at the Center for Strategic and International Studies (a Washington think tank), puts it “vigorous debate among economists and public confidence in this conversation is critical if China is to successfully navigate the choppy economic waters. If the party and government only want to hear good news, then they’d be better off hearing nothing because the value of the words would be less than zero.”
- “While restrictions on foreign media have always been tight, they are becoming tighter, with a growing list of foreign publications having their websites blocked from view within China, including The Wall Street Journal.”

Special Reports

FT – China’s robot revolution – Ben Bland 4/28
FT – Rise of the robots is sparking an investment boom – Richard Waters and Tim Bradshaw 5/2
Mauldin Economics – Where’s the Beef? “Lies, Damned Lies, and Statistics” – Rob Arnott and Lillian Wu 5/4
Washington Post – America’s great housing divide: Are you a winner or loser? 4/28
- Interesting interactive graphic to see how much home values have changed in your neighborhood since 2004.

Graphics

FT – Will duration risk rear its head for bond investors? 4/28

FT – Rise of the robots is sparking an investment boom – Richard Waters and Tim Bradshaw 5/2

FT – US producers Ultra and Midstates fall victim to low oil price 5/3

Featured

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

Chinese banks disguise risky loans as ‘investments’. Yuan Yang and Gabriel Wildau. Financial Times. 28 Apr. 2016.

“Chinese banks are using complex financial engineering to disguise risky loans as ‘investments,’ rendering traditional risk metrics such as non-performing loan ratios virtually useless.”

“Analyst say most of these assets are in effect loans but are structured to appear as holdings of investment products issued by a third party. Such financial alchemy allows banks to evade regulations designed to limit risk.”

“Banks are required to set aside fewer provisions against ‘investment’ assets than traditional loans.”

“Because the investments are not classified as loans, defaults are not reflected in these banks’ non-performing loan ratio. Many analysts believe China’s official NPL ratio of 1.67% is all but irrelevant in assessing banks’ overall asset quality.”

“Fitch, the rating agency, believes this practice, also known as channel lending is used to provide credit to the likes of ‘cash-strapped property developers and local governments’ that cannot obtain formal loans.”

“Now that overcapacity sectors such as steel and cement are facing restrictions on formal borrowing, channel lending could become even more important to zombie companies.”

“Banks classify the assets they hold in these third parties as ‘investment receivables’ or ‘debt receivables,’ not loans.”

“Shadow lending in debt receivables increased 63% to Rmb14tn ($2.16tn) last year, according to an analysis of 103 Chinese banks by Wigram Capital Advisors, equivalent to 16.5% of the formal loan book.”

“Aggressive balance sheet expansion by midsized lenders has also increased their systemic importance to China’s overall banking system. The big four’s share of total banking assets has fallen from 51% in 2009 to 38% at the end of 2015, according to Wigram’s calculations.”

China’s fizz goes flat, even with far bigger credit stimuli. James Kynge. Financial Times. 4 May 2016.

Bottom line: “money is losing the power to energize important economic muscles. Asset prices in the all-important property market – which drove China’s recovery from the 2008 financial crisis – are now so high relative to household incomes that it is hard to envisage another sustained rally.”

“On average, it would take 25 years, 33 years, 36 years and 19 years of household income in Beijing, Shanghai, Shenzhen and Guangzhou respectively for a family to buy a 90 sq m (969 sq ft) apartment, according to calculations by Mizuho Securities in Hong Kong. By contrast, London house prices are 9.2 times average earnings for first-time buyers, according to Nationwide data.”

“The International Monetary Fund estimates that $1.3tn in corporate debt – or almost one in six of the business loans on Chinese banks’ books – was owed by companies that brought in less in revenues than they owed in interest payments.”

“So unleashing a new tide of credit to ease debt problems is ‘like smoking opium to look healthy,’ said Professor Li Weisen of Fudan University, according to the South China Morning Post.”

“China expanded total domestic credit by Rmb12tn, or 34% of gross domestic product, in the year to November 2009 – significantly less than the Rmb27.9tn, or 40% of GDP, in the year to February this year, according to Bernstein Research.”

“But while the 2009 stimulus reinvigorated growth from 6.1% in the first quarter to a full-year GDP growth rate of 9.2%, the flood of credit seen in the year to February has been accompanied by a gentle decline in GDP headline numbers.”

Rising Profits Don’t Lift Workers’ Boats. Peter Coy. Bloomberg. 5 May 2016.

“Big business is getting bigger, and workers’ slice of the economic pie is getting smaller. Those trends have bred resentment toward large corporations. Now research shows a surprisingly tight link between the two phenomena: The share of the pie that goes to workers has been shrinking most in precisely those industries where ownership is becoming more concentrated.”

“Increasing industry concentration ‘may explain one of the transcendent issues confronting the U.S. economy,” namely labor’s declining share and profits’ rising share of the value a company creates, Michael Feroli, the chief U.S. economist at JPMorgan Chase, wrote in an April 25 research note.”

As an explanation of the trend, “Feroli says, is that industries with more concentrated ownership can charge higher prices. They pay out their extra profits to shareholders, or to the government in taxes, but not to workers.”

“One hopeful sign for workers: The share of national income going to wages and salaries has rebounded since 2012, erasing about 30% of its post-1997 decline.”

Other Interesting Articles

Bloomberg Businessweek

The Economist