Global Deflation Alert: Chinese Credit Creation Tumbles To 27 Month Low

At the end of November, we showed a troubling observation for China - and global - macro watchers from Axiom's Gordon Johnson: for the first time ever, record Chinese credit creation had failed to stimulate the economy, and in fact the exact opposite appeared to be unfolding – economic growth is slowing across a number of data points despite massive new credit injected into the economy over the past year.

In economic terms, this meant that China's credit impulse had hit rock bottom, and was perhaps at its lowest level ever, something UBS hinted at over the summer when it showed that no matter how much credit China creates, it can no longer keep the first derivative, i.e. impulse, surging at is had in the past despite record amounts of nominal debt created. Quite the contrary.

And while one can debate the definition of credit impulse, and its impact on the global economy, one thing is clear: China's credit creation - the growth dynamo of the entire world - is rapidly slowing. We got the latest confirmation of this earlier this week, before last night's battery of economic data which painted a very mixed picture of the Chinese economy, with retail sales missing, while IP and CapEx barely met expectations...

... when the PBOC reported November new loans of Rmb1.12Trillion and Total Social Financial of Rmb1.6Trillion. While on the surface both numbers appeared solid, beating consensus, a careful read between the lines showed some very troubling details which confirmed that not only was November not the upward "turning point" for monetary policy some expected it to be, worse, China's credit slowdown was accelerating.

For one, adjusting for municipal bonds and equity raising, as Deutsche Bank did, showed that system credit growth slowed further to 14.4% yoy from 14.9% the prior month.

Putting this number in context means that adjusted credit growth (including municipal bonds) of 14.4% yoy this month was the slowest in the past 27 months. In fact, the last time Chinese credit was growing this slow, global markets were about to get rocked and only the Shanghai Accord of 2016 prevented a global bear market.

Looking at the breakdown, loan growth accelerated to 13.3% yoy (vs. 13.0% in Oct), while shadow banking and corporate bond financing remained muted. Shadow banking components (entrusted loans, trust loans and undiscounted bills) made up only 11% of Nov TSF versus 22% in 1H17. This suggests that following a series of tightening rules, banks are bringing off-BS shadow banking into on-BS. What is notable, is that de-levering shadow credit, cutting off financing layers and bringing debt creation into the "open", M2 growth actually rebounded from a historical low of 8.8% yoy in Oct to 9.1% yoy. The M2/GDP ratio stayed flattish mom at 207% versus a record high of 210% in March.

The slowdown in credit creation wasn't only at the aggregate level: looking at banks’ balance sheets, asset growth dropped below 10% yoy for the first time ever...

... dragged by shrinkage in interbank funding.

Looking at the recipients, short-term household loans almost doubled last month from a year ago as regulators clamp down on other opaque forms of borrowing to tame shadow banking sector risks. According to Reuters, new short-term household lending, which includes credit card debt and car loans, rose more than 80 percent to 202.8 billion yuan ($30.65 billion) in November from a year ago, and nearly trebled from the previous month.

Recently China has been cracking down on risks to the financial system due to excessive leverage, and has recently zeroed in on fast-growing, loosely-regulated micro-lenders that make unsecured cash loans. The crackdown on micro-lenders followed warnings from the authorities on rising household debt, which includes mortgages and consumer loans.

As Reuters adds, the jump in demand for bank short-term household loans also comes against a backdrop of Beijing trying to temper speculation in the property market by tightening the loan-to-value ratios for mortgage loans in some cities. As a result, the tighter mortgage rules have led to the widespread ‘re-purposing’ of short-term household loans for the deposit a homebuyer has to make to get mortgage, say analysts and people familiar with the matter.

“Short-term lending growth really starts to pick up just as property (purchase) controls start to weigh on long-term lending growth,” said Julian Evans-Pritchard, an economist at Capital Economics. The surge in such loans suggests that “households are finding ways around some of those mortgage restrictions using short-term credit,” he added.

Short-term household credit has also become more accessible, with Chinese lenders swapping struggling corporate borrowers for more promising retail borrowers as this allegedly carries relatively lower risk to their balance sheet and asset quality.  “It’s hard to bring it down because it’s convenient for banks ... it’s cheap in terms of capital and in terms of provision,” said Alicia García Herrero, chief economist for Asia Pacific at Natixis.

Ultimately, local banks face a choice: continue with shadow lending, or hand out money to households. Having done the former for years, China's financial system is now shifting to the latter.

“Of course, it could create problems down the road because there’s too much concentration on the mortgage loan,” she noted. “We’re not there yet because this (household loans) is only 30-plus percent of Chinese banks’ loan books.”

The surge in question in short-term retail loans - at the expense of traditional, long-term loans - is shown in the charts below. Putting in context, Chinese household debt-to-GDP rose to 47% in the second quarter of this year from 39% in the same period two years ago, according to the Bank for International Settlements.

Household loans as a proportion of overall China bank lending is expected to grow by a quarter this year, versus 7 percent growth for corporate loans, according to a Natixis report. The bad loan ratio of household debt is significantly lower than it is for businesses.

Separately, and as discussed on many occasions in the past, China has launched probes into consumer loans that are being misused for home purchases, warning they can’t be used to “fuel property bubbles”, a senior banking official said in September.

Essentially, what China is doing, is now that it has filled up the shadow conduits with debt to the point where they pose a systemic risk, Beijing is hoping to flood the world's largest population with debt as the last recourse to keep the debt game going for a few more years; the good news is that one decade after the US great financial crisis which was catalyzed by record household and consumer debt, we know how it all ends.

* * *

Yet going back to the beginning, the biggest irony in all this is that China's quiet attempt to redirect credit formation while injecting massive amounts of loans is still not enough, as the following chart of China's credit impulse vs home prices shows.

In the end, whether China's deleveraging is premeditated or accidental doesn't matter: a few more month of China's credit impulse collapsing and it will be too late to prevent a hard landing, first in China where real estate was, is and will be the most popular and important asset, and then the rest of the world. As we explained in "Why The Fate Of The World Economy Is In The Hands Of China's Housing Bubble", to understand what the world economy will do in 6-9 months you only have to follow China's debt creation and housing market today.

And right now, both of those are headed straight down, and the worst is yet to come: as Deutsche Bank sumamrizes in its latest snapshot of China's banking system, "we are likely at most halfway through the financial deleveraging process. New regulations on asset management and liquidity risks will be phased in and more rules will probably follow."

Which means even less credit creation, even faster slide in property prices, and even greater global credit deflation which is coming just as the world's central banks are poised to tighten financial conditions expecting a deluge of inflation. The result will be another economic crash in the coming year.

Fonte: qui

Tensions Escalate As Indian Drone Crashes In China

Reuters said the Chinese have expressed “strong dissatisfaction” with India over the recent crash of an Indian unmanned aerial vehicle (UAV) in Chinese territory.

The Indian Army’s official statement has said the UAV was on a training mission and lost contact across the Line of Actual Control (LAC) in the Sikkim area.

According to Republic World, an Indian English-language media outlet,

The defense ministry said the Indian border security personnel, as per standard protocol, immediately alerted their Chinese counterparts to locate the UAV and they later reverted with its location.

“An Indian UAV which was on a regular training mission inside the Indian territory lost contact with the ground control due to some technical problem and crossed over (to) the LAC in the Sikkim Sector,” the defense ministry said in a statement.  

On the other hand, China’s defense ministry said in a statement the Indian UAV had crashed in “recent days” but the ministry did not give specifics..

Zhang Shuili, a military official in China’s western battle zone command, said in the ministry statement, “This action by India violated China’s territorial sovereignty. We express strong dissatisfaction and opposition.”

China and India have had deep distrust over their disputed border, which triggered a military conflict in 1962. Just recently, both sides confronted each other between the June and August timeframe this year- at one instance an all-out brawl was caught on video as troops battled each other on the heavily contested border (see: Video Emerges Showing Clashes Between Indian, Chinese Soldiers).

While details are still murky, it is believed the downed drone could have been a Searcher Mk II or a Heron – both imported from Israel. In April, India received its first Heron TP-armed drones from Isreal, giving the country the capability to carry out cross-border strikes.

Avm Manhoan Bahadur, editor of India’s The Print, explains here are four reasons why this loss is worrisome, irrespective of the type of the UAV, 

First: it is the loss of an aviation asset that is difficult to come by. The Heron/Searcher is imported from Israel and to get a new bird as a replacement would take years to process in our bureaucratic maze.

Second: while we would be one UAV less, it is the loss of a reconnaissance capability that would hurt operationally. A UAV, especially of the Heron class, brings with it high altitude transit and reconnaissance capability, which is vital in our northern borders. Flying inside national airspace, the payloads carried by the Heron can look across the border without the adversary realising that it is being snooped on; it would paint as a blip on his radar without him able to do anything about it. The closer the flight path is to the border, and if across, better is the quality of information that would be available.

Third: if it has fallen into unwanted hands, it is really worrisome. The Chinese would surely strip the payload for its technology and improve their own.

It is a well-known fact that Israeli electronics are one of the best in the world, while those of China are not. Even though Israel would not have sold their latest version of the payload to India, it would be safe to assume that the Chinese engineers would be eager to get a hand on the electronics.

The Chinese are known to aggressively pursue getting hold of western technology. They reportedly got hold of the electronics and stealth data of the F-117 shot down in March 1999 during the NATO bombing of Yugoslavia. There are reports they had a look at the American Special Forces H-60 stealth Blackhawk helicopter that crashed during the Osama bin Laden raid in Abbottabad. 

Bahadur asks the difficult question, was the UAV shot down? If so, tensions are about to heat up on the Line of Actual Control (LAC) in the Sikkim area.

Last, but most importantly, why did the ground control lose command of the UAV? If it was a link loss, then the UAV would have come back on its own due to the safety feature of ‘get back home’ logarithms that kick-in. So, if that did not happen, was it shot down from ground or by a Chinese aviation asset – fighter or helicopter? If yes, it would imply that its position was compromised by a radar/acoustic or visual signature – all things that the court of inquiry would be looking into (incidentally, an IAF Searcher was lost to a Pakistani F-16 in 2002 across Amritsar).

If this was not the case, was the control taken over by spoofing of the radio link by the Chinese, as was supposedly done by Iran’s ‘cyber warfare units’ on 4 December 2011 when an American RQ-170 Sentinel UAV was recovered by them in a fairly undamaged condition? If this was the case, it would be a very serious occurrence, as we would have to revamp and overhaul UAV SOPs for operations near the border, as also look at the electronic warfare susceptibility of the UAVs with us.

The most re-assuring news (if that can be called as such) would be that the UAV had some technical defect, like an engine fault, which made it lose height and make it unrecoverable or return home in the automatic mode. Or that it crashed so hard that its electronics were totally destroyed on impact. But that would be wishful thinking.

7 Dicembre 2017

Fonte: qui

China: Systemic Risk Surges As HNA's High Coupon Borrowing Binge Accelerates

In early November 2017, we returned to one of our favourite subjects, systemic risk in China related to its big four highly-indebted conglomerates, HNA, Anbang, Evergrande and Dalian Wanda. In particular, we asked whether the extortionately high coupon of 9% on an HNA dollar bond issue, with less than one year to maturity, marked the beginning of China’s Minsky moment? As we noted at the time, HNA has $28 billion of short-term debt maturing before the end of June 2018, much of it accumulated during an acquisition binge over the last two years, which has seen it become a major shareholder in companies such as Deutsche Bank AG and Hilton Worldwide Holdings.

Speaking to Bloomberg at the time, Warut Promboon, managing partner at credit research firm, Bondcritic, noted...

“Nine percent is really high for one year. Basically, it tells you that the worry is real."

In a sign that HNA is under pressure, both from the Chinese government and its creditors, CEO Adam Tan announced last week that the company was reversing its previous strategy. From Reuters.

HNA Group CEO Adam Tan said the acquisitive company is making adjustments to conform with national policies, and has sold some investments and real estate projects to improve its liquidity, domestic media reported on Tuesday.

Tan said the company would not invest in those areas not backed by the government, while supporting Beijing’s Belt and Road initiative, the 21st Century Herald reported. “Companies cannot invest chaotically overseas, because chaotic investment creates trouble,” Tan was quoted in a separate article by the media portal Sina.com.

HNA is already in trouble, the question is how much? The group is planning an IPO of Gategroup Holding AG, an airline catering company it only purchased in 2016 for $1.5 billion, next year. However, its interest expenses have been rising rapidly and paying 9% coupons is only going to make it worse.

Meanwhile, it continues to tap bond markets at high rates, this time paying 8.2% for an issue by a subsidiary of Hainan Airlines, the core business from which HNA developed. According to Bloomberg, units of HNA Group Co. are stepping up fundraising in the local bond market even as borrowing costs soar, adding to concerns about the Chinese conglomerate’s debt burden. Yunnan Lucky Air Co., a unit of Hainan Airlines Holding Co. -- HNA’s flag carrier -- sold a 270-day yuan bond to yield 8.2 percent last week, the highest coupon rate ever for the Yunnan airline. Tianjin Airlines Co., another subsidiary of Hainan Airlines, issued similar-maturity notes at the highest coupon rate in five years in November.

As Bloomberg notes, while other Chinese companies have cancelled bond issues, HNA doesn’t have that luxury.

While surging onshore bond yields last month forced Chinese companies to cancel the most bond offerings since April, HNA’s units didn’t slow their pace of financing. They revived debt sales from November, following a lull after news emerged in June about a crackdown by China’s banking regulator. The accelerated fundraising suggests a need for money and may hurt the conglomerate’s credit profile, according to credit research firm Bondcritic Ltd.

“They just keep piling on debt,” said Warut Promboon, managing partner at Bondcritic. “It’s not going to work.”

Two calls to Hainan Airlines’ public relations officers weren’t answered. There were no replies to questions sent via text messages.

The flood of issues from constituents of the HNA group is expected to continue, assuming that bond markets are amenable.

Hainan Airlines said last week that it is planning to sell 1 billion yuan of perpetual bonds on Dec. 6. That would be its third note sale in the local Chinese market in a month, according to Bloomberg-compiled data. In the carrier’s most recent sale of onshore securities last month, the company, which has top ratings from local credit assessors, issued local bonds at yields equivalent to junk notes in the nation.

Another HNA unit, Sanya Phoenix International Airport Co., is planning its third bond sale in three weeks on Monday, according to a statement on Nov. 29.

During his presentation last week, CEO Adam Tan commented that “Each of our business groups has its own cash flow management”. However, if Hainan Airlines is paying junk rates despite its “top” local ratings, it suggests that creditors are assessing risk from a group perspective…and unfavourably. Last week, Bloomberg noted that S&P cuts the HNA Group’s credit rating to five times below junk, citing its significant debt maturities, rising borrowing costs and proposed acquisition of New Zealand’s UDC Finance (will it ever learn).

S&P said on Wednesday it lowered HNA’s credit profile by one notch to b, or five levels below investment grade, from b+. The change was disclosed in a report by S&P on New Zealand’s UDC Finance Ltd., which HNA is seeking to buy.

“HNA Group has significant debt maturities over the next several years and its funding costs are meaningfully higher than that of a year ago," Andrew Mayes and Sharad Jain, analysts at S&P, wrote in their report. "We will closely monitor HNA Group’s access to capital markets and funding costs to determine whether additional actions are necessary.”

As to Australia & New Zealand Banking Group Ltd.’s UDC Finance, S&P said it may cut the company’s long-term debt rating by four notches to a junk level of BB- from BBB if its sale to HNA is completed. The deal, announced in January, has yet to be completed pending approval from New Zealand’s overseas investment approvals board.

It’s possible that HNA is approaching the “catastrophic margin call”, from its practice of pledging its own shares and those of its investments, which we first postulated in July 2017 in “A Reverse Rollup From Hell’: China's ‘Boldest Dealmaker’ Faces Margin Call Disintegration”. From our post.

…while most Chinese companies pledged "only" their own shares to get loans, a handful of companies also used shares of the acquired companies as pledged collateral. This is precisely what HNA Group did, which now faces not only growing regulatory scrutiny from Beijing that threatens to spook bond investors and raise HNA’s financing costs, but also send its shares plunging as holders are forced to liquidate even as most of the shares pledged to fund its buying spree are already declining, accelerating its demise. And, in a scenario that can only be dubbed as a "reverse rollup from hell" - on steroids and margin - one that would make even Valeant blush and snicker, if the value of its collateral, i.e. stock price, falls enough, HNA will soon be forced to sell its holdings to repay debt, thereby resulting in the disintegration of the company.

HNA is a private company, hence a detailed breakdown of its borrowing position and its share pledges is not available. However, the circumstantial evidence remains highly negative and the systemic risk it poses for China is likely rising not falling.

Fonte: qui