Shanghai Limits Individual Purchases Of Risky Bonds As China Overtakes US As Biggest Corporate BorrowerSubmitted by Tyler Durden on 06/16/2014 22:24 -0400
With China's shadow banking system's collateral chain's collapsing amid government crackdowns on the ponzi, the 'desperate for liquidity' borrowers have increasingly turned to global capital markets' suckers to fund the next malinvestment. As China's currency becomes more internationalized and yields around the world collapse (thanks to central bank largesse), demand from investors has driven, for the first time ever, the Chinese corporate bond market has overtaken the United States as the world's biggest. As S&P warns, this is raising global credit risk as "as much as 10% of global corporate debt is exposed to the risk of a contraction in China's informal banking sector," or around $4-$5 trillion, "causing overall corporate risk to increase globally," and it's not expected to slow anytime soon. It appears the authorities are starting to recognize the bubble as they plan to 'limit individuals' purchases of risky bonds'.
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Over 1 in 5 homes (with $674 billion of mortgages) in China stand empty... and if you think that urbanization will fix that, as WSJ reports, a 10 percentage point rise in the urbanization rate (already at 54%) would result in only a 2.6% drop in vacancy rates. China has a major over-supply issue thanks to property developers who had rushed into the market to build homes, which have been a popular investment as prices seemed bound to keep rising. But now, as Vanke recently warned, things are changing and "the golden era" of China's property market are over. The vacancy rate of sold residential homes in urban areas reached 22.4% in 2013 and as new home prices are slashed to move product, a 30% drop would leave 11.2% of Chinese homes underwater on their mortgages...
Over a year ago we were the first to bring the topic of China's shadow banking system's problematic rehypothecation issues to the general trading public. In "The Bronze Swan Arrives: Is The End Of Copper Financing China's "Lehman Event"?" we explained how the Chinese commodity financing deals (CCFDs) worked and how they would inevitably be a systemic event for the nation so dependent on the shadow banking system for its credit (and its "growth"). The day has arrived when the Bronze Swan is landing (and it's unlikely to be soft). As we have discussed recently, the probe into 'missing' collateral (or multiple-used collateral) at China's Qingdao warehouse is a major problem... and now Goldman confirms, the Qingdao situation likely to continue ongoing CCFD unwind and has the potential to leave foreign banks with undercollateralized loans and/or losses.
On the heels of growing contagion concerns regarding shadow banking collateral and the "rehypothecation evaporation" and this weekend's 'odd' Chinese trade data (big drop in imports, no doubt impacted by dramatic commodity invoicing swings), the PBOC has fixed the Chinese currency 0.36% in the last 2 days... the biggest strengthening in the currency since October 2012. It is unclear for now exactly what is going on but we suspect the panic button outflows as banks pull credit and unwind CCFDs are forcing China's hand to offset CNY selling pressure... and of course China does it in grand style.
While we have warned about the problem with near-infinitely rehypothecated physical/funding commodities/metals, be they gold or copper, many times in the past, and most recently here, it was only this week that China finally admitted it has a major problem involving not just the commodities participating in funding deals - in this case copper and aluminum - but specifically their infinite rehypothecation, which usually results in the actual underlying metal mysteriously "disappearing", as in it never was there to begin with. It would appear our fears of global contagion (through various transmission channels) are now coming true as WSJ reports that as many as a half-dozen banks are trying to determine whether the collateral for loans they made to commodities traders was used fraudulently by a third party to obtain other loans. As we detailed previously, it appears the day when the Commodity Funding Deals finally end is fast approaching... and as we note below, why that will certainly be a watershed event.
The US Dollar, gold, and oil closed the week unchanged... Treasury yields rose 6-8bps on the week... and the Russell 2000 had its best week in 2014... Sure, why not? VIX was crushed back to a 10-handle as managers lifted hedges and the Tepper-induced short-squeeze from yesterday followed through (+2.5% against a 1% rise in the S&P). The Dow and S&P 500 both closed at record highs (notably rich to the Fed balance sheet). Volume was 20% below average (and that was a payrolls day!). Copper tumbled over 2% - its worst week in 3 months as China's warehouse probe continues. VIX closed at its lowest close since Feb 2007 (and once again the strange shadowy figure of massive after-0hours volume spikes in VXX appeared).
Copper prices accelerated lower overnight and are sitting at 5 week lows following rapidly growing fears that the commodity warehousing probe will uncover exactly what we have been warning about for months - there is no 'there', there. As we explained in great detail here and here, the discrepancy of reportedly 80,000 tonns of aluminum and 20,000 tonnes of copper is sparking wholesale liquidations as carry traders, lenders, and borrowers all scramble to find out if their promised commodity is there. Iron ore, which has seen its price tumble dramatically, is also on the watch list as the port had said it was investigating whether iron ore warehouse receipts were fraudulently used multiple times to raise finance by different banks.
Timothy Geithner is likely to go down in American history as one of the most dangerous, destructive cronies to have ever wielded government power. The man is so completely and totally full of shit it’s almost impossible not to notice. The last thing we’d ever want to do in our free time is read a lengthy book filled with Geithner lies and propaganda, so we owe a large debt of gratitude to former Congressional staffer Matt Stoller for doing it for us. Stoller simply tears Geither apart limb from limb, detailing obvious lies about the financial crisis, and even more interestingly, Geithner’s bizarre bio, replete with mysterious and inexplicable promotions into positions of power..."Geithner is at heart a grifter, a petty con artist with the right manners and breeding to lie at the top echelons of American finance..."
Goodbye ZIRP, hello NIRP. Today's decision by the ECB to officially lower the deposit facility rate to negative (as in you pay the bank to hold your deposits) is shocking, but not surprising: we previewed just this outcome precisely two years ago in "Europe's "Monetary Twilight Zone" Neutron Bomb: NIRP." Here is what we wrote in June 2012 about Europe's unprecedented NIRP monetary experiment.
As we reported yesterday, the third largest Chinese port of Qingdao is being investigated for after a source at a local warehouse said that "it appears there is a discrepancy in metal that should be there and metal that is actually there... We hear the discrepancy is 80,000 tonnes of aluminium and 20,000 tonnes of copper... It's either missing or it was never there - there have been triple issuing of documentation." This has resulted in a prompt and acute selloff of copper and other commodities as we further documents, but the problems may only now be starting and the banks. As Reuters reports, worries over a probe into commodity stockpile financing at China's Qingdao port appeared to deepen on Wednesday as Standard Bank Group and a part-owned unit of Louis Dreyfus Corp warned of potential losses and copper prices fell further."
Borrowing heavily from Albert Edwards "Ice Age" analogy of our new normal, PIMCO's Bill Gross, after explaining why he does not have a cell phone, discusses the "frigidly low" levels of "The New Neutral" in this week's letter. Confirming Ben Bernanke's "not in my lifetime" promise for low rates and a lack of normalization, Gross explains that the "the new neutral" real policy rate will be close to 0% as opposed to 2-3% (just as in Japan) leaving an increasingly small incremental rise in rates as potentially responsible for popping the bubble. Gross concludes, "if 'The New Neutral' rates stay low, it supports current prices of financial assets. They would appear to be less bubbly," clearly defending the valuation of bonds knowing that he can't expose stocks as 'bubbly' without exposing his firm to more outflows.
"Banks are worried about their exposure," warns one warehousing source, "there is a scramble for people to head down there at the minute and make sure that their metal that they think is covered by a warehouse receipt actually exists." The rehypothecated catastrophe that we discussed in great detail here (copper financing), here (all commodities), and here (global contagion) appears to be gathering speed as the China's northeastern port of Qingdao has halted shipments of aluminum and copper due to an investigation by authorities after they found "there is a discrepancy in metal that should be there and metal that is actually there."
A dispassionate look at some of the reasons people are offering for low volatility.
Despite all the shadow banking system hand-wringing, macro-data-collapsing, real-estate-bubble-bursting, stock-market-tumbling reality facing the China; somehow, China's official government manufacturing PMI just printed 50.8 - its highest in 2014 and the 20th month of expansion in a row. Given the mini-stimulus efforts of the government, perhaps it is not surprising that the official (more SOE-biased) data signals all-clear (when HSBC's PMI is still in contraction for the 5th month in a row). The employment sub-index fell to a 3-month lows and the Steel industry's output and new orders has cratered... So what's wrong with this chart?