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Meet The Relentless, Mystery Buyer Of Chinese Stocks Even As China's Economy Grinds To A Crawl
The bad news for China is getting worse with every passing day. First it was purely in the financial realm, with both record capital outflows and a crashing housing market leaving the local government-backstopped banks exposed, forcing the PBOC to cut rates not once but twice in 2015, even as sliding wages in China's 4 largest cities confirm the deflationary wave has moved out of the financial arena and has entered the economy proper, something we subsequently confirmed when we showed the latest updated batch of key Chinese charts.
Earlier today we got yet another confirmation of just how truly bad things are for the world's largest (depending on how one counts GDP) economy, when Shanghai Daily reported that fiscal revenue growth slowed in the first two months this year as reduced economic growth dampened tax income and other sources of government revenue.
Fiscal revenue rose 3.2 percent to 2.57 trillion yuan (US$411 million) in the first two months, down from 11.1 percent in the same period a year ago and 2014’s 8.6 percent rise, the Ministry of Finance said on its website yesterday.
Worse, while overall revenue posted a modest increase, personal income tax dropped 7.1% year on year to 164.6 billion yuan. No, not Greece: China.
Adding insult to injury was revenue from tariffs which also declined 5.3 percent after oil, iron ore and commodity prices declined, reducing the value of imports. And confirming that the Chinese housing bubble has burst, Government revenue from land sales dropped 36.2 percent to 455.3 billion yuan due to the sluggish housing sector.
And proving it is not just the Eurozone who is incapable of trimming spending when revenues collapse. China's fiscal expenditure rose 10.5% to 1.89 trillion yuan, up from 6 percent last year. Oh well, when China's economy implodes, it too can blame "austerity."
Yet the story of China's now seemingly imminent hard landing is hardly surprising. What is, is that as all of this is taking place, the Shanghai Composite continues to soar to record highs.
But nlike the late summer and early fall of 2014, when the rise in the Chinese stock market could be attributed to the PBOC's PSL "QE Lite", the relentless buying leg that started in mid-November has stunned most people, as nobody has been able to figure out just who is responsible for all this buying.
Until now.
But before we reveal the answer, recall what we wrote on November 16 in "China's Shadow Banking Grinds To A Halt As Bad Debt Surges Most In A Decade" when we revealed that one of the most aggressive sources of credit in China - those operating literally in the "shadows" - were not only not creating any incremental credit, but had stopped lending activity altogether!
This is what JPM said then:
The monthly Chinese money and credit figures released this week showed continued contraction in the share of shadow bank intermediation in new credit creation. Figure 6 shows that the share of shadow banks, proxied by the ratio of monthly total social financing over monthly new bank loans, has been on a downward trajectory since the end of 2013, experiencing its fourth episode of slowing since 2010. As of October this year, our smoothed trend in the share of shadow bank intermediation (blue line in Figure 6) stood at its lowest level since 2009. The previous episodes of slowing in shadow bank intermediation during the first halves of 2010, 2011 and 2013 did not see such a sustained pace of contraction. This likely reflects the impact of regulatory tightening on shadow banking activity. With the ratio in Figure 6 approaching 1.0, the picture we are getting is of almost all of new credit creation in China being intermediated via traditional rather than shadow banks currently.
Why do we bring up China's shadow banking system?
Because according to Reuters, it is precisely China's trust firms, with total assets of $2.2 trillion, and who together with Banker Acceptances comprise the bulk of China's shadow banking pipeline, and no longer able (or willing) to lend to China's small companies and individuals due to a spike in regulation, are shifting more cash into frothy capital markets and over-the-counter (OTC) instruments instead of loans.
In other words, instead of using their vast cash hoard of over $2 trillion to re-lend and stimulate China's economy, China's unregulated, shadow banking conduits are now directly buying stocks!
Or as Reuters puts it, "by redirecting money into capital markets and OTC products like asset-backed securities (ABS) and bankers' acceptances, trusts are acting less like lenders and more like hedge funds or lightly regulated mutual funds."
Ironically, or not because this is precisely what is happening in the US and Europe, instead of encouraging lending and economic growth, China's reform which has cracked down on shadow lending, has instead led to yet another surge in risk assets as these same lenders are instead buying risk assets, which in China means almost exclusively stocks, outright.
The details of what is going on in China right under the regulators' noses, and yet completely unobserved until now, are simply stunning.
The shift - a response to a clampdown last year on trust lending to risky real estate and industrial projects - means a significant chunk of shadow banking risk is migrating rather than shrinking.
China trusts take in funds from retail and institutional investors and re-lend or reinvest that money, often in parts of the economy that struggle to obtain bank credit, like mid-sized private enterprises or municipal industrial projects. As of end-2014, total trust assets were 14 trillion yuan, according to China Trust Association data.
Previously, people who bought into opaque wealth management products, many of which were peddled by banks but actually backed by trust assets, found themselves heavily exposed to real estate loans. Trust firms' changing asset mix means these investors may now instead find themselves exposed to high-yield corporate debt (junk bonds), volatile stock funds or risky short-term OTC debt instruments.
While this could help keep the wealth management industry running, and by extension help the trust industry stay afloat, it could delay efforts to properly price risk.
A Reuters analysis of China Trust Association data shows that while loans outstanding grew just 8 percent last year - far below the 62 percent growth in 2013 - growth in obscure asset categories including "tradable financial assets" and "saleable fixed-term investments" was 77 percent and 47 percent, respectively.
It's not just speculation - it's validation.
Sources at two major trust firms, who asked not to be named due to the issue's sensitivity, confirmed they were shifting investment into the capital markets and OTC instruments.
An individual at one of China's top three trusts said that in the past year his firm's investment in shares and bonds grew 30-40 percent and 50 percent, respectively - helping explain where some of the leverage that has driven recent Chinese stock and fixed income market rallies has come from, and raising questions over how sustainable those rallies may be.
He said his trust had begun investing in ABS and bankers' acceptances - tradable claims on a company's future revenues - in January and October 2014, respectively, and would invest more this year.
Issuance of bankers' acceptances, the riskiest form of shadow finance, slowed for most of last year only to rebound late in the year, while ABS issuance has risen rapidly over the past year as China's formal credit markets tightened.
Reuters notes the obvious: "Chinese companies often use bankers' acceptances as a substitute for cash, so an increase in issuances can suggest businesses are under funding stress. Net issuance of bankers' acceptances surged from the fourth quarter of last year, and in January hit the highest level since the first quarter of last year, eclipsing trust loans and company-to-company "entrusted" loans as the largest net source of shadow finance. This could imply that regulators' efforts to squeeze the shadow finance sector have been only partially successful. A spokesperson for the China Banking Regulatory Commission declined to comment when reached by telephone."
To put this in perspective, not even in the late stages of the US stock market just before the Lehman collapse did the US Shadow Banking system directly invest in stocks, and certainly not using funds that validate the Chinese funding crisis.
In fact, the biggest paradox of the Chinese fiasco is that the more the economy slows down, the higher the stock market will soar as the traditional source of funds for a broad segment of the population, trusts and acceptances, are no longer willing to invest in growth but would rather go all in on the last stage of the Ponzi Finance cycle and frontrun other sources of shadow funding.
And since they all know there will not be a happy ending, they can at best hope to be able to sell ahead of everyone else, just before the bottom drops out of the stock market, first in China and then everywhere else.
That said, at least the last mystery of China's soaring stock market has now been exposed, and all that will take for the SHCOMP to suffer a massive correction is for Beijing to decide stocks have risen far enough, and halt all stock investments by the shadow banking intermediaries who no longer serve their quasi-official role.
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The Chinese are following America's example, unfortunately: when the real estate crumples, stimulate the equity market; rinse, repeat-until it doesn't work.
But who is doing it and why is the interesting part and as they get more tightly tied in with their stock market the farther that market will get from reality. It'll be interesting to see if the PBOC goes full QE when the bubbles start popping.
So if 3% growth for US or EU $14T economies is a big deal and a “booming economy” that might be inflationary and all that, then why should the Chinese $14T economy be expected to grow at 7% or more?
Oh my, I didnt recognize you at first Mr Greenspanke
Could it perhaps be Jim-bull-in-China-farmers-driving-Maserati's-Rogers?
my roomate's step-mother makes $79 hourly on the laptop . She has been fired for 10 months but last month her pay was $18694 just working on the laptop for a few hours. see here... www.globe-report.com
PBOC, using USTs?
What could possibly go wrong?
What's good for the goose is good for the gander
i was expecting a picture of kevin henry (since he's buying everything else with his digital-dollar machine)
... new normal ...
"In other words, instead of using their vast cash hoard of over $2 trillion to re-lend and stimulate China's economy, China's unregulated, shadow banking conduits are now directly buying stocks!"
Your turn to the Dark Side is complete.
I know a lot of people are thinking "BFD" on this, but this IS worse than in the US. That's WAY out of bounds.
"Hi, what are you guys doing with my money? We used it to buy shares in Solyndra- they do solar cells or something. If you lose on that, is my money insured? No and by the way, we already lost your money."
Not to worry, they have bonded warehouses full of commodities to back them up......
Thank God for that. Otherwise this might get out of hand.
and they are selling a lot of cheap crap to USA, it's a good business
Most of their cheap crap goes to their number one trading partner, the EU. Russia is obviously looking to up bilateral trade with China, as well, so you'll soon get to revel in the wonders of "buy three and hope one works" purchasing.
As someone who buys a lot of stuff on a retail level and really looks at country of origin tags, I assure you that China has peaked so far as selling cheap crap to the USA is concerned.
Yes, Harbor Freight is still opening new stores. Most people have no concept of quality or value although it is becoming much more difficult to find anything of quality regardless how much you are willing to pay.
Harbor Freight has some great deals. How can you go wrong on a pair of cheap work gloves or a vise. High end socket sets... not so much. Gotta know what can be made cheaply and what should not.
we are so fucked. I will write diary about this...
Lol FUCKED is an understatement for what we are, not only have we been fucked, but we have been given pearl neckless and pink-socked.
Im living in Russia, it is not so bad here as you think. I was talking about the other parts of the world
Oh Russia will be fine, the Russian people have been through worst episodes than a financial crisis and there is a sense of community in most Russian cities/towns. It's my fellow brain washed, debt-laden Americans who will be screwed, as they have never been witness to any prolonged negative situations.
Russia is northern hemisphere. Good luck.
It isn't bad anywhere... yet.
It will be bad everywhere... yes.
Stellar use of pink sock.
I had to look up the term "pink socked" and nearly threw up my breakfast. Thanks. True about what is happening to us though.
http://www.urbandictionary.com/define.php?term=pink+sock
Why? It's not like anyone is gonna survive to read it.
Here there and everywhere, nothing is more important than proping up the stawk market. This obsession has become fucking insane!
It will end in time and it will end very badly. Once it does start to unravel these lunatic central bankers will go ape shit wild trying to hold it all together!
FUBAR is an understatement!
I was watching the Japan based English news from NHK on the "World" channel last night.
They had a segment on the economy; the first part was all the usual "recovery" talk and a cogent overview of Central Bank policies over the past couple of decades - then they followed that with a "however" segment that spelled out the collapsing data from China, Samsung's 9% drop in income the past year (worst since 2008), and other macro data that clearly spells out "no recovery".
A year ago it would have been all good news; perhaps it is time for the next crash?
Check out www.mhznetworks.com for those playing along at home. Ten or twleve English language daily newscasts from all over the world. Russia, Ukraine, Japan, Taiwan, Ireland, China, Africa, and many others.
Plus no commercials except after the end of the program and the start of the hour or half hour.
I'll be a Monkey's Uncle!
I was wondering about their stock market. Thnx! Now, I'm wondering when the overpriced global housing market will correct. Whether you look at South Korea, Taiwan, Australia, NZ ... anywhere ... prices are way out of line with wages, rents, or however you want to value residential RE.
Banco de Madrid in Spain closed it’s doors after a bankrun and well... there’s almost no sound about it. The media really silenced it...
there was in Russia xD
“The CNMV asked if we could return 100% of client funds if we needed to, and we replied that of course we couldn’t.”
there...same as for any bank anywhere in the world, nothing to see here...
https://www.thespainreport.com/14809/spanish-stock-regulator-takes-contr...
bot some ASHR today - best of breed! and excellent accounting!
Enjoy the peak stock market....none of us are going to live to see it return this glory. When it goes down...it will be for hundreds of years.... The massive fraud across countries of printing to ramp the stock markets...while the economies implode is lesson that will be remember for a long long time. PEAK FRAUD!
I'm not sure about 100's of years, but for sure a couple decades.
Well, when I read stories like this, I think of passengers on the Titanic madly rushing over to the port side of the ship because the starboard side is sinking.
There is really only one question remaining in my mind:
Are we headed for a Depression followed by war
Or are we headed for a war that is kicked off a la Falklands Invasion to distract from the crashing economy?
In either case, I'm damned glad I don't live in a city and am taking this year off to get the ranch fully operational and productive.
What a stupoid fuck is all I can say. One year to get a ranch fully operative and productive? In the face of a big downturn in agriculture? You are nothong but a fucking govt troll. GTH
Nice to meet you, whoever you are.
We've had the land for some time and every year I do a little-- such as planting lots of fruit trees, building greenhouses, rebuilding the barn roof so it slants to the south and then hanging solar panels on it.
But I no longer feel interested or happy doing my thing in the city and I believe it's time to maximize personal food production and get all the half-finished projects wrapped up. Not looking to make money punching cows or doing the amber waves of GMO.
Revelation 18:4 .....'And I heard another voice from heaven saying, come out of her My people, that ye be not partakers of her sins and that ye receive not of her plagues.'
So the sharks are all just feeding on each other? I'm sure that'll work out just fine then.
Problem!!!
If the Chinese are using both the existing US$ anchored financial
system, AND their home grown SCO based financial system, how
do we know that the US$ part is in recession while the SCO
based one is booming... or vice versa???
Inquiring minds and all that...
Great article, thanks Tyler.
Alibaba and the 1.3 billion slaves.
so all we need is to do a "ghandi" .. get a billion or so people to go somewhere, get them all building stuff, print currency to spend, import loads of food and energy, create massive balance sheets full of technology and assets with no income and voila! we have the worlds fastes growing and most powerful economy!
let's go to a clearly underpopulated country with nice weather...let's see...yemen, iraq, ummm, nope...poland, norway, australia, kazakhstan, saudi....hmmm...no... i know...UKRAINE, or maybe Utah..:)