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Peak Insanity: Chinese Brokers Now Selling Margin Loan-Backed Securities
One of the reasons why the Chinese dragon quite often appears to be chasing its own tail is that the country is trying to re-leverage and deleverage at the same time.
Take China's local government debt refi effort for instance. Years of off-balance sheet borrowing left China’s provincial governments to labor under a debt pile that amounts to around 35% of GDP and thanks to the fact that much of the borrowing was done via LGFVs, interest rates average between 7% and 8%, making the debt service payments especially burdensome. In an effort to solve the problem, Beijing decided to allow local governments to issue muni bonds and swap them for the LGFV debt, saving around 400 bps in interest expense in the process. Of course banks had no incentive to make the swap (especially considering NIM may come under increased pressure as it stands), and so, the PBoC decided to allow the banks to pledge the new muni bonds for central bank cash which could then be re-lent into the real economy. So, China is deleveraging (the local government refi effort) and re-leveraging (banks pledge the newly-issued munis for cash which they then use to make more loans) simultaneously.
We can see similar contradictions elsewhere in China’s financial markets. For instance, Beijing has shown a willingness to tolerate defaults - even among state-affiliated companies. This is an effort (if a feeble one so far) to let the invisible hand of the market purge bad debt and flush out failed enterprises. Meanwhile, Beijing is enacting new policies designed to encourage risky lending. In April for instance, the PBoC indicated it was set to remove a bureaucratic hurdle from the ABS issuance process, which means that suddenly, trillions in loans which had previously sat idle on banks’ books, will now be sliced, packaged, and sold. Specifically, the PBoC said regulatory approval would no longer be required to issue ABS (hilariously, successive RRR cuts have served to reduce banks’ incentive to package loans, but we’ll leave that aside for now). Once again, deleveraging (tolerating defaults) and re-leveraging (making it easier for banks to get balance sheet relief via ABS issuance), all at once.
There’s a parallel between this dynamic and what’s taking place in China’s equity markets. That is, a dramatic unwind in the half dozen or so backdoor margin lending channels (a swift deleveraging) has been met with a government-backed effort to prop up the market via China Securities Finance Corp., which has been transformed into a state-controlled margin lending Frankenstein that could ultimately end up with some CNY5 trillion in dry power (a mammoth attempt at re-leveraging).
Now, the PBoC will look to supercharge efforts to re-engineer a stock market bubble via leverage by pushing brokerages to issue ABS backed by margin loans. Here’s The South China Morning Post:
Huatai Securities is selling 500 million yuan of the country's first asset-based securities product built on margin-financing loans as underlying assets.
The product is due to be listed and sold to investors through the Shanghai Stock Exchange.
The minimum investment for the product is 100,000 yuan, with exposure of a single borrower capped at 5 per cent. Investors will bear the risks for gains and losses in the underlying portfolio.
Approval to mainland brokerages to securitise margin loans was given by the China Securities Regulatory Commission on July 1. Brokerages have been encouraged to raise capital via securitisation to help them recapitalise.
A couple of things should be obvious here. First, this sets up the possibility that a perpetual motion margin doomsday machine is being created. That is, if brokerages simply offload the margin loan risk to investors and use the proceeds to fund still more margin lending which can also be turned into still more ABS, and so on, then the effect will be to pile leverage on top of leverage on the way to constructing a monumental house of cards. Beyond that though, one certainly wonders what happens in the event the underlying stocks become completely illiquid (i.e. Beijing decides to suspend trading on three quarters of the market again). Here’s a bit more from Bloomberg:
China’s first asset-backed security tied to stock margin loans is raising concern that authorities are fueling new risks as they attempt to reverse an equities slump.
Guotai Junan Securities Co., the nation’s second-biggest listed brokerage, plans to sell 500 million yuan ($80.5 million) of bonds Friday backed by margin facilities it extended to stock investors, according to a company statement. The offering comes after a stock rout last month that prompted regulators to allow brokerages to securitize margin loans.
China is increasingly opening to ABS, having reversed course in 2012 to allow sales regulators had banned in 2009 after the products helped spark the global financial crisis. Investor concern has mounted that unintended risks could spread after unprecedented state intervention to help staunch the stock slide that wiped out as much as $4 trillion.
"The risk could be that brokers may not be able to execute forced liquidations in case of sharp declines in the overall stock market," said Shujin Chen, a banking analyst at DBS Vickers Hong Kong Ltd. "Liquidity risk can also be a problem if there are too many stocks that suspend trading, as happened in July."
"So far we don’t know how the brokerages are going to use the proceeds," said Gao Qunshan, an analyst at Tianfeng Securities Co. "It can be positive if they are using the funds to develop new businesses but negative for China’s financial market if they keep lending out for margin financing."
Yes, it certainly "could be a negative if they keep lending out for margin financing," which they most certainly will if not of their own accord then by PBoC decree.
And the punchline: the senior tranche (which accounts for CNY475 million of the total CNY500 million deal) is rated AAA.
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Ya know Tyler? When the VIX gets hammered down, and Nas-Farce gets killed .
Fuck me naked if I don't love being ass<> hammered by microwaves from New Jersey.
Joe Public is going to get ass raped again.
So it goes.
Peking Lo Ko
If people are dumb enough to invest in this, don't they deserve that?
Be diversified in your long term investments.
(snikker)
To those unfamiliar with US financial history, this is very similar to what occurred in the "Roaring Twenties" leading up to the Great Crash and Great Depression of the '30s.
There is that word tranche again. Every time I see that word somebody gets fucked over.
I am proud. our Chinese friends have learned how to create even better bullshit paper products than whitey. They are starting to catch on to this Ponzinomics. This level of maturity and sophistication shows they are almost ready to run a reserve currency!
Harvard University.
Training MBA s world wide since 1636.
“It would take a while before the postmodern Narcissus perceived the ruins of society behind the emptiness of his mirror.”
~Verhaeghe
It seems the financial community is either intent on creating momentum that forms into bubbles or they package and pedal shit that eventually explodes.
At this rate it seems their only alibi will be an EMP which probably explains why they have done precious little to guard against it happening.
They are to a large extent, middlemen. they get a cut no matter which way the money flows and the bigger the promise, the bigger the cut......
The Chinese stock market is the government.
Why does ZH forget China is communist?
Is it the thickness of your skulls?
I can neither voye you up or down. The fact of the matter is that both the USA and China are veering in the same direction albeit in different ways and speeds. Neither nation's government is concerned with the welfare of its citizens. Both governments are concerned only with retaining power over its populace and eventually extending that control outside its borders.
Well said. The Chinese Government is not doing what is logical or economically correct.
They are doing exactly what the American Government has been doing. That is to do anything to keep the party go on as long as possible.
However, there is one big difference. In China, the rich are not in control. They can be arrested and often shot dead (legally).
And that could be the reason why the rich is looking for ways and means to run to America with all the ill gotten wealth.
China is the greatest fraud of the 21st Century. (Yes, even bigger than the US)
Hitler showed the world the way to prospertiy is to abandon gold standard, kick out private bankers and nationalize the central bank. That's precisely what China has been doing. Without any wealth siphoned off as some percantage of money creation in the form of interest on debt owned by private bankers, the unstolen wealth is injected directly into economy. Why is this a fraud? The way that money is created in the US is that every source dollar is debt owned by private bankers who simply steal some cream to fatten themselves. That seems more like a rampant fraud, at least to Hitler at the time.
"Despite objections from Schacht, the president of the Reich’s Bank, Hitler withdrew Germany’s money system from the gold standard…Hitler substituted a direct barter system in foreign dealings. German currency became defined units of human productivity.
In January 1938, the Soviet diplomat Kristyan Rakovsky commented on the German money system. Rakovsky had held posts in London and in Paris and was acquainted with Wall Street financiers. He explained, “Hitler, this uneducated ordinary man, has out of natural intuition and even despite the opposition of the technician Schacht, created an especially dangerous economic system. An illiterate in every theory of economics driven only by necessity, he has cut out international as well as private high finance. Hitler possesses almost no gold, and so he can’t endeavor to make it a basis for currency. Since the only available collateral for his money is the technical aptitude and great industriousness of the German people, technology and labor became his ‘gold’…. As you know, like magic it’s eliminated all the unemployment for more than six million skilled employees and laborers. “
Germany’s withdrawal from the gold-based, internationally linked monetary system in favor of a medium of exchange founded on domestic productivity corresponded to Hitler’s belief in maintaining the sovereignty of nations. This was an unwelcome development in London, Paris and New York, where cosmopolitan investment and banking institutions profited from loaning money to foreign countries. Germany no longer had to borrow in order to trade on the world market. Foreign demand for German goods correspondingly created more jobs within the Reich."
- Richard Tedor, Hitler’s Revolution, 2014
Don't try to muscle in here with the Hitler bullshit. China is a completely different situation.
The whole fucking place is a fraud. It's an entire country built on the premise that nobody can ever admit a mistake has been made. And PLENTY of mistakes have been made in China.
Down vote all you want, but if you're not willing to explain the down vote, it's meaningless. If you think the US is a bigger fraud, then just say so. If you think China ISN'T a fraud, I'm all ears on that explanation.
According to Wiki, "In law, fraud is deliberate deception to secure unfair or unlawful gain. Fraud is both a civil wrong (i.e., a fraud victim may sue the fraud perpetrator to avoid the fraud and/or recover monetary compensation) and a criminal wrong (i.e., a fraud perpetrator may be prosecuted and imprisoned by governmental authorities)." Now what is your definition of fraud?
Exactly the same.
Every book in China is cooked to a crispy outter shell with a warm gooey center. The books of every private sector company are medium rare. The bullshit the government publishes are cooked to a charcoal briquette. There is NO GROWTH in China absent government works programs. And the collapse in the private sector is now eclipsing even the government's efforts to grow the macro economy.
Don't waste your time ND.
Bots "r" us.
These bots are programmed to gain information.
The NSA does the same thing
and a few days on, mass starvation. so, whatever it takes to stave that off and make the bric charade storyline complete. At least till the religious side of the story takes us all to hell.
Chinse investors are being booted from Austraia over fraudulent land purchases.
Hitler showed the world that the fastest way to prosperity was to round up whole segments of society, put them in extermination camps and steal their -and their countries assets- and hand that over to G.W. Bush's grandfather. That was short lived of course -not the envisaged 1000 years cause the rest of the world did not consider this fair, to say the least. And all these laborors you speak off did not have much choice: you'd either work or end up in a concentration camp. You admire a system like that?
Hitler was only a tool of the Tribe, poor guy. People give him way too much credit.
China may not be the greatest fraud of the 21st century but it may well be the fastest growing one. And let's not forget who it has learned from.
Oh, yes, they absolutely learned from the best. I doubt, however, whether they are growing AT ALL any more. I think they're in deep fucking weeds.
How can a country top selling $65 trillion worth of securities to banks around the world, created out of mortgages written during a housing bubble, and then printing trillions more out of thin air to buy back the worthless securities back from the banks of the country that sold the securities and printed the money?
What do you know that the rest of us don't
And they hold how many T bills?
Does that not make the US deeper into the fucking weeds?
There is no bigger fraud than the Wall-St/K-Street criminal combination
A case can be made for that. But I don't think even that outruns the totality of the China fraud.
Your statement itself is a greater fraud than whatever fraud you were accusing China of.
Unless you're wearing your 'Captain Hyperbole' costume from last Halloween.
Greed is not an American monopoly.
That's correct but it is a Greek word and a great game when confined to the board.
Can't help but notice that the "economy" of P Bros Monopoly includes no credit money; would be enlightening to watch how the dynamics of the game change when that one trait gets added.
How do you say "The Big Print" in Chinese?
The Chinese characters will appear scrambled on ZH. So, I'lll give you Welsh version.
"y print mawr"
NSA central. Children of the Korn.
Wee swel bredga woans.
Someone show me some pratical understanding of the Under-fundeded .gov pension system
I've mis-spelled this shit sideways
Tomorrow. I have to turn in my phone to my cranky FBI snitch wife who wants me to goto bed. (kidding). She just wants to go to produce market early tomorrow replace a lemon tree that passed away. Bet you a dollar we end up with five other fruit trees. It's not a good idea. We're not going to be here in Charleston,SC for a while. I just roll with the punches.
I did post something a few days back. What are you looking for? I won't be returning to this thread, find me on a new one.
If you are married to a government agent you need to be a better .gov agent. That is gov fight club 101
It's a joke. My wife wants me to go to bed. Early this morning. 2-ish. I had to fix the travel laptop because we've decided to travel to our place in Hilton Head Island on Monday . She fucked it up somehow.
My time has expires on Zerohedge financial porn site. Find yourself a good wife that puts up with Geopolitical / Financial hobbies.
She recently wanted me to purchase more stocks, I said absolutely fucking no.
She's getting smarter. It takes time. Such as, we would of been fucked buying that stock honey. (said to me)
That's why I love her.
I was going to order in Chinese tonight...not now. Thanks ZH
de-leveragatives
when that whopping $80.5M comes full circle and hits the chinee big board LOOK OUT! [/SARC]
You have to watch out for those RRR cuts. If they are severe enough you can bleed to death.
oh, is that the sound of the printing press I hear? 24/7 shift request
"BLICS a twet to Amewica" - more like competition for the same scam
This is so stupid.
This sounds like something that was outsourced to Goldman Sachs, in which case, the Chinese might consider buying a supply of anal chasity belts:
http://www.mcclatchydc.com/news/politics-government/article24561376.html
How Goldman secretly bet on the U.S. Housing crash
In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers that it also was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.Fires not big enought yet; throw some LOX in the mix!
This has to be some kind of bad joke.
To understand why this will work ...you must understand the new China financial market...you must understand "yin and yang" financial transactions..you can find it in their "accounting 101 class" at Beijing university..