Goldman: "We Met With Chinese Investors And The Tone Remains Very Negative"

One month ago, when looking at the surprising spike in Chinese corporate bond defaults - which yesterday added one more company to the list after Wintime Energy missed a 1.6bn yuan bond repayment in principal and interest - we asked if "it is time to start worrying about China's debt default avalanche."

Fast forward one month to today when Goldman's credit analyst team headed by Kenneth Ho, said that "the past week we met with investors in Guangzhou and Shenzhen, and the tone remains very negative" for one reason: most investors suddenly feel as if they have lost the backstop of the central bank, which until recently would never allow corporate bankruptcies, and suddenly - as part of the country's deleveraging campaign - is eager to take air out of the system, while at the same tine draining liquidity out of the system. Or, as Goldman writes, investors "would like to see policymakers provide more targeted lending to help with refinancing needs, and view that the recent liquidity injections are too broad to be able to alleviate the market concerns."

Here are some more details from Goldman's Kenneth Who, who writes that "Over the past week, we met with a number of investors in Guangzhou and Shenzhen. Most were equity investors, together with a number of macro and credit asset managers."

A simply visual summary of these concerns is shown in the chart below, according to which Chinese financial conditions are now roughly tied for the tightest ever since the financial crisis, mainly due to slower credit growth and stronger currency in May.

The following are the key takeaways from Goldman's meetings:

Investors continue to have a long list of worries. Similar to the feedback from our recent trip to Beijing, most investors are worried about the trade war, defaults, and credit crunch, with particular concerns about liquidity in the LGFV and property sectors. After the sizeable RMB depreciation in recent days, we noted increased worries about policymakers' stance towards the RMB, and concern that further RMB depreciation would trigger capital outflows. Overall, investor sentiment remains very cautious, and are meaningfully more bearish than offshore investors.

Goldman notes that investor focus is on, what else, potential policy support: after all it is so much easier to buy when you know the central bank has your back. According to the Goldman analysts, most investors are looking to policy action that could help turnaround investor sentiment, and question what types of measures policymakers could adopt.

Below are the three key measures Goldman discussed with investors:

  • Measure #1: Targeted lending. PBOC's expansion to include AA-rated corporate bonds as collateral for the Medium-term Lending Facility (MLF) and the recent 50bps cut in RRR were taken as efforts to provide broad liquidity in the financial sector. To us, these measures indicate policymakers' awareness of the credit issues. However, many questioned whether these policies by themselves would be sufficient, as they are considered to be too broad-based. Investors would like to see more targeted measures that help to direct credit flows to the smaller companies that are reliant on shadow bank for funding.
  • Measure #2: Fiscal support. A number of investors were also wondering which fiscal tools could be used to provide support for growth. Many took it as a negative shock that China Development Bank suspended new Pledged Supplementary Lending (PSL) to fund shantytown upgrades, as reported by Caijing. On-budget fiscal stimulus will also likely be less supportive in the second half, as our China economists estimated that on-budget spending earlier this year was the most front-loaded compared with the past few years. Overall, we expect some fiscal headwinds in the coming months, but should there be significant slowdown in growth, policymakers will likely provide support, such as bringing back PPP projects as reported by Xinhua.
  • Measure #3: Financial reform easing and forbearance remain as options. There was a general consensus amongst investors that more defaults will come in the second half of this year, and that financial tightening will unlikely ease in the near term. While we share a similar view, we continue to believe that policymakers will oscillate between reform and forbearance. In our view, there will likely be a more supportive forbearance stance if growth slows and credit concerns become a major worry.

Still, despite the growing default worries, fears of a credit crunch and rising yields, the Chinese bonds market remains stable and gross issuance is at a faster pace even compared with 2017.

For the first six months of this year, total gross corporate bond issuance in China's domestic bond market reached RMB 3.4tn, representing an increase of 44% compared with 1H17. To us, this indicates that the onshore bond market is still functioning, despite fear of a credit crunch. Though it is worth noting that only 12% of the gross issuance this year has come from AA-rated companies, compared with 20% in 1H17, suggesting that liquidity is abundant for better credits, but less so for weaker ones (Exhibit 1).

That said, risks of sharp changes are lurking, and as Goldman writes, while the bank believes that the overall corporate bond market is still functioning, it sees potential increase in tail risk. To wit:

Bond market redemptions have been heavy in recent quarters, and will remain heavy in the coming quarters (Exhibit 4), and the areas we see having the biggest risks are the weaker credits. It is clear that the markets are increasingly pricing in concerns for the lowest-rated credits (Exhibit 5). As such, we continue to hold the view that it is too early to bottom fish on the highest yielding Chinese credits.

Comments

Pinto Currency Son of Loki Fri, 07/06/2018 - 13:44 Permalink

Goldman does not say a word about the central problem.

Chinese domestic banks have borrowed USD $2T in the offshore interbank market and lent USD long to Chinese domestic borrowers.

USD and rates have spiked.

Now China's banks are cornered having borrowed short and lent long. And their borrowers are starting to panic given decreasing USD liquidity.

http://uk.businessinsider.com/foreign-bank-lending-to-china-hits-record-high-2017-11?op=1

PBOC has half the reserves to money stock that Thailand had when the Baht crisis hit.

PBOC came out this week and told everyone to remain calm. Calm?

https://www.telegraph.co.uk/business/2018/07/03/china-faces-perfect-storm-currency-plunges-trump-opens-fire/

This is just getting started and is going to be very, very ugly.

In reply to by Son of Loki

the artist Putrid_Scum Fri, 07/06/2018 - 14:00 Permalink

You got that reversed buddy. 

China has been doubling their economy, Concrete, steel, copper, wheat, beef, etc every 10 years. That is the math of 7% growth per year. 

What does this mean in real terms?

From 2011-2013 China poured more concrete than the USA did in its entire history. (look it up in Forbes and others) Let that sink in. From 2014-2024 they will need to double that in order to tread water. From 2024-2040 they will need to double that again just to stay in the same place they are now. And so it goes with steel, copper, energy consumption. They will not make it to 2025 and my guess is they collapse much sooner than that.

2008 to present day turbulence is a direct result of scraping the ceiling of world economic and commodity/energy production/consumption. Everything political since then has been the result of Nations on the Grand Chessboard scrambling for position. Trump-Putin summit will include talks about how to deal with the Dragon. 

Their expansion and clamor for resources and energy will be cut short and controlled as predicted. 

It is China that is Fucked. USA is in for some pain while we sort this out but sort it out we will. In China...heads will roll and society itself will take a phase shift downward. 

Bush-Clinton-Bush-Obama-sHill were all about selling out our country and handing over our position on the Grand Chessboard. White hats had different ideas and they are on top and forever will be on top. That is the reality. The Cabal that we just watched crash and burn is done, even if they don't go to jail they are done. Adjust your politics and life accordingly. It doesn't mean I agree with everything that is going on but I don't spend time in denial of the math and political realities. It means I adjust my course to land in the best spot for myself, family and country. 

Please watch Prof. Bartlett's lecture on Arithmetic, Population and Energy. By far the most important hour on YouTube. 

https://www.youtube.com/watch?v=sI1C9DyIi_8&t=4s

edit- As expected...downvote but no substance. I must have just burst someones bubble.

In reply to by Putrid_Scum

itstippy CJgipper Fri, 07/06/2018 - 14:07 Permalink

Actually, over the past twenty years many millions of Chinese middle-class and upper-working-class people developed a passion for saving like crazy and plowing the money into real estate and stocks.  It's payed off handsomely for most of them; many have made a lot more money through their investments than they have in wages.  It's now a yuge headache for the Chinese government.  They can easily let a few oligarchs crash and burn, and shoot a few of them publically for fraud, but they can't let millions of Chinese workers lose their life's savings.  It would cause civil unrest and accompanying unpleasantness.

Chinese are obsessed with real estate and stock speculation the way Westerners are obsessed with sports.  If the "easy riches" financial speculation mania ends in tears, the Chinese government will be blamed for dropping the ball.

In reply to by CJgipper

screw face Fri, 07/06/2018 - 12:47 Permalink

 THE #BARBARIAN HOARD

"....suddenly feel as if they have lost the backstop of the central bank, which until recently would never allow corporate bankruptcies, and suddenly - as part of the country's deleveraging campaign - is eager to take air out of the system, while at the same tine draining liquidity out of the system." 

....did some body say classic capitalism

JPegg Fri, 07/06/2018 - 13:44 Permalink

Tone, what tone. I don't see any tone.

 

Shepwave  buy signals for this week worked just fine thank you very much.  Crash next week. 

CashMcCall Fri, 07/06/2018 - 13:50 Permalink

Laughable. Why would Chinese Investors meet with Goldman? They wouldn't. Part of the Trump Goldman Administration is to promote the propaganda that China is worried over Trump's bullying tariffs when the opposite is true. Trump has failed and his bluff was called in today's markets.

The Jobs report was weak. Part time summer employment only. Jobless claims up. This is supposed to be the position of strength that CNBC shill Jim Cramer claims is how you take on the Chinese. CNBC is the voice of the Goldman narrative. 

Meanwhile today Russia piled on with more Tariffs against US Energy and Mining equipment. The US is getting hit with new tariffs from every country they hit with Aluminum and Steel. 

Then there is always the absolute hypocrisy of Trump. He blasts Europe for Car Tariffs but never discusses the US Tariffs of 25% on European SUV's and Trucks. 

The biggest hit is agricultural products from the US. Tariffs have invited competition. Brazil that grows about 100 metric tons of Soy is planning to double production. This will be roughly twice this year's US production. So the global price of Soy will drop and the US Farmer will lose their market share forever. 

Back when Obama applied Sanctions on Russia, Russians needed to grow more foods. By 2016 Russia became the largest global producer and exporter of Wheat. They took the market from the US. When you punish people you turn them into competitors. Be enough of a bully and pretty soon everyone is gunning for you. 

This is the first time in US history where the world appears to be turning on the US Bully. While Europeans are wishy-washy, the Russians, Mexicans, Chinese, and Indians are not. Trump is now isolated and the US has the most to lose in any Trade war. 

 

 

MuffDiver69 Fri, 07/06/2018 - 13:51 Permalink

I heard a women from Asia involved in business as an analyst and she said her poll had 23% of business wanting to leave China at the moment...probably true..