Bloomberg has been out in force on reporting on Chinese debt levels and developments today, and this is really interesting so I think I’ll try to give my take on the whole thing, piece by piece after this summary.
- First, China is looking into changing interbank deposits into eligible deposits for the loan-to-deposits ratio, to increase liquidity and allow banks to lend more.
- There is no shortage of willing buyers of Chinese debt, as has been shown by Hong Kong institutions running out of the RMB270 billion investment quota allotment through the RQFII program!
- If liquidity is increased, reform is implemented and Xi Jinping’s policies of tightening for noncompetitive firms will really bear fruit, there seems to be a lot of international investors willing to look into picking out the cherries from the distressed debt cake!
Altogether this is very promising, and warrants a bit of a closer look for each of the main points, but also into the tangential specifics of the individual Bloomberg articles.
First is the recalculation of bank deposits to include deposited money by other banks, which would technically allow Chinese banks to add roughly RMB7 trillion to deposits according to China International Capital Corporation, and thus allow 75% of that to be lent out again through different means, meaning roughly RMB5.25 trillion on new loans, or a very rough half of GDP. This number is subject to downwards revisions if classification of some deposits fails to be counted as money.
CICC however also sees a rather natural effect of increasing the deposits: if the receiving bank gets to count this to assets, then since this money also adds to debt said bank needs to raise more capital to meet the reserve requirements. They expect that the government will allow a lower reserve requirement ratio to not force liquidity to dry up in policies that are designed to increase liquidity in the market, which seems very highly sensible to me.
Hong Kong’s lack of renminbi investment quota is a little bit humorous but shows a lot of how the market here works and indicates which contracts are in demand and which are not.
The RQFII program largely allows any entity to invest renminbi yuan in China according to its given quota, relatively freely, as long as majority ownership is still Chinese. Given the macro-market financing structure in China, this means that you are much more likely to find debt to invest in than equity, and consequently those markets are probably a lot more liquid and investable. Case in point? Well just look at the disappointing volumes on the Shanghai – Hong Kong Stock Connect Northbound trading! Institutions are willingly leaving about RMB10 billion a day of equity purchases on the table, but clamoring for something else than A-shares enough that Hong Kong is asking for an increased quota!
There could either be a large problem with A-shares, or it could really be that there’s a problem with the Stock Connect. Perhaps the buying and selling isn’t as easy as was expected, and institutions don’t trust the clearing banks to hold contracts ready for sale? Perhaps the wider access to shorting and securities lending on the mainland makes this very unattractive for larger institutions? Are there too big lags in the order routing processes? Or is it simply that a fraction of a 10% share of a country’s total financing isn’t interesting enough for the Masters of the Universe-type bankers to play with?
I sadly don’t know, and ooh how badly I wish I did know exactly why this is the case. This disconnect is so impressive and tells you so much on how foreigners will view Chinese opening and how future developments should be guided that it’s probably one of the most important set of questions on China’s financial future that there are around!
The tidbit that the next step is mutual fund recognition (which I take to mean that mutual funds on one side of the compass gets to invest in assets on the other) is not much of a high finance Wall St.-movie-esque bang. What it is however is a massive shortcut to fund size, liquidity and know-how without needing to build massive markets first, allowing huge swaths of China’s financial development challenges to be sidestepped in the long run. In typical post-Maoist style, I think any such program will be very contained and slowly expand to not cause bubbles in Hong Kong, or massive dislocations of capital throughout China, but what a next step for China’s capital account opening to take. I used to think I was excited for the Shanghai – Hong Kong Stock Connect, I guess I was wrong…
I have to admit that I don’t know too much about distressed debt, especially as it applies to China. The processes are difficult and the waters are very murky, so I have very little to add to what is written in the Bloomberg article. However, the massive interest that seems to exist in trading this debt is very promising, and opening up more avenues for debt-shock absorption would indeed be very good going forwards. Again, we run into a problem of liquidity, and with luck there is enough ways to trade debt after its restructuring that this is seen as worthwhile. Both the processes above will likely help this with more money circulating in the economy, more foreign stakeholders valuing liabilities in China’s apparently very attractive debt markets, and the prospect of future vast, well-capitalized funds acting as market stabilizers.
The future is bright, but more importantly it changes like the pattern of a kaleidoscope, different at almost every turn of the hand!