Lured by More Debt, Chinese Stocks Zoom

All it takes is to give the substance which addicts pine for.

Friday’s closing from Bloomberg

From Bloomberg: (bold mine)

China’s stocks rallied, sending the benchmark index to its biggest gain in four months, amid speculation the government is loosening funding restrictions for property developers and banks to support economic growth.

Shanghai Pudong Development Bank Co. (600000) and Industrial Bank Co. both surged at least 6.6 percent. The China Securities Regulatory Commission said after exchanges closed that lenders can issue preferred shares. China Vanke Co. and Poly Real Estate Group Co. jumped more than 6 percent after the Shanghai Securities News reported regulators are reviewing financing applications from “many” listed developers.

The Shanghai Composite Index (SHCOMP) climbed 2.7 percent to 2,047.62 at the close, the biggest gain since Nov. 18, after reaching record-low valuations yesterday. Policy makers are trying to bolster real estate and financial companies as the economy slows and bad debts increase. Allowing lenders to sell preferred shares would give them a new way to meet long-term fundraising requirements…

The Shanghai index has dropped 3.2 percent this year as analysts cut their estimates for 2014 economic growth, the nation suffered its first onshore corporate bond default and an unlisted developer collapsed. Today’s announcement on preferred shares follows a government statement this week that China will speed up construction projects to bolster the economy.

Preferred stocks are a hybrid instruments or as defined by Wikipedia.org "may have any combination of features not possessed by common stock including properties of both an equity and a debt instrument". So the Chinese government essentially incentivize the overindebted entities to have access to more credit via alternative ways.

This announcement comes a day after reports that China’s largest private steel maker the Highsee Group has failed to repay a 3 billion yuan ($3.75 billion) that threatens another account of bankruptcy or default.

Another report also says that Chinese economy has been materially slowing

From another Bloomberg report

China’s economy slowed this quarter, with industries including retail and mining showing weaker revenue growth while loans through non-traditional channels became more expensive, according to a private survey.

Even with the moderation, the labor market and wage growth were little changed from the previous quarter, according to the China Beige Book survey, published by New York-based CBB International.

The report adds to signs that Premier Li Keqiang may face difficulties reaching an expansion target of 7.5 percent this year without stimulus. The State Council, or cabinet, said this week it will speed up construction projects and other measures to support the economy after data showed moderating growth in industrial production and investment.

So the Chinese government seems to be applying a whack-a-mole approach or to deal with the problem as they appear. Treating symptoms rather than the disease is a kick the can down the road strategy. Yet the debt problems comes in the face of a slowing economy which magnifies the default risks.

But don’t worry be happy. Stocks should continue to rise even when problems mount.

China's debt problem is further compounded by her currency woes. 

China’s currency continues to crash as shown by the US Dollar-renminbi (yuan). The USD-Rmb collapsed by 1.2% this week!

The yuan has now crossed the Rmb 6.2 threshold considered by some analyst as “danger zone” because the previously one way trade has attracted many export companies to use “complex hedging products” with the said level as the watershed for losses. There has been “roughly $150bn of such positions remained open when the renminbi began its rapid decline in mid-February, and that current mark-to-market losses on such products stand at more than $2bn,” according to the Financial Times.

As I noted during this week’s second default

Have a debt problem? Easy, for modern day government the solution has just been to borrow and spend. Problem solved.

How many more stimulus in the face of waves of debt defaults just to boost the markets? Interesting stuff.

The same question applies.