Global Risk ON: PBOC Unleashed a Historic Credit Tsunami in January! ECB and BOJ Jumpstarts Balance Sheet Expansions!

Global Risk ON: PBOC Unleashed a Historic Credit Tsunami in January! ECB and BOJ Jumpstarts Balance Sheet Expansions!

Wonder why Global Stocks supposedly had the best returns since 1987 in January 2019?

Chart from Bloomberg

From Reuters: China’s total social financing (TSF), a broad measure of credit and liquidity in the economy, hit a record 4.64 trillion yuan ($685.01 billion) in January, far more than expectated, data from the central bank showed on Friday…The rise in financing levels should allay some of the anxiety about weakening credit growth as China’s economy slows. TSF includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales. The People’s Bank of China has revised the way it calculates TSF by adding financial institutions’ asset-backed securities and loan write-offs. It has also added local government special bonds issuance into the TSF calculation from September. TSF is used as a barometer of fundraising trends and can provide some clues on activity in China’s vast and unregulated shadow banking sector.

Chart from Yardeni.com

More…

From Reuters: China’s banks made the most new loans on record in January - totaling 3.23 trillion yuan ($477 billion) - as policymakers try to jumpstart sluggish investment and prevent a sharper slowdown in the world’s second-largest economy. Chinese banks tend to front-load loans early in the year to get higher-quality customers and win market share. But they have also faced months of pressure from regulators to step up lending, particularly to cash-starved smaller firms. Net new yuan lending last month was far more than expected, and eclipsed the last high of 2.9 trillion yuan in January 2018.

The same article on corporate credit…

Demand for credit picked up sharply in the corporate sector, followed by the household sector, according to data released by the People’s Bank of China (PBOC) on Friday. Corporate loans jumped to 2.58 trillion yuan from 473.3 billion yuan in December, while household loans rose to 989.8 billion yuan from 450.4 billion yuan, according to Reuters calculations based on the PBOC data. Corporate loans accounted for 80 percent of new loans in January, up sharply from 44 percent in December.

China bank lending expanded by a gigantic USD 2.5 trillion year on year on January 2019 while Total Social Financing exploded by USD 3.1 trillion!

China’s estimated GDP in USD is at 13.457 trillion, which means 2018 bank lending growth signified an 18.6% share while TSF growth accounted for 23.06% share of the GDP.

In other words, in the face of snowballing defaults, the Chinese Government PANICKED!

It’s not just China.

From Reuters: Cheap bank loans, a form of stimulus first launched by the ECB during the global financial crisis, look set to make a comeback in coming months and investors anticipate shorter term loans with a variable rate to allow the central bank flexibility. It’s just two months since the European Central Bank wrapped up its 2.6 trillion euro (2.3 trillion pounds) bond-buying scheme, but with euro zone growth at four-year lows and other global central banks already backtracking on policy tightening, bond market expectations of ECB action are on the rise. That’s expected to take the shape of a loan package for banks — known as Long Term Refinancing Operations (LTROs) or the more targeted TLTROs. Details could come in March or June at ECB meetings that would coincide with updates of the central bank’s economic forecasts. LTROs or TLTROs — which ECB sources say are a priority over other measures — should lower funding costs for businesses and households and offset the effect of negative interest rates on banks, investors argue.

From Reuters: Bank of Japan Governor Haruhiko Kuroda said on Wednesday that it was his responsibility to achieve the central bank’s 2 percent inflation target by persistently continuing its stimulus policy. Speaking to a lower house budget committee, Kuroda also said he would closely examine the central bank’s stimulus policy so that it would not cause side effects.

From Reuters: The U.S. Federal Reserve should stop paring its balance sheet by the end of this year, Governor Lael Brainard said on Thursday, suggesting the Fed could wind up with a permanently bigger balance sheet than had been expected even a few months ago. The Fed’s “balance sheet normalization process has really done the work it was intended to do,” Brainard said in an interview on CNBC, adding that she would not want this policy tool, which is tightening financial conditions, to run counter to interest-rate policy. At its January meeting, the Fed put further rate hikes on hold.

All of a sudden central banks have been talking about easing!

Unfortunately, at 2.25 to 2.5 for the FED, ZERO rates for the ECB, and -.1 for the Bank of Japan, leveraging monetary policy through interest rate channel has been limited.

Central banks thus would have to deal with negative interest rates and balance sheet expansion through Large Scale Asset Purchases or Quantitative Easing.

Chart from Yardeni.com

And last week’s public statements weren’t just talks, the BoJ and the ECB backed the PBOC by expanding their balance sheets in January.

So to support the stock markets, central banks would have to keep expanding their balance sheets thus feeding on the global debt pile which is at USD 244 trillion as of the 1Q 2018 or 318% of the GDP (government debt at USD 66 trillion or 80% of theglobal GDP)

The BSP will be next. But it will first cut reserves.

Global central banks panic, stock markets love them.

We are at uncharted territory.

Anyway, it’s the year of the PIG.

[Beware the Year of the Pig! Unblemished Record of Economic Turmoil Since 1947! February 3]

...

Will Financial Tremors in China and Hong Kong Lead to the Big One?

Bankruptcy comes in stages. In the early stages, it is barely visible. Income does not keep pace with expenditures. The spendthrift borrows. "No problem." This is seen as a temporary anomaly. Then the borrowing speeds up, but there is sufficient capital to justify the increased debt. The accountants warn of trouble ahead. The debtor responds: "So far, so good!" "There's more where that came from!" The process continues. Then the accountants say: "The future is now." The spendthrift responds: "Eat, drink, and be merry, for tomorrow we die." —Gary North

In this issue

Will Financial Tremors in China and Hong Kong Lead to the Big One?

-Mounting Stress on China Yuan and the Hong Kong Dollar; Will the Hong Kong’s USD Peg be Broken?

-From Convergence to Divergence: China’s Stocks Leads The Rest of the World Lower as US Tests Record High!

-Will China’s Government Launch Xi Jinping Put 2.0?

-Has Financial and Economic Rescues Reached its Natural Limits?

Will Financial Tremors in China and Hong Kong Lead to the Big One?

From Turkey back to China.

Mounting Stress on China Yuan and the Hong Kong Dollar; Will the Hong Kong’s USD Peg be Broken?

After hitting a 15-month low, the Chinese yuan rallied most since January by .79% last Thursday, on rumors that US-Chineseofficials reopened doors for trade discussions.  In spite of the rally, the USD yuan firmed by .45% this week. (see figure 1, upper pane)

 

Figure 1

Like the yuan, the Hong Kong dollar’s US dollar peg has been under pressure. Hong Kong's de facto central bank, the Hong Kong Monetary Authority (HKMA), reportedly bought more than $2 billion worth of local currency to maintain a long-held peg to the US dollar leaving just $12 billion in its reserves by the end of the week.

Tremors in the yuan appear to have diffused into Hong Kong. Should the USD-HKD peg break, not only will the yuan’s fall accelerate, tensions may intensify in Hong Kong and China’s financial markets that could prick both China and Hong Kong’s property bubbles.

From Convergence to Divergence: China’s Stocks Leads The Rest of the World Lower as US Tests Record High!

 

Figure 2

Strains in the currency markets have been reverberating on China and Hong Kong’s stock markets.

The national benchmark, the Shanghai Composite (SSEC), tumbled by a staggering 4.52% this week, to hit the lowest level of the 2015 crash in January 2016. Hong Kong’s HSI sank 4.07% to a one year low.

From its zenith in January, the SSEC has lost 24.99% and posted a year to date performance of -19.3%, Asia’s worst. Meanwhile, Hong Kong’s HSI which has been down 17.92% from the January peak may likely drop into the bear market’s lair.  

Pressures on the Chinese stock market appear to have truncated the recent rally of ASEAN stocks. Excluding the Vietnamese benchmark, which closed almost unchanged (+.04%), the national indices of Indonesia (-4.83%) and the Philippines (-2.84%) led ASEAN benchmarks down.  

Only six (31.6%) of the nineteen national bourses defied selling pressures in Asia. The region’s weekly performance had an average of -1.35%.

Bank Indonesia raised rates for the fourth time since mid-May this week to stanch the hemorrhaging rupiah (-.79% week on week, -7.66% in 2018). The Philippine peso slid .55% to 53.43.

Since the January acme, the complexion of the performance of global equities experienced a radical change.

While US stocks represented by the S&P 500 (+.59, week, +6.6% year to date) continues to climb to its January highs, the MSCI World ex-US (MSWORLD), China’s Shanghai Composite and the Emerging Market iShares ETF have fallen to reach more than a year’s depths.

Convergence in global equity market performance has morphed into a divergence. Yet how sustainable can this seminal divergence be?

Have global investors been rotating into the US? If world national benchmarks have been signaling an economic downshift, will US stocks follow suit? Or will the US power the global economy higher? But how can the latter be if the trade war will remain in place or if it will intensify?

Such divergent dynamic has also emerged in parts of Asia.

With most of the region’s markets under pressure, the Pacific benchmarks of Australia and New Zealand ironically hit milestone highs.

Bifurcating markets have also appeared in India. While the Indian rupee’s free fall plumbed a fresh low, its equity benchmarks raced to landmark heights!

Will China’s Government Launch Xi Jinping Put 2.0?

The plunge in China’s stock markets should be a concern to Asia. The Middle Kingdom has significant links with latter which functions primarily as its supply chain network. China has likewise been a significant source of Asia’s financing, fund flows, and a market for tourism

In 2015, a slew of draconian measures had been implemented by the Xi administration to arrest the stock market crash.

Aside from imposing assorted bans and limits on equity sales, the government infused cash to brokers and state-owned enterprises to put a floor on the stock market. 197 people, including journalists, were reportedly incarcerated for spreading rumors. “Spreading rumors” carries a three-year jail sentence after its introduction in 2013

The Xi administration’s stock market rescue efforts had been known as the Xi Jinping Put.

Nevertheless, the SSEC still crashed by 48% in 6 months.

The crash exposes how meddling and manipulating the markets will fail to attain its intended objectives. Though perhaps China’s markets could have gone lower, the present stress highlights the fact that kick the can down the road may have reached its end.

China’s stock markets may likely bear the brunt of the accrued imbalances caused by the 2015-2016 Xi Jinping Put.

All actions have consequences.

 

Figure 3

That episode caused the Chinese government to panic!

It launched a considerable amount of fiscal stimulus (see above), accelerate interest rate cuts and infused massive amounts of credit to stabilize and insulate the economy from the aftermath of the stock market crash. According to Federal Bank of New York’s Liberty Street Economics, “In 2016 alone, credit outstanding increased by more than $3 trillion, with the pace of growth still roughly twice that of nominal GDP” (bold and italics mine)

Since the stock market crash, the bank loan share of M2 continues to bulge.

Some of the global central banks responded by implementing negative interest rates in 2016 (e.g. ECB, Bank of Japan, Denmark and Sweden).

Under introduction of the corridor system, the Philippine Bangko Sentral ng Pilipinas slashed rates to a historic low in June 2016(also partly in response to domestic downside price pressures or “disinflation”).  Remember the erstwhile BSP chief Amado Tetangco Jr’s spiel on deflation or disinflation?

If stocks continue to crumble, will the Chinese government respond in the same way as they did in 2015?

Will interest rate cuts be the next move for global central banks?

Has Financial and Economic Rescues Reached its Natural Limits?

But here is the thing.

China’s property markets continue to burn the road.

New home prices and property investment growth have rocketed at the fastest pace in 2 years which had been financed by a rapid buildup in household debt which soared 15.14% in June month on month.

So rescue operations will only accelerate the meltup in the housing market which the Chinese government has been attempting to control, although at local levels.

Figure 4

And weakness in stocks or properties may aggravate its fragile offshore dollar/eurodollar conditions in part by rekindling capital flight and mainly from growing scarcity of access to US liquidity and collateral. China’s international reserves have begun to fall again last July. [upper window]

China’s monetary system, like the Philippines, is built upon mainly forex or international assets (mostly US dollars). [lower window]

China has been experiencing tremendous economic and financial tensions. The snowballing strains appear to be spreading. It has been ventilated on the currency markets (the yuan and Hong Kong dollar) first and then has spread to the stock market. Will credit be next? Then housing?

Unless Chinese authorities will be able to pull a rabbit out of a hat soon, a major financial and economic tremblor may be upon us, with the epicenter in China.

PhiSYx Surged 4.1% on Heavy Pumps and Dumps, Philippine Treasury Yields Spike Anew to Multi-Year Highs, China Launches Economic Rescue Package!

In this issue

PhiSYx Surged 4.1% on Heavy Pumps and Dumps, Philippine Treasury Yields Spike Anew to Multi-Year Highs, China Launches Economic Rescue Package!

-PhiSYx Soared 4.1% on Heavy Pumps and Dumps

-Market Share of Sy-Ayala Group Bulges to 51.83% of the PSYEi 30!

-The Making of the Chart Patterns, Treasury Yields Spike Anew to Multi-Year Highs

-External Risks: China Launched Massive Economic Rescue Package; Bank of Japan Fights Rising Yields and Plunging Facebook and Twitter Stocks

PhiSYx Surged 4.1% on Heavy Pumps and Dumps, Philippine Treasury Yields Spike Anew to Multi-Year Highs, China Launches Economic Rescue Package!

PhiSYx Soared 4.1% on Heavy Pumps and Dumps

This week’s 4.08% advance by the headline index, the PhiSYx, marks the second biggest since the first week of January 2017 (+5.96%). The frenzied advance of January 2017 highlighted the reversal of the bear market. Will this week’s advance resonate? Or will this be a bull trap?

Well, how was this accomplished? That’s the most significant question eluded by everyone.

 

Figure 1

And the answer has been provided by the above.

It is a week characterized by unfettered and flagrant pumps and dumps. In fact, July 25 recorded the biggest ever pump and dump!

On that day, following a frantic intraday pump, a stunning 97.22 points or 1.2% was shed from the end session dump! That day’s dump, possibly enraged the price fixers, that incited a panic buying, mostly on SM group of companies, to record a marvelous +2.02% gain in the next day or in Thursday, July 26. SM closed with 3.86%, BDO +1.85% and SMPH 3.31%. SM and BDO were major beneficiaries of marking the close pumps. The heavyweights of the Ayala Grop closed with lesser intensity: ALI +.86%, AC +1.66%, and BPI +.71%

And because losses may inspire a revival of selling, price fixers ensured that the Friday session would close in the positive, thus the relentless bid on market heavyweights to push the index 121 points up, 64 points or 52.9% from a mark the close pump.

Cumulative Pumps and Dumps for the week amounted to 259.54 points or a staggering 3.5% of the other week’s close!

Market Share of Sy-Ayala Group Bulges to 51.83% of the PSYEi 30!

Figure 2

SM contributed to a shocking 25% share of headline index’s astonishing advance. (topmost pane, Figure 2) Along with SMPH and BDO, gains of the SM group accounted for a 38.9% share of the forced inflation of the PhiSYx. Meanwhile, the Ayala heavyweights delivered 26.5% share of the gains in the headline index.

As a result from the SM-Ayala pumping, the top 5 issues have accounted for a record 45.85% share of the PhiSYX. Add BPI to the equation, a whopping 51.83% share of the index has been corralled by 6 companies. SIX companies make up the MAJORITY of the PSYEi 30!  

Thus, it would be a big mistake for anyone to see the index as representative of the 30 issues.

And as the years progressed, enabled and facilitated by the serial pumps, the market cap share of the index has accrued towards these companies, particularly on the SY group.

Such represents the monumental scale of mounting imbalances from the serial price fixing.

The Making of the Chart Patterns, Treasury Yields Spike Anew to Multi-Year Highs

Though this week’s average daily volume of Php 5.86 billion signified a 52.3% improvement from the January 2014 levels reached last week, it was about 19.5% lower compared to January 2017’s Php 7.28 billion. Price manipulations have been drained volume away from the general market.

Technically speaking, this week’s forced advance has powered the index above the broken secular trend lines of 2009 and 2012. Though at first glance this would look bullish, the damage from such trend violations has been critical and needs further less aggressive progress to be convincing. (bottom pane, figure 2)

And chart patterns depend on the spontaneity of the markets and not from the gaming of it.

And as I have repeatedly pointed out here, vertical price actions implies that Newton’s third law of motion (For every action, there is an equal and opposite reaction) will eventually take place, as it has in the past secular cycles.

Bear markets are merely symptoms of such a process. While interventions have managed to delay to the day of reckoning, it has caused imbalances to expand and accumulate only.

Of course, various interest groups want to see stock markets rise perpetually. The GSIS, for instance, bragged about a 69% jump in net income in 2017 mainly from stock market gains.

So the incentives to participate in price fixing may come from interest groups which depend on sustained inflation of the stock market.

Be reminded that the PhiSYx returned 25% in 2017 even when its aggregate net income grew by only 4.21% while market cap based net income grew by 8.43% only over the same period.

That is how detached the domestic stock market has been with reality.

 

Figure 3

And such orchestrated panic buying of index heavyweight stocks has taken place as local currency treasuries have been pummeled

LCY yields have skyrocketed to multi-year high levels on short to the middle curve. And rising yields/falling prices comes even as the BSP has been managing the bond markets. (figure 3)

These stock market pumps have emerged as if rising yields will have no impact on financing costs of heavily leveraged firms like SM and Ayalas, on aggregate demand and on competition for access to savings.

External Risks: China Launched Massive Economic Rescue Package; Bank of Japan Fights Rising Yields and Plunging Facebook and Twitter Stocks

And what’s even more striking has been ongoing pressures endured by our neighbors.

I have been saying here that China’s markets have been undergoing severe stress. [Asian Crisis 2.0 Watch: The Second Semester is Vulnerable To Crashes, The PhiSYx Syndrome, July 2, 2018]

The actions by the Chinese government last week have affirmed my view.

China’s State Council announced an enormous fiscal stimulus worth 1.35 trillion yuan (USD $199 billion) intended for infrastructure spending for local governments.

 

Figure 4

Meanwhile, to ease credit pressures and to encourage credit flows into small and medium enterprises, the PBoC injected 502 billion yuan (USD $73.9 billion) of cash into the banking system.

While interventions by the Chinese government helped spur a vigorous rally in risk assets throughout Asia, yields of benchmark10-year Japan Government Bonds (JGBs) spiked to the proximity of 1-year highs despite the aggressive interventions by Japan’s central bank, the Bank of Japan (BoJ).

It stands to reason that intensifying strains in the economy and the financial system have compelled the governments of China and Japan to undertake rescue packages which stock markets have bet that these measures would work.

What if they won’t? What if the imbalances have reached a critical mass from which stimulus would do little to alleviate such pressures from finding an outlet valve?

The Shanghai Composite closed by up by only 1.57%, following 2-days of pullback. The stimulus incited a substantial rally in Chinese equities, but it appears that the upside momentum may have lost steam.  

And the stimulus aggravated only the yuan’s decline. The USD dollar CNY charged to a one year high.

Across the Pacific Ocean, plunging stocks of technology mainstays of Facebook and Twitter which had been primary drivers or anchors of the recent record rally may also presage the surfacing of risks. Facebook, Amazon, Netflix, Google and Applecomprise 10.6% share of the S&P 500, while the S&P technology index accounts for 23%.

At the end of the day, risks won’t be wished away by the manipulation of markets.

Let me close with a quote from a recent speech by BSP Chief Nestor A Espenilla, Jr

In the BSP, we affirm that good governance is not just about compliance with laws and regulations.  Rather, good governance must frame and ground our intent so that our actions, initiatives and policies add value.  Good governance results in breakthroughs in the effective delivery of our mandates of maintaining price stability, financial stability and an efficient and safe payments system.

Pls. go back and look at figure 1.

Does the BSP think that the tolerance of market manipulations represents ‘good governance’ that ‘may add value’ and enhance or ‘maintain financial and price stability’?

Nestor A Espenilla, Jr: Good governance in the pursuit of mandates BIS July 17, 2018