Another piece in the Chinese capital-flow puzzle.
Chinese conglomerates that had gone on a debt-fueled buying binge over the past decade but have come under heavy pressure from the government to sell their overseas holdings in order to reduce their astronomical debts – well, they’re doing it.
In the US, Chinese conglomerates have dumped $26 billion in assets so far in 2019, up from $8 billion in the full year of 2018.
Globally, Chinese companies have agreed to sell about $40 billion in overseas assets so far this year. This now exceeds the already heavy pace of selling for the full year of 2018, which totaled $32 billion, according to data from Dealogic cited by the Financial Times. But the buying hasn’t totally stopped: So far this year, Chinese companies have acquired $35 billion in assets globally.
This made Chinese companies a net seller of overseas assets for the first time in the data going back to 2009.
In 2015, Chinese conglomerates sold only $10 billion of overseas assets but acquired $100 billion of assets, for a net increase of $90 billion.
In 2016, the peak of China’s debt-fueled, haphazard, glory-driven acquisition binge, these conglomerates acquired over $200 billion in assets overseas, as observers scratched their heads, while sellers laughed all the way to the bank.
Since then, Chinese companies have come under heavy scrutiny in the US, particularly over issues related to intellectual property (IP) that China stands accused of trying to obtain by hook or crook, including by outright theft, by mandatory tech transfer when US companies want to do business in China, and by acquisition of US tech companies. This scrutiny has scuttled acquisitions by Chinese companies of US tech companies, including of US tech startups. And it is discouraging further acquisitions.
But tech acquisitions are still favored and supported by the Chinese government. What the government has cracked down on are glamour acquisitions of luxury hotels, movie theater chains, real estate developments, air lines, air-line related companies, and the like – the things that the US government is less critical of and would allow to proceed.
Part of the funding of these foreign adventures came from foreign-currency debt originated overseas. But this source of funding has tightened up as defaults among Chinese companies hit a record in 2018.
Defaults have continued unabated in 2019, amid worries about the accuracy of financial reporting by Chinese companies. Companies suddenly were out of funds and defaulted on debts, though they had piles of fake cash on their balance sheets that, upon further examination, did not to exist. Official concerns over fake financial statements reached such heights at the end of July that China’s regulators halted 46 IPOs and bond offerings.
And there have been some regional banks that were bailed out by the government to prevent their disorderly collapse and contagion. And credit has tightened. And companies are forced to deleverage.
Many of the overseas assets now being sold by Chinese conglomerates were acquired during the acquisition boom in 2016 in the US and Europe.
HNA has come under heavy pressure after a legendary debt-fueled acquisition binge that totaled 30 companies in the two-year span between mid-2015 and May 2017, after which it suddenly ended:
- The final act: the $2.2-billion purchase in May 2017 of the office tower at 245 Park Avenue in Manhattan. At $1,282 per square foot, the price was among the highest ever paid for this type of asset.
- The $6.5 billion for a 25% stake in Hilton Hotels.
- The $3.7-billion (value at the time) for a 9.9% stake in Deutsche Bank.
- The $6 billion acquisition of Ingram Micro in California, the world’s largest IT distributor.
- The $2.5 billion acquisition of aircraft leasing company Avolon Holding.
- The $1.5 billion acquisition of airline caterer Gategroup
- The $2.8 billion acquisition of Swissport, the world’s largest airport ground and cargo handling company.
- The $10 billion acquisition of CIT Group’s aircraft-leasing unit, which was combined with to HNA’s Avolon Holdings to create the world’s third-largest aircraft leasing fleet.
A portion of the debt funding for these deals came from state-owned banks in China. And a portion came from US and European banks, including JPMorgan Chase, Natixis, Deutsche Bank, UBS, Barclays, and Societe Generale.
Now, HNA is busily trying to unload these assets, which is a lot harder than buying them. This year alone, these sales include:
- Sold another batch of Deutsche Bank shares, reducing its stake to 6.3% (from 9.9% in 2017)
- Sold its stake in Hong Kong International Construction Investment Management Group to Blackstone;
- Sold budget airline Hong Kong Express Airways to Cathay Pacific Airways.
- Sold its 90% stake in the Manhattan office tower, 850 Third Avenue (at a $41 million loss).
- Sold its 74% stake in Austrian asset manager C-Quadrat, which had become infamous as the vehicle through which HNA had acquired its stake in Deutsche Bank via a complex and controversial series of derivatives.
- Sold an office tower in Beijing to Vanke, a large real estate developer in China.
- Is close to a sale of Ingram Micro to an investor group led by RRJ Capital, according to “people familiar with the matter.”
Other Chinese conglomerates have come under, let’s call it, ultimate pressure, such as Anbang Insurance, which was seized by the Chinese government in 2017 and its chairman was arrested. It has since unloaded a big chunk of its overseas assets, including last week, a portfolio of 15 luxury hotels to a Korean firm for over $5.8 billion.
These hotels include several in California – San Francisco’s Westin St. Francis, the Loews Santa Monica, the Four Seasons Silicon Valley, the Montage Laguna Beach, the Ritz-Carltons in Half Moon Bay and in Laguna Niguel – plus hotels such as the Essex House in Manhattan and the InterContinentals in Chicago and Miami.
Anbang is still sitting on its Waldorf Astoria in New York, which it had acquired in 2015 for $1.95 billion, the highest amount ever paid for a hotel in the US. The hotel is closed for renovation.
Chinese authorities have cracked down on overseas acquisitions and have forced companies to unload properties in part to put a stop to the debt binge by Chinese companies and force them to deleverage before it all blows up in a disorderly fashion; and in part to curtail capital flight.
China’s capital controls are being rolled out in waves, impacting variously companies and individuals. Investments in real estate have been targeted in particular. And a new batch of capital controls arrived two weeks ago. Read… China Imposes New Capital Controls, Targets Foreign Real Estate Purchases, as Yuan Falls to 11-Year Low
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Only one question for wolf street reader. r they going to sell houses?! Especially in LA and Boston area…
Hah! As the Chinese divest of these assets, they will use the dollar proceeds to buy other dollar-denominated assets – specifically, residential real estate! In fact, this has already begun and I see strong buying in every single market. Call your local Realtor© or miss out (1-800-GO-NINJA)!
Another starving realtor trying to drum up business. The implosion of Housing Bubble 2.0 is well underway, SoCalJimbo, so you better hit your local food bank since the cratering of the housing market is about to get real.
Gershon,
SoCalJimbo is one of our “SocalJim” spoof commenters.
SocalJim is famous here for his relentless and prolific optimism about real estate, though he had of lot of good insights from his insider point of view. We have two folks here that are spoofing him occasionally.
Gershom, the 1-800-GO-NINJA was intended to make it clearly a parody account. NINJA (No-Income-No-Job-or-Assets) loans / no-doc loans were popular in the runup to the housing crisis, but something a realtor would never advertise as a phone number.
Good question; I’m sure So cal Jim has the answer.
He’ll have *an* answer.
As we used to joke, hanging out at the local Radio Shack, “You have questions, we have answers – they might just not be the right answers”.
Knock it off guys.
Cyberbullying should stop at teenage years at the latest.
I agree.
No matter how much people think Socaljim as the unloved RE industry mouth piece, he has 50% chance of being right in his estimate of where houses are going. He think his chance on stagflation and orderly drift up is more than 50% chance and he make bets on that. I am skeptic and stay at 50% going either debt collapse or orderly engineered inflation. Valuation is simply too high on everything and if anybody make any miscalculations, shit may hit the fan and there goes the orderly inflation drift.
People in the west are so enamored with the Chinese miracle that they refuse to understand “Companies suddenly were out of funds and defaulted on debts, though they had piles of fake cash on their balance sheets that, upon further examination, did not to exist.” that the Chinese will fake EVERYTHING. There are lots of crooks and cheats in the west but it is far worse in China where it is “culturally” acceptable. I would not own any equity from there.
i am surprised by your comment that it is culturally acceptable in China to cheat. Is that really true of the entire culture, or just within business/government? The Chinese citizens I’ve met in social circles have been very honest and courteous on an individual level.
I agree. I have some very honest hard working friends in China.
WHY do so many people always make the leap that just because they anecdotally know some people who don’t fit a general profile that the profile isn’t accurate?
Book:
To Steal a Book Is an Elegant Offense: Intellectual Property Law in Chinese Civilization (Studies in East Asian Law, Harvard University)
https://www.amazon.com/Steal-Book-Elegant-Offense-Intellectual/dp/0804729603
One of several studies:
JOURNAL OF CHINESE ECONOMICS, 2014 Vol. 2. No. 2, pp 73-78
Call for Copy – The Culture of Counterfeit in China
by Ling Jiang
Abstract: The aim of this paper is to deepen the understanding of Chinese counterfeit phenomenon by exploring the effect of culture. Counterfeit activities are shaped by Chinese historical, social and political reasons. Intellectual property rights protections don’t have an obvious presence on Chinese soil. The discussion of counterfeit consumer behavior research via the effect of culture is provided.
Recent planted “lost wallet” return rate experiment by country. NOTE what country is the worst in the resulting chart:
https://pbs.twimg.com/media/D9mk_d2UYAIpAdP.jpg
I think it is like politicians in US. Everybody knows they are lying when their lips move and yet everybody bite for them and hear they talk on TV. This is what it means as socially acceptable. Now use the same kind of social acceptable thinking to cheats. For example, you know a guy who cheats but he brings in construction projects and he is willing to hire you and pay you salary. You know he cheats and you decided to work for him for the salary. When the times come and his cheating project is exposed, you just leave to work for somebody else. This is accepting. Same way as voters “accepting” lying politicians as long as they make you believe they will bring the policy you prefer. Which you will find that you got cheated.
Take up arms and change governments? US government is less oppressive than what I’ve read about the 1776 British Empire. USAF is less oppressive than the USMC from what I’ve been told. Everyone makes the best of the situation they have been thrown into. Deal of the cards.
I am NOT suggesting any improvement in system rules or laws or social culture especially requiring citizens to risk their lives. I am just saying what “socially acceptable” means.
Nobody would risk their lives for anything that is NOT life threatening. That’s how slavory works, that’s how government rules. What I do is to turn off TV, I do NOT go vote unless they give me a candidate that represent any principle rather than interest.
I spent 30 years exporting agricultural goods from NZ to China. You can not trust any Chinese company. In order to operate in their country we were required to go there and teach them, for free, how to do the business. The graft was incredible. When I asked one of our Chinese partners about the acceptance of graft and backhanders he said there is no such word to describe it and that it is expected that you will pay for the privilege of doing business with someone. This being how they look after each other. The requests to add illicit properties to the products to increase profitability were ongoing
They also like to alter invoices and mislabel product to avoid paying taxes. I could say more but best not to say too much.
Just google the melamine scandal where they added melamine to their infant milk powder to increase the protein level and killed a lot of infants.
One of my Chinese customers mentioned several times that Chinese will only buy on a rising market. Eg when property prices are rising. But will sell as soon as they see the beginning of a down trend. The idea being to not pay off the property but to benefit from the rising value.
I am glad to be out of it and retired.
“…I am glad to be out of it and retired….”
So pleased you got out before they corrupted you…. too.
Mr Lim say…’when you shake dirty hand, hand get dirty’ .
But that’s OK. Just business.
Malamine in formula vrs Enron accounting? hmmm. Same thing imho, only different product.
Maybe we’re talking about human nature in general.
flying kiwi, If what your saying is a condition of doing business in China than a lot of US companies would have had to pay a lot of bribes to do business. I believe it is illegal for US based companies to do this. If true then the US prosecuting US Companies that engaged in bribery might have changed the way China and US companies did business. But it turns out some (most?) US companies did not want to prosecute trade violations for fear of losing profitable business. US companies, profits over the rule of law. That’s what competition promotes.
Is also cultural acceptable in Italy, Spain, Argentina and many many Latin American and European countries.
1985 diethylene glycol wine scandal?
That one is so old it was referenced in the Simpsons first season, on the episode “The Crepes of Wrath”.
@ raxadian – Is also cultural acceptable in Italy, Spain, Argentina and many many Latin American and European countries.
sadly, i think it’s culturally acceptable everywhere. i had to give up spanish, italian or mediterranean blend olive oil. the stuff was yellow instead of green and smelled wrong. then i read that most of the lower end stuff is a blend of cheaper oils and then they bribe to get certified as extra virgin olive oil. i also stopped getting my fish from chinatown after my asian mother-in-law warned us that hey were putting highly diluted bleach on fish to keep them looking and smelling fresh. the list goes on and on…
Olive oil adulteration goes back so far, I remember reading about it in a Mark Twain book.
Indeed, if you want the real stuff, get California olive oil.
Dilute bleach on fish is the same thing as is done on chicken here in US markets so I dunno what to say about that, except that Asians in general seem to have much higher standards with regard to seafood and while it’s possible to buy some fairly raunchy frozen fish in an Asian market, the fresh stuff is generally really good.
Actually the most green one is the cheapest one. Yellow one is regular “Virgin” and extra virgin is… not as green as you think but definitely not as green as the cheap end.
extra virgin olive oil is hard to get.
The ten brands worldwide that are real extra virgin are:
California Olive Ranch: ‘Everyday Extra Virgin Olive Oil’
Burroughs Family Farms: ‘Organic Extra Virgin Olive Oil’
Mr. Organic: ‘Organic Extra Virgin Olive Oil’
Cobram Estate: ‘Select Extra Virgin Olive Oil’
ZOE: ‘Extra Virgin Olive Oil’
Cave Creek: ‘Ultra-Premium Extra Virgin Olive Oil’
Ellora Farms: ‘Certified Extra Virgin Olive Oil’
Goya: ‘Ultra-Premium Extra Virgin Olive Oil’
Colavita: ‘Premium Extra Virgin Olive Oil’
And
Kouzini: ‘Greek Premium Organic Extra Virgin Olive Oil’
I am not sure if all these brands still exist.
Yerfej is correct – I have worked in China. It is culturally acceptable to do anything to anyone who is not an immediate relative, and yes that includes running over them with your car to save face or murdering over 60 children packed in a Volkswagon van (there are numerous accounts of these and other incidents in the newspapers if you are not blind and living in the west). I have seen incidents like this with my own eyes and had them “explained” to me by the Chinese. Chinese behavior in the west is no indication of and not related to their behavior in China, period.
There is no existential postulate in Chinese culture for honesty, from the individual, to a business, to the government.
Murdering 60 children in a van. How would that impact the social credit score?
The Chinese culture reminds me of the Ferengi race in Star Trek. The Ferengi’s religion is a form of capitalism, specifically 299 “Rules of Acquisition” define the entire culture. I’d say the Chinese follow Rule of Acquisition 47, as stated below:
“The best deal is the one that brings the most profit. Never spend more for an acquisition than you have to. Never allow family to stand in the way of opportunity. … A Ferengi without profit is no Ferengi at all!”
Just pray the Chinese do not follow what we have learned in America, specifically Rule of Acquisition 34, as stated below:
“War is good for business”…
There is this little known text, not very famous, some ancient Chinese dude wrote it. I think it’s called the Art of War.
Just because they haven’t had one in a while, doesn’t necessarily mean they forgot how.
“In 2006, the Chinese Academy of Social Sciences estimated the number of annual mass incidents to exceed 90,000, and Chinese sociology professor Sun Liping estimated 180,000 incidents in 2010.”
China has plenty of small wars. Just not televised, except in Hong Kong.
The Chinese sure seem to like hotels and airline related industries.
They also purchased Smithfield Foods.
They lost their shirt on the Deutsche Bank investment.
….and their trousers as well
I do business in China and I met mostly reliable suppliers. The assets sold are to deleverage and to get usd as their is a shortage of offshore usd funding. And yes as someone commented above I think many companies in USA also are way over their head in term of Borrowing
HNA is your culprit there. Their buying spree in the travel and accomodation segment has been nothing short of phenomenal, as is their sudden fall from grace.
A couple of months ago Aigle Azur, 49% owned by HNA (the maximum ownership quota allowed by EU airline rules), filed for bankruptcy protection. Despite being the largest shareholder, HNA didn’t lift a finger for the French airline, whose most likely fate is to be cut up and each piece auctioned off to pay creditors. Aigle Azur is worth far more in pieces than as a whole.
The same applies to the Frankfurt-Hahn Airport (HHH). The perpetually money-losing airport is 82.5% owned by HNA but the Chinese group has proven unwilling (or unable) to cover financial losses, so the minority partner, the Land of Hesse, will cover losses from FY 2017 to FY 2021 with the blessings of the EU.
When HNA representitives arrived to shake hands and sign contracts in front of the cameras I was shocked at how supposedly sane people had checked their brains at the door and somehow believed HNA could solve problems by merely throwing money at it. It was beyond obvious these smiling and very polite Chinese businessmen had no clue about what they were buying and didn’t care one bit, otherwise they would have given HHH a very wide berth.
I think HNA was the combination of different factors.
On one side the age-old Japanese saying that “A great sword in the hands of a novice will soon find its way in the hands of a great warrior”. HNA was cash-laden, but had little experience in foreign markets so they just bought everything that was pitched to them, and most of those sales pitches were made by consumate corporate snake oil salesmen.
On another HNA executives fell prey to that peculiar social obsession in China of showing they had gone beyond the borders of the Motherland, buying everything in their path, even if their acquisitions made zero financial sense. This is the same reason why Chinese tourists will patiently line up in front of fashion stores in Milan and Paris to buy exactly the same handbags and shoes they can buy in Shanghai and Beijing: they are not so much interested in the item itself as in showing their friends and families the receipt as a trophy of sorts.
Finally I cannot shake off the feeling that HNA has been used to enable capital flight on a truly colossal scale. HNA has a fantastically convoluted corporate structure and is notorious for using somehow even more convoluted payment methods which lend themselves well to purposes the Chinese government doesn’t like that much.
So if the HNA fellas went on buying everything but had no idea what they were buying, would that suggest someone else’s money was doing the actual buying?
Smiles and all.
Seems like they unloaded trouble hotels. Westin in SF has had very public labor disputes. There was protesters outside it for months pounding a drum.
The Ritz Half Moon Bay is being sued and losing for multiple reasons. Labor being one. The other is coastal access.
Interesting, in my opinion.
In grad school in the 1980’s everyone made a big deal about Japan. Once they started acquiring american landmark properties, I thought this signals the beginning of the end for them. Japan has never come back after the 1990 blood bath in the Nikkei. I have said that China’s time in the sunshine will be less than Japan’s….so here we sit…..stay tuned and gird your loins!
I’ve got a Smithfield ham factory right next door to me. If anyone doubts they use real wood smoke to smoke-flavor the hams, they’re welcome to come by late at night to smell the hickory smoke plume the place emits – it smells pretty nice actually.
– When are US companies going to follow the example of these chinese companies ? US companies have borrowed billions to buy back their shares and some of them are loaded to the gills with debt. One such example is General Electric. I expect a fire sale over there as well. GE seems to be (very) cash strapped and seems to have a negative cashflow.
– And there are the first (e.g. US) companies that are reducing their dividend in an attempt to reduce their debt load.
– It reminds me of what happened with japanese companies. These japanese companies came to the US in the (2nd half of the) 1980s with a (large) bag of money and bought – among others – lots of real estate. Then when the japanese economic tide turned these same japanese companies sold the same assets again. They had to raise cash to survive and many an nobject was sold at a (heavy ???) loss.
– Rinse and repeat.
Yes, the parallels between the Japanese bubble of the 1980s and the Chinese bubble now, and how the unwinding is taking place, are fascinating. There are huge differences between the two, but there are also big parallels, and they’re becoming more and more apparent.
– Anheuser-Bush Inbev cuts its dividend by 50% to be able to pay down its debt.
https://www.bloomberg.com/news/articles/2018-10-25/ab-inbev-cuts-dividend-in-half-as-earnings-miss-estimates
Who is next ?
wasn’t there a time when Japan unloaded a bunch of money on assets in the US, I specifically remember the Rockerfeller center being one of those prized assets. Then just a few years later, they were sold, not sure if it was for a profit or loss though. Seems like the cycle is repeating here.
Except in this case, it is forced by the Chinese government.
It’s been going on forever.
Newly rich person comes to town. Local kid sells them the Brooklyn Bridge.
Its was during the S&L Crisis. I think Pebble Beach got dumped too.
Assume these are straight currency exchanges, that’s quite a lot of cash
Japanese bizman bought Pebble Beach golf course for 900 million and had to unload after a year for 500 million…
Anyway, I don’t see any respite from sky high real estate prices.
My neighbor sold his house in 2 weeks for a million dollar to an old Chinese couple..
I don’t believe any data having to do either with the Chinese govt or any Chinese company.
Yes, wise choice. This should be the first line in a textbook on how to approach an investment in a Chinese company.
But the thing is these companies are doing what they’re doing because investors let them and even encouraged them to, under the time-honored principle: As long as it doesn’t matter, it doesn’t matter :-]
Another term for this that I have applied to US markets before is “consensual hallucination.”
Trouble is, “hallucination” implies absolution from accountability.
No matter how prevalent it is, these activities are dishonorable.
For those who desist, virtue is its own reward.
To my ear, hallucination in this usage implies more of a fugue or drug induced state. Accountability is always there, maybe one just doesn’t see it. Think of a rockstar for a model; maybe they wake up in a hotel room, all the furniture is smashed, there is an empty needle in their arm, and despite all the “fun” the evidence suggests they had, they are in an ugly world of pain, and need cash to buy more drugs to help ignore the pain they’ve caused, and continue to cause themselves.
I propose “mutually agreed self-deception”.
The Silicon Valley apartment market is definitely going soft. Empty apartments in sought-after Cupertino school districts. Normally there would be high demand from mainland Chinese parents with educational ambitions.
I have two friends that work at Lenova in the US. They like it, and they seem to have a better work life balance than many companies in US. They are not very profitable I don’t think; so not sure if they care more about being a tech player in US than earning profits.
I’m sure the person who bought it just wanted to diversify assets out of china
1) Maersk ceo : the global trade is growing though at a slower pace.
2) The Chinese banking assets : $48T // reserves < $3T // GDP $13T.
3) NPL between 10% to 40%, larger than reserves, higher than
the Chinese $13T GDP.
4) China dollar debt problems are getting worse.
5) In 2014 foreign investors were invited in. The left is great, always winning. Stay on the left hand side of a bubble and u will be safe. But in 2015 the Shanghai stock exchange (SSEC) have peaked and
foreign investors took their money from the right hand side and escaped.
6) On Aug 24 2015 China big x4 banks and the PBOC couldn't kick the can down, SPX collapsed.
7) USD is the most important currency in the world.
8) The invisible Yuan is the most important Real Goods currency.
9) China enslave nations get Real Goods from China, prices are based on Yuan, in exchange for oil. Not a dime was transferred between the two sides. Not even the Yuan.
10) A trade deal was sign lately between China and Iran :
x8 oil tankers @ 40% Brent plus 100 fine Persian carpets for the elite for 4,000 Chinese cars, 10,000 TV sets, and 100,000 men underwear.
11) Real Goods for Real Goods.
12) US is the foreign debt king. China is the barter king.
13) China imported 500 millions tonnes of oil in 2018. If consumption is
less than 500 million tonnes, China sell oil in the open market for USD,
to quench dollar dehydration.
>> left hand side of a bubble
>>foreign investors took their money from the right hand side and escaped.
Please explain this terminology.
Narmageddon, think in terms of a price chart centered on the peak of a bubble.
The left side of the chart shows the bubble rising to its peak.
The right side shows the disastrous crash.
Maybe Chinese businesses are afraid of holding investments denominated in yuan?
Ballooning Treasury supply will make matters worse. The Congressional Budget Office this week estimated the fiscal 2020 deficit will exceed $1 trillion, two years earlier than previously estimated. The $433 billion borrowing estimate for July through September, made last month, is more than double the initial estimate made in April.
The repo rate for general collateral, which has averaged about 2.20% since the Fed cut the fed funds target range to 2%-2.25% on July 31, could initially exceed the top of the range by 10 basis points to 15 basis points, Pozsar said, at which point “it’ll drag everything else with it, including the fed funds rate.”
Pozsar says things could start to get ugly as soon as early October, when investors start scrambling to secure funding for year-end.
“You have a massive supply shock made worse by the inversion, and dealer inventories are the bogey man,” Pozsar said. “Things are going to get bad before year-end.”
https://advisorhub.com/bond-plumbing-may-be-what-spurs-fed-cuts-rather-than-economy/
Mr Mustard,
The Fed will lower the IOER on Wed and increase further the spread between it and the fed funds rate target, which will make the banks more eager to lend out the $1.3 trillion in liquidity that they have parked at the Fed as Excess Reserves. That will take care of the liquidity shortfall in the repo market.
Also, if the IOER is sufficiently lower than short-term Treasury yields, the banks will switch some of their $1.3 trillion now parked at the Fed as Excess Reserves to Treasuries, where they will earn more money. This will help absorb the supply of new Treasuries – at least for a while.
But yeah, the biggest problem is that Treasury yields are too low from the 1-year on up, rendering them unattractive as long-term investment. This is a problem when over $1 trillion in supply has to be absorbed every year. Something has to give – and if the market is given a chance, it would be yields, which would rise until these securities are attractive enough to find plenty of long-term investors.
Time to restart QE?
It will be interesting how it all plays out. Stockman has the great saying that the communist figured out they could get more from the people by printing fiat than from the butt of a gun.
Capitalism works pretty well to crank out a mid to high single digit return, but when you do it all with debt, people get sloppy with their calculations. It seems like to me in China a lot of the real estate is not backed by future cash flows, so it is a negative yielding asset which means it’s no asset at all.
Negative yielding for whom.
the ccp allowed peopel to own dwellings, hence the peopel take their cash out of their mattresses, and buy apartments in ghost cities, from, THE CCP.
The ghost cities are a have, the question is still, who has been had.
Depending of course on where you sit when asking the question.
Remembering, in the morning, the ccp can announce they are confiscating all no primary residence dwellings in ccp china, and their is nothing anybody in ccp china, can do about it.
The main difference between ccp china and the west, is that in the west, the government gets to do what it wants, after a big long public fight, so everybody has some notice.
In ccp china, only the political mafia clans and their cronies get notice, and it happens overnight.
Interest on Excess Reserves is indeed a crucial parameter. The banks that have excess reserves have been unwilling to lend to the banks that have insufficient reserves, and reducing IEOR is a step to “correct” that.
Many big banks would prefer other (often not quite as big) banks with insufficient reserves to become insolvent (that’s what not having enough reserves means, in practice), so that the bigger banks can acquire them for cheap through a forced sale. That’s how the game is played on Wall St.
So, the question is, will FRB/FOMC announce today that IEOR will be reduced relative to the FFR, whether or not FFR iitseklf is reduced. That is the question.
And the answer is that Fed/FOMC placed the IEOR 5bps above the botiom end of the FFR range versus 10bps above before.
FFR 2.00-2.25 changed to 1.75-2.00
IEOR 2.10 changed to 1.80
MBS runoff still at 2B/month, reinvested in UST
No outright QE announced
Correction of typo, 20 not 2:
MBS runoff still at 20B/month, reinvested in UST
Dear Nar,
This is from Alhambrapartners this morning and it helps explain the path forward:
“At what point do we begin to suspect US primary dealers are simply hoarding? At the very least, they are refusing to enter the markets even with additional reserves in hand so as to keep orderly function. That’s another way of saying hoarding, though.”
In addition, from a recent paper, it’s clear to see that when QE programs are offered, banks hoard excess funding, which in the long run, lowers yields in bond markets. One problem is that banks are in a position to legally need greater reserves and thus the hoarding is a constraint that reduces their willingness to lend reserves, thus they play a little game of arbitrage, playing it safe, not taking risks loaning. On the other side, the FED and CB’s feel that they need to give banks enough money to lend more, but it’s like a catch-22 and effectively, the Fed essentially enables bans to make more money through hoarding, while rates are lowered — which helps explain negative rates and all the swaps that help in that hedging. Amen
Yup, the Fed needs to take away that punch bowl ASAP!
The Board of Governors of the Federal Reserve System voted unanimously to lower the interest rate paid on required and excess reserve balances to 1.80 percent, effective September 19, 2019. Setting the interest rate paid on required and excess reserve balances 20 basis points below the top of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC’s target range.
China’s Hong Kong Problem Is Just Beginning
https://www.forbes.com/sites/miltonezrati/2019/09/17/chinas-hong-kong-problem-is-just-beginning/#3c44324272ce
The assertion is that the CCP cannot send in the troops because that would be like commiting suicide. The economy would blow up and likely take down China (and the world?) with it.
On the other hand, it appears that China will not bend because what the protesters want is not possible to give. They have political demands but they always want affordable housing etc which is complicated if not impossible.
https://www.bloomberg.com/news/articles/2019-09-18/lam-won-t-concede-to-hong-kong-protest-demands-top-adviser-says?srnd=premium-asia
So China cannot quell the protests through force or negotiation.
Airlines are cratering, hotels are cratering, property prices are starting to crater, retail is cratering, F&B is cratering – and there appears to be no way out.
If this continues for much longer we will have a major crisis that I very much doubt will be confined to Hong Kong (given the precarious state of the global economy)
Tick tock tick tock.
How many hongkongers do you know and regularly communicate with.
The problem is much worse than what the articles on both side make it, as the protests are a headless chicken.
How does the ccp, or lam the puppet, negotiate with the protest leaders, when their is no 1 protest leadership to negotiate with.
As a settlement with 1 part of the headless chicken can be rejected for no real reason, by all the other parts, brexit chaos, X 100.
I am personally amazed at the restrain shown by the ccp in this ongoing matter. Fire bombs, are deadly force, the ccp is entitled to reply in kind.
I spend roughly have of my year in Hong Kong and China. I will am headed there next week for a two month stint.
The issue is not so much there is nobody to negotiate with (Joshua Wong would be more than happy to step up in that role) rather I believe it is impossible to give the protesters what they want.
1. They want China to back off and honour the agreement signed pre-handover. This is actually the easiest issue to deal with. They just need to walk it back behind the scenes and make sure China does not lose face. Commit to democracy in 2047 and deal with that issue later.
2. A 200sf flat (size of a car park) sells for USD500k. How do you raise a family in that? And even that is beyond reach for most. How do you fix a property market that is so massively out of whack without tipping the entire market over and causing a financial crisis?
That, I believe is the main stumbling block and the fact that the govt has offered nothing indicates they believe there is no fix.
FYI – the government sent dozens of triads armed with steel rods into the Yuen Long MTR about two months ago. They beat the living daylights out of anyone unlucky enough to come off the train.
There are plenty of videos online showing police mingling with these same triads. One councillor has come out and thanked the triads for supporting China (his horse was running in Happy Valley yesterday and the protesters threatened to have a go at the race course so the races were cancelled – unheard of in HK).
As the protesters have stated, the government showed us the way in terms of using violence to achieve objectives.
Now there are some who are calling for the police to viciously beat protesters who damage the subway.
Ok, then surely the police should be encouraged to beat murderers and rapists. And what about thieves, surely they should beat them to deter others. What about DUI offenders? They need to feel the weight of the truncheon as well no?
Beating protesters has only made the situation worse. These videos circulate enraging the protesters. And this increases support for violence from pacifist protesters.
Most people are to the point where they now support the more violent elements among the protesters.
Well done Carrie Lam.
10% of shops in Causeway Bay are now shuttered. Hotels are reeling as are airlines (I got a 600sf suite in a top hotel for USD130/night) The layoffs have started. Give this another two months and the city will bleed out.
What happens when the banks (including HSBC with massive exposure to HK) topple. Can they be bailed out?
What about the major corporations in the city including the likes of Cathay Pacific? TBTF?
What happens to the stock market and the Chinese economy?
So many unknowns here.
A friend at an IB in HK told me their risk people are saying the only way out is if the government can toss the protesters a meaningless bone to calm them down. They tried that a couple of weeks ago and they punched Carrie Lam in the face destroying a few subway stations.
The same person indicates that expats don’t venture outside of their neighbourhoods on weekends as they may have trouble getting back.
The situation is grim. People are in a state of purgatory waiting for the door to hell to open (or to get on a plane out).
‘We burn – you burn’
‘Revolution of our Times’
This is well-worth watching: Rebellion:
https://www.youtube.com/watch?v=7g4N6Oe3g2Q
I don’t see this as a big deal. In due time, the protest would be quenched/suppressed.
The sad thing is that extradition bill happened for a very good reason. It all started with a murder in Taiwan. But it has blown up to be much more than that, now the bill is withdrawn, but the problem has remained.
If this was peaceful protest, it’s one thing, but things have gotten way out of hand. Protesters pointing lasers at cops, random violence against people who doesn’t want to get involved, cops going in with excessive force. Everyone literally just needs to cool it and get off the streets for a few days.
I’d say Beijing has shown remarkable restraint on the situation, for a variety of different reasons. This is slowly choking off Hong Kong’s economy, and it isn’t a good thing. Sooner or later, the people who are protesting are going to realize that what they are doing is just giving other cities in China more of an edge. You don’t see mass protests in Shanghai or Beijing for example.
There is a reason why corporations domicile in Hong Kong and sign all agreements in Hong Kong rather than China.
It’s called rule of law.
I have done business in China for many years. It is a shocking place.
My business partner and I sold our China operations last year and he left the country with his family (Chinese wife) soon after.
As he put it ‘even though you try to follow the laws with respect to accounting procedures and other practices you never know if you have done something wrong and you will get hauled in’
This is a country where virtually every foreign media website is blocked. You cannot even watch a Youtube video.
China needs Hong Kong. Yet they are trying to turn HK into just another sh%tty mainland city by destroying the fabric of what makes HK what it is.
But then the CCP is essentially a gangster organization (the order to send triads after those people on the subway in Yuen Long surely came from the top) so what do you expect from them.
This Kyle Bass interview shines a bit of light on a very sinister situation
https://www.youtube.com/watch?v=4cwXifDaCjE
There is some kind of Vietnam in the repo market.
Dealers refuse to lend, because the dragon is out there.
Prof Mandelbrot Chaos, is back.
We don’t understand, neither the Fed.
Old Chinese proverb: you can’t pick a turd up by the clean end.
Applies to both sides of Pacific Ocean.
Dumping US debt that is going to be inflated away by the Fed is probably a wise decision for anyone who wants to preserve their wealth.
Regarding Chinese culture and corruption, please do remember that “China” as mentioned referred to Mainland China, ruled by the CCP, whose acts include killing tens of millions of its citizens through starvation, and also enacted decade plus reign of terror called the Cultural Revolution, decimated much of the old cultures. So any observed corruptions, are not “Chinese culture”.