Tuesday, June 30, 2015

Braking and Accelerating in China (excerpt)

The Chinese have a very high savings rate, widely estimated to be 40%-50% of their income. A rough proxy for the amount of saving is M2, which rose to a record $21 trillion during May. It is up $2 trillion y/y and $12 trillion over the past five years.

The PBOC’s monetary policies have channeled most of those deposits into loans that expanded industrial capacity and funded property development. Now there is a glut of these, which is weighing on economic growth. Yet as I discussed yesterday, China’s banking regulators are set to scrap the country's longstanding loan-to-deposit ratio requirement, which is currently 75%. That move could inject another $1.1 trillion into the economy.

Over the past seven months, Chinese investors have poured money into the stock market seeking better returns, thus inflating a speculative bubble, which may be starting to burst already. Helping to burst the bubble are regulators intent on keeping a lid on margin lending by shadow banks. The 6/25 FT reported that official margin lending totaled $354 billion as of Wednesday’s close, up nearly 5.5-fold from a year earlier. However, this officially sanctioned margin lending, which is tightly regulated and relatively transparent, is only the tip of the iceberg for Chinese leveraged stock investing.

Unregulated margin leverage can reach 5:1 or higher, with no limits on which shares investors can buy. The funds come mainly from wealth management products (WMPs) sold by banks and trust companies. These are structured deposits that banks market to customers as a higher-yielding alternative to traditional savings deposits. Regulators moved to limit the availability of shadow margin debt on Saturday, June 13, triggering panic selling on Monday, June 15.

This past Saturday, China’s central bank cut its benchmark lending rate to a record low and lowered reserve-requirement ratios for some lenders. In the fourth reduction since November, the one-year lending rate was reduced by 25 basis points to 4.85%. The one-year deposit rate will fall by 25 basis points to 2%, while reserve ratios for some lenders, including city commercial and rural commercial banks, will be cut by 50 basis points. The PBOC was clearly worried about a meltdown in the stock market.

Today's Morning Briefing: Central Bank Credit & Credibility. (1) Are central banks losing control? (2) Given global turmoil, US stocks may be more attractive again. (3) BOJ pumps up liquidity, but fails to ramp up production. (4) Japan’s forward earnings still rising to record highs. (5) Chinese savings glut. (6) As China’s margin debt regulators step on brakes, PBOC steps on monetary accelerator. (7) Wealth management products may be China’s weapons of mass financial destruction. (8) ECB stimulates bank lending a little bit. (9) How much does Greece owe ECB? (10) Not cool: Dudley compares Greece to Lehman. (11) Liftoff or back off? (12) Fist fight between IMF and BIS. (More for subscribers.)

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