China opens financial sector and other links

Bloomberg captions its story on China opening its financial services industry to foreign majority ownership with a mention of banks. But, the details do not mention banks yet. Only security companies, insurance firms and asset management companies. [Link]. Ownership cap of 51% for foreigners will be lifted after a few years. But, one has to watch for conditions and other restrictions.

Ian Bremmer in TIME: ‘How China’s Economy Is Poised to Win the Future’.  A conclusion  that backs China – heavily caveated though. But, I am not sure I still agree. [Link]

The Economist says that the private sector has prospered under Xi. Something that has perhaps not happened under the Indian strongman PM in the last three years. [Link]

A very interesting and important piece by John Pomfret in WaPo on the changing thinking in Washington, D.C. on China.

JAVIER C. HERNÁNDEZ and AUDREY CARLSEN write an interesting piece in NYT on the personality cult that is being built around President Xi.

“China’s planning a 1,000km tunnel to divert water away from one of India’s largest rivers”, says a headline in Quartz. It will be hugely problematic for India and Bangladesh. [Link]

Bloomberg has an interesting story on a note that the Chairman of the People’s Bank of China has penned on the website of the bank. The English version is not out yet. But, one can use ‘Google Translate’ to read it in English. The Bloomberg story is here and the Chinese language page is here.

It would be a mistake not to include the tit-for-tat articles by Joseph Nye on America holding aces in the poker game with China and the retort by Wang Wen that China holds the aces now. The claim by Wang Wen that China holds aloft the banner of free trade is rather amusing. These two articles must be read together with the articles by Ian Bremmer and John Pomfret. Apologies if they are behind paywalls.


(1) If one wanted to stay safe  traveling in dangerous, it is good to carry something to trade, when threatened such as, say Rolex watch. Plus, more tips here.

(2) The contrarian in me is tickled by this long-form article in FT on the travails of the Deutsche Bank. [Link]. Most likely behind a paywall.


Lewis on Thaler and other links

Been on the road since last Friday. Too much of travel and hence less time to think but made time to read, though.

Thanks to Tracy Alloway’s Twitter handle, saw this Michael Lewis piece on Richard Thlaer, written first in May 2015, republished early in October.

Google/Alphabet’s urban cities project is fascinating, mind-boggling or scary or something to be welcomed? I have no idea.

HSBC might have helped Guptas in South Africa to launder money.  Could be behind a paywall.

A comprehensive interview with CEO of UBS. Parts of it have a wider relevance than only to financial types.

Countries around Asia are banning sale of sand and Singapore’s land expansion is threatened.

Americans are ‘freaking out’ but, as consumers, they are feeling confident more than ever in the last seventeen years.

The scariest chart is the last one – Halloween special.

This – a similar set of scary charts – is from the bond market perspective. The information below boggles the mind:

ECB QE is currently 7 times bigger than net issuance. So is it any wonder why yields have fallen, and what happens when the ECB tries to turn off the easy money tap?

STCMA – 9th August 2017

Lest I castigate myself later for not documenting this, I am linking a few stories (mostly from Bloomberg) on this topic.

(1) The founder of Credit Acceptance Corporation resigns as Chairman, sells a big chunk of his stock (still retains a large portion) and critics evaluate if the company stock is the next BIG SHORT [Link]

(2) Santander Consumer USA Holdings Inc., which is counted among the biggest subprime auto-loan firms, verified income on just 8% of borrowers on loans it recently bundled into $1 billion of bonds, Moody’s Investors Service said. …Delinquencies on U.S. subprime auto asset-backed securities climbed to a 20-year high in February, exceeding the levels seen in 2009 following the financial crisis, Fitch Ratings warned in a March report. [Link]

(3) This story by Lisa Abramowicz has a chart that shows that securities backed by auto assets have crested the peak of 2006.

(4) The percentage of subprime auto-loan securitizations considered deep subprime has risen to 32.5 percent from 5.1 percent since 2010, Morgan Stanley said….Sixty-day delinquencies for bonds backed by these loans have risen 3 percentage points since 2012, compared with just 0.89 percentage points on all other subprime auto securities, Morgan Stanley’s Vishwanath Tirupattur, James Egan and Jeen Ng said in a report dated March 24. [Link]

Deep subprime borrowers are those with FICO scores of 550 or below.

(4) Depending whose money they’re using, Wells Fargo & Co. and JPMorgan Chase & Co. either love subprime car loans or fear them.

Both banks have grown more reluctant to make new subprime loans using money from their own balance sheets. Wells Fargo tightened its underwriting standards and slashed the volume of all loans it made to car buyers in the first quarter by 29 percent after greater numbers of borrowers fell behind on payments. JPMorgan’s consumer and community banking head Gordon Smith earlier this year said the bank had cut its new lending for subprime auto loans “dramatically.”

At the same time the firms are indirectly funding billions of dollars of the loans by helping companies like Santander Consumer USA Holdings Inc. borrow in the asset-backed securities market, essentially shunting money from bond investors to finance companies. Wall Street banks packaged more loans from finance companies into bonds in the first quarter than the same period last year, and Wells Fargo and JPMorgan remained two of the top underwriters of the securities. [Link]

(5) In May, Santander agreed to pay $26 million to settle allegations brought by Delaware and Massachusetts as part of ongoing investigations into the auto industry’s lending practices. Santander, whose partnership with Chrysler goes by the Chrysler Capital brand name, neither admitted nor denied wrongdoing….Whatever the case, the Santander-Chrysler relationship has opened a rare window into an industrywide race to the bottom that may have lasting consequences. [Link]

(6) Although this story has a deliberate, scary headline, the details are not. Discussing absolute dollar amounts is misleading as the underlying GDP and household networth have grown.

American consumers now collectively have the most outstanding revolving debt — often summarized as credit card debt — in U.S. history, according to a report Monday released by the Federal Reserve. Americans had $1.021 trillion in outstanding revolving credit in June 2017. This beats the previous record in April 2008, when consumers had a collective $1.02 trillion in outstanding credit revolving credit. [Link]

(7) More interesting is this chart. That American household savings rate has not improved but is lower than it was before.

US Household savings rate

Source: WSJ Daily Shot (August 2, 2017)

(8) If one were looking for a sign of market top, probably, this one is a very good candidate:

An $800 million subprime auto bond sale from Westlake Financial Services Inc. last week was priced at some of the highest valuations — as measured by the extra yield the notes offered compared with the benchmark rate — since 2014, the analysts wrote in a note Monday. The portion of the security rated BB, or two steps below investment grade, offered the least additional yield for a deal of its size and rating on record. Demand for the offering was strong enough to increase its size from a planned $700 million. [Link]

(9) NFC Equity to GVA

Equity in non-financial corporations (market value) to their Gross Value Added. We are fast approaching the levels of the 2000 peak. Perhaps, with 2Q data, we would be there already.

(10) Is the savings in corporate pension costs a silver lining at all to the story of stalling and even declining (very slowly, for now) life expectancy in advanced nations?

(11) A friend forwarded this article, ‘Our broken economy in one simple chart’. President Trump is predictably criticised at the end of the article for proposing a tax rate that allegedly worsens the inequality in the US. But, I could not stop wondering then about the worsening of the inequality to such extreme levels even without Trump tax cut and especially during the eight years of an egalitarian President.

448 million social media comments and other STCMA – 24 June 2017

The retreat of the Renminbi. Quite. The image of the Global Payment Currency rankings is telling. Danish Krone has a bigger share than Renminbi. Strategically sound advice from Shyam Saran not to assume that Renminbi’s onward international march is dead but factually incorrect. Article behind paywall.

Anjana Trivedi of WSJ calls it a ‘The Onion’ Headline. I have to agree.

A very good tweet:

Until China willing allow failures and losses, deleveraging campaign should be taken as seriously as any Democratic congressional campaign [Link]

James Mackintosh tweeted this:

Lovely Deutsche Bank chart of over-optimistic economists’ predictions for 10-year bond yield. Average 12-month forecast error: 60 basis points too high. [Link]

Two great tweets by James Kynge of FT

MSCI’s China A-share choice was between relevance and governance. Like many seduced by China dream, they chose former…. [Link]

…. And will come to regret the lack of the latter [Link]

His articles on the MSCI including China A shares in its index on the China Banking Regulatory Commission asking Chinese banks to reduce their exposure to China’s corporate cowboys (ambitious overseas acquirers) are worth reading. Could be behind paywalls, though.

Chris Balding’s blog post on the both these topics is worth a read too.

It is all about free cashflows in these Chinese corporate cowboys or, more precisely, the lack of it.

Chris Balding tweeted, while commenting on this blog post at PIIE.

“How brutally misleading and worthless a blog post by @PIIE. Look at all the products that aren’t even allowed in so don’t have a tariff rate​” [Link]

I guess we all know where PIIE stands with respect to China.

From the abstract of the forthcoming paper by Gary King of the Harvard University and co-authors:

We estimate that the (Chinese) government fabricates and posts about 448 million social media comments a year. [Link]

After Moody’s, now S&P also threatens a downgrade of China’s sovereign credit rating. Currently, it stands at AA- with a negative outlook.

China’s capital controls put real estate developments in Johor at risk, as most of them bet on the Chinese buyer.

A great article in ‘Australian Financial Review’ on Malcolm Turnbull becoming a China hawk from being a Panda hugger. You must be lucky to catch it. A question that came up in the head is why these leaders have to learn this all by themselves, all over again, when there is so much history and evidence?

The answer, my dear mind, is “They are not stupid. Their incentives are differently aligned and the cost benefit calculus of pursuing those incentives keeps shifting all the time.”

Chinese loans may put Bangladesh in a debt trap.

The economists who wrongly predicted a decline in healthcare costs for American families under Affordable Health Care are still at it, with dire predictions and interpretations of the Republican new Senate Bill. Here is an article from 2013 on how their predictions of declining health care costs turned out.

Avik Roy explains here how the Senate version improves up on the House version of the Health Care bill while keeping health care afforable.

Greg Ip gives the thumbs up to the Trump team banking proposals.

According to Zerohedge,  Israel deployed fighter jets to help prevent a coup in Saudi Arabia on the announcement of succession that replaced the present crown prince with the King’s son. Strange world.

Interesting article on how Jokowi in Indonesia is rebooting his Presidency before the 2019 elections after his ally and ex-Jakarta Governor had been sent to jail for blasphemy against the Koran.

Technology, jobs and societies are my favourite and anxious topics. These two links make me wonder whether we can ever become sensitised to the dangers of what we consider progress and development.

This is a review of Dan Drezner’s book, ‘The Ideas Factory’ by Edward Luce in FT.  These lines explain the problem of jobs and technology linked above:

The optimal talk, particularly for Ted, which serves as an advertising platform for paid speaking, is to focus on what Evgeny Morozov, a critic of Silicon Valley, describes as the “cyber-whig” view of history: the belief that technology is carrying us upwards.

“Find some peculiar global trend — the more arcane, the better,” Drezner quotes Morozov saying. “Draw a straight line connecting it to the world of apps, electric cars and Bay area venture capital . . . Mention robots, Japan and cyber war. Stir well. Serve on multiple platforms.”

How safe are U.S. banks?

Today the banks have about 6 percent tangible equity. That’s how much capital we have now, in the banks, on a tangible capital, loss-absorbing capital basis. If we had another crisis like the last one [6 percent of assets lost], that equity would still be wiped out. So you’re at zero today if we had a similar crisis, not negative 3 percent. That’s not negative, as it was in the last crisis, but it’s still zero.

No, we’re not adequately capitalized. We’re better capitalized. And doubling from a very small number is not a real big hurdle. I think the real hurdle is getting to what is adequate, which I judge as a minimum 10 percent tangible capital, leverage ratio, not risk-weighted.

And when we get there I’ll feel much better about the ability to withstand shock.

Here’s what I mean: If you think about it at today’s current level of tangible equity of 6 percent, [if] you have an individual bank fail, very large bank fail … you’re going to have repercussions across the economy and across other banks. That’s what happened last time.

Now, if you only have 3 or 4, or even 6 percent capital, and you have one major bank fail, every other major bank with only 6 percent tangible equity becomes suspect. Do you have really enough capital? Stakeholders may say that’s no more than the losses that we’re seeing in this one large bank, let’s run on the others, why take a chance? But if you have 10 or 12 percent, and you have a major bank failure, you say, “Well, it’s a failure, but the banks are much more strongly capitalized” and therefore they don’t run. And you don’t create a systemic crisis out of an individual bank crisis. [Link]

Thomas Hoenig, current Vice-Chair of the Federal Deposit Insurance Corporation, is one of the bureaucrats that America has been lucky to have. That excerpt was from his interview with ‘Washington Examiner’. If you have not read his speech in 2012 on tangible equity/tangible assets ratio vs. risk weighted capital, you should.

Complexity should be grounds for suspicion that the system is being gamed.

NPA resolution: the details that matter

Caught up with Andy Mukherjee’s Bloomberg Gadfly columns, as I always do, from time to time. As always again, he has something that is important and that is often overlooked by others. This blog post is dedicated to three of his recent columns surrounding the issue of non-performing assets in the Indian banking system.

As of last month, the National Company Law Tribunal was looking for four judges and 12 technical members, all of whom are required to be at least 50 years old with 10 years of legal or 15 years of accounting practice behind them. Five years spent adjudicating labor disputes is also acceptable.

In a footnote, Andy Mukherjee adds, Hopefully, the 65 vacancies the company law tribunal advertised a month earlier — for court officers to typists — have been filled, and the court’s headquarters in New Delhi has selected its tech support vendor for the phone lines. [Link]

This is par for the course with information efficiency of markets, of course:

At the end of 2015, when concerns over Indian lenders’ balance sheets reigned supreme, ICICI Bank Ltd. had around 214 billion rupees ($3.33 billion) in gross nonperforming assets. The bank announced a 78 percent jump in NPAs for just the first three months of 2016, and shell-shocked investors pushed the stock down almost 10 percent in three days.

That was last May. Fast-forward a year, and investors rewarded ICICI Bank’s freshly revealed bad-loan pile of 425 billion rupees — twice as large as the end-2015 stock — by pushing the shares up as much as 9 percent Thursday. [Link]

This is sad and must count as one of the most important collateral damage of the demonetisation drive. But, the benefits are yet to be counted and, one hopes, that someone is working on making the benefits happen. Or, too fond hopes?

What monoline lenders lack in deposit muscle, they make up for in their superior knowledge of borrowers and risk management. It’s a shame that policy whimsy and cynical politics mean the specialists can’t survive except as part of conventional banks. [Link]

Everything is under control – China linkfest

(Some links could be behind paywalls. Apologies)

China’s history problem: how it’s censoring the past and denying academics access to archives [Link]

Xi Jinping’s political theory system is complete now

China bans religious names for Muslim babies in Xinjiang

Why is this Xinhua edit invoking 1997 and 2008 crises? What is cooking?

China wants independent think-tanks to toe the party line

FT: The decision by Caixin — whose chief editor, Hu Shuli, also has strong relationships with Communist party officials — to publish its exposé suggests that the political winds are shifting against Anbang.

Yes, we should not forget that the media alone could make independent decisions when other elements of the society are not allowed.

WSJ: Screws tighten on risky Chinese insurance

WSJ: “China’s War on Debt Causes Stocks to Drop, Bond Yields to Shoot Up and Defaults to Rise.” I doubt if it is anything more than one of those ‘on-again, off-again’ thing or political hunting season.

Bloomberg: “The system-wide contraction is a result of a flurry of government measures over the past month that included ordering banks to bolster risk controls, stepping up scrutiny of shadow financing and cracking down on malfeasance among senior bureaucrats.”

A very good commentary on many things – on the world of ‘liberal’ media and on China – in one tweet.

Prof. Carl Minzner, Fordham School of Law, has given a speech at the India-China Institute in the New School on May 1 on China after the Reform Era. I requested him for a copy of the speech. He sent me this paper.

The implications of this Bloomberg story are many. Europe has no choice but to swallow a lot of things, if the biggest owner of its ‘Too big to fail’ bank is a Chinese group whose ultimate owner is…

Shandong province’ Zouping County’s Qixing Group is too big to fail for China and China is too big to fail for the world.

China’s credit excess is unlike anything the world has ever seen but, everything is under control