Yuan
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FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS/Jason Lee/Illustration/File Photo
March 18, 2019
By Tommy Wilkes
LONDON (Reuters) – Collapsing asset price volatility has turned ‘carry trading’ into one of investors’ top plays of 2019. Many reckon the run is far from over.
This strategy sees investors borrow in currencies where interest rates are low to invest in countries where yields are high, such as in emerging markets. Investors can pocket the difference, or ‘carry’.
For the trade to work liquidity needs to be plentiful, the global economic backdrop benign and, importantly, currency volatility next to nothing. Broadly, all those conditions seem to be in place.
Volatility, or vol, had been crushed this year by central banks’ decisions to hit the pause button on interest rate rises. Societe Generale analyst Kit Juckes says markets’ “outright boredom” so far in 2019 has been the perfect recipe for carry trade success – FX volatility is near multi-year lows.
As a result, carry trading has returned 5.5 percent in 2019, according to HSBC’s Global FX Carry Index. That follows a fall of 1.4 percent in 2018, when rising U.S. interest rates caused a stampede out of emerging markets, the favored place to earn carry.
The current environment for carry is “textbook”, says Andreas Koenig, head of foreign exchange at Amundi Asset Management.
(GRAPHIC: Speculators long on Mexican peso – https://tmsnrt.rs/2Cg2cxu)
SELL AND BUY
Koenig has been betting on the Turkish lira and Brazilian real, both of which offer yields well into the double digits.
Investors buying 10-year Russian government bonds can earn yields of 8.5 percent, or 8 percent in Mexico. Those returns have been further burnished by currency appreciation — some emerging currencies such as the rouble have firmed as much as six percent against the dollar and euro.
On the other hand, the Japanese yen, Swiss franc and euro tend to be carry traders’ funding currencies of choice, as their low yields make them attractive to sell.
Yields in Switzerland on the benchmark bond return -0.35 percent; in Germany barely 0.07 percent. But the euro has been particularly popular this year as the struggling economy has further delayed policy tightening plans in the bloc.
(GRAPHIC: Comeback for carry – https://tmsnrt.rs/2O2a6iz)
But can the good times last?
Analysts say the carry trade is here for a while, or at least as long as rates remain low and economic data is strong, but not so strong it forces a central bank rethink.
BNP Paribas predicts near-term growth in major economies will be “not too cold, but certainly not hot.
“The tepid economic outlook means we are positive on long carry and short volatility trades,” the bank’s economists wrote last week.
POOR PERFORMANCES
As history shows, the hunt for carry is not without risks.
Should U.S. growth deteriorate, international trade conflicts escalate or the end of the decade-long bull run crystallize, the resulting volatility spike can send “safe” currencies such as the yen, euro and Swiss franc shooting higher, while inflicting losses on riskier emerging markets.
But even in a good carry environment, some high-yield trades may not work. For instance, MSCI’s emerging currency index is up 1.6 percent in 2019 after last year’s 3.8 percent drop, but the gains mask individual poor performances.
Robin Brooks, economist at the Institute for International Finance, notes that since the Federal Reserve’s surprise policy U-turn in January, high-yielders such as South Africa’s rand and Turkey’s lira have actually weakened.
Asian currencies including India’s rupee and the Malaysian Ringgit have gained – a “puzzle” Brooks attributes to expectations of a U.S.-China trade deal rather than investors responding to the Fed’s dovish shift.
(GRAPHIC: Emerging markets currency performance in 2019 png – https://tmsnrt.rs/2Cg2cxu)
Investors have also loaded up their carry trade positions already: speculators are $2.3 billion net long in Mexico’s peso against the U.S. dollar, against a neutral stance in January, according to CFTC positioning data.
(GRAPHIC: Speculators long on Mexican peso – https://tmsnrt.rs/2FbJ996)
Amundi’s Koenig said that following the strong recovery in high-yielding currencies in 2019 “the risk is not only in terms of volatility but in underlying levels.
“Carry from here is not my favorite strategy,” he said. “In a late-cycle stage, it’s not very likely that it holds forever.”
(Graphics by Ritvik Carvalho; Editing by Toby Chopra)
Source: OANN
FILE PHOTO: BMW cars are seen at the automobile terminal in the port of Dalian, Liaoning province, China January 9, 2019. Picture taken January 9, 2019. REUTERS/Stringer
March 16, 2019
SHANGHAI (Reuters) – BMW AG <BMWG.DE> and Mercedes-Benz said on Saturday they will lower their prices in China, after the government announced it will reduce the country’s value-added tax (VAT) starting on April 1.
The German automobile companies each published posts on Chinese social media announcing immediate price cuts for several models. The discounts come as China endures a shrinking market for automobiles as the economy slows.
BMW said it would reduce prices for both domestically produced and imported models, including the locally-made BMW 3 series and BMW 5 series, along with the BMW X5 and BMW 7 import models. The BMW 320Li M model will sell for a suggested retail price of 339,800 yuan ($50,620), a drop of 10,000 yuan from its original price.
The reductions mark the company’s “active response to the national VAT adjustment notice,” BMW said in a post on WeChat, China’s popular messaging app.
Daimler AG-owned <DAIGn.DE> Mercedes-Benz announced similar price cuts on a range of its cars, also effective immediately, in advance of the upcoming VAT drop. The cuts shown on its social media page range from 10,000 yuan to 40,000 yuan on select models.
On March 5, Chinese Premier Li Keqiang announced that China will cut VAT across a range of industries, with the tax set to drop in the manufacturing sector from 16 percent to 13 percent and in the transport sector from 10 percent to 9 percent.
The carmakers’ cuts come as China’s automobile industry faces a major slowdown. In 2018, China’s car market shrank 5.8 percent, marking its first contraction in over two decades.
Policymakers have introduced a range of policies to stimulate demand for cars. In January, China’s National Development and Reform Commission (NDRC) said it would loosen restrictions on the second-hand car market and provide subsidies to boost purchases in rural areas.
(Reporting by Josh Horwitz; editing by Richard Pullin)
Source: OANN
FILE PHOTO: People look at an electronic board showing stock information at a brokerage house in Shanghai, China July 6, 2018. REUTERS/Aly Song
March 15, 2019
SHANGHAI (Reuters) – A rally that has made China’s stock market the world’s best-performing this year has fed a rush of leveraged bets in the country’s stock options market, prompting regulators to warn investors of rising risks.
Growing interest in China’s equity option market came after a contract soared as much as 19,267 percent in a single session last month.
Data from the Shanghai Stock Exchange shows that the number of open contract positions in the ChinaAMC 50 ETF exceeded 3 million for the first time on record this week as investors hope to take advantage of the equity bull run to land huge profits.
An option gives investors the right to buy or sell the underlying asset at a set price on a specific date. The ChinaAMC 50 ETF tracks the SSE 50 index, dubbed China’s “nifty fifty index”, which has risen more than 20 percent this year.
Interest has been concentrated in a call option expiring March 27 that gives investors the right to buy the ETF at 3 yuan ($0.4467), in effect a bet that the ETF will jump at least an additional 9.5 percent this month from its closing price of 2.74 yuan on Friday.
If the ETF does not reach the option’s strike price of 3 yuan by the expiry date, the option will be rendered worthless.
Zhang Yi, an options analyst at Everbright Futures Co Ltd, said that a buoyant stock market has driven investor hopes of making a quick fortune.
“Some investors are jumping into the options market, without understanding the basics of this instrument, such as what the time value of an option is.”
The speculation has prompted a warning from the Shanghai Stock Exchange.
In a statement on March 8, the exchange noted large volumes, open positions, and price fluctuations on option contracts, and warned investors of the risk that the time value of the option would rapidly diminish ahead of its expiry.
The price of the 3 yuan call option expiring March 27 plunged more than 22 percent on Friday to 0.0052 yuan.
Despite the recent frenzy, Zhang said the words of caution from regulators and stringent risk-management rules in place mean that that there is little risk of a dangerous option bubble.
“China’s option market is still small, and has huge potential to grow, as there’s huge demand for this tool for risk-management,” he said.
(For a graphic on ‘Option frenzy’ click https://tmsnrt.rs/2O4LB4g)
(Reporting by Andrew Galbraith and Samuel Shen; Editing by Kim Coghill)
Source: OANN
FILE PHOTO: An investor looks at an electronic board showing stock information at a brokerage house in Shanghai, China September 7, 2018. REUTERS/Aly Song/File Photo/File Photo
March 15, 2019
By Luoyan Liu and Andrew Galbraith
SHANGHAI (Reuters) – Heartened by signs of an end to a long-running trade war with the United States and monetary easing at home, China’s stock indices have vaulted by a fifth since the beginning of this year and recovered a big chunk of 2018’s losses.
The Shanghai stock index scaled the 3,000 mark for the first time since June this month. The rally has been characterized by heavy retail participation, rising foreign flows into the country and soaring turnover.
Here are some of the salient features of this rally:
China has outperformed its Asian peers and most other global stock markets this year.
Beijing’s efforts to support an economy growing at its slowest pace in 28 years, through tax cuts and government spending, are widely seen as the critical factor behind the recent run-up.
On top of that, the United States and China are possibly in the final weeks of discussions to hammer out a deal to ease their tit-for-tat tariffs dispute.
(For a graphic on ‘China equities outrun other Asian markets’ click https://tmsnrt.rs/2CjoVsn)
(For a graphic on ‘Chinese stocks rise amid yuan appreciation’ click https://tmsnrt.rs/2OayIG5)
The rally has been dominated by mid-cap firms. Shares in Eastern Communications have seen a jaw-dropping 752 percent gain since late November amid speculation the company would be a beneficiary from China’s 5G tech push, even as the firm repeatedly clarified it has no revenue whatsoever from 5G business.
(For a graphic on ‘China bulls charging to record highs’ click https://tmsnrt.rs/2CmEP5d)
Trading volumes have jumped while investor confidence has been picking up. The number of Chinese stock investors had climbed to 147.5 million in January 2019, while market turnover soared to 2015 highs. Retail investors accounted for 99.6 percent of total investors.
(For a graphic on ‘Investor confidence picked up’ click https://tmsnrt.rs/2UBVadB)
(For a graphic on ‘China’s A-share market daily turnover soared’ click https://tmsnrt.rs/2Uze0BV)
Private equity funds have become one of the driving forces behind the rally. Their average equity exposure stood at 72 percent in March 2019, its highest since at least late 2017, showed data from Simuwang.com, an industry website.
(For a graphic on ‘Chinese private equity funds hiked their equity exposure levels’ click https://tmsnrt.rs/2UyNGYH)
Mutual funds are joining the party too, looking for better returns in stocks. According to the data from China Securities Regulatory Commission, the number of equity mutual funds in China had been steadily increasing in the four quarters of 2018, while their fund shares and net asset value were also on a rising trend.
(For a graphic on ‘Shares of equity mutual funds climbed through Q4 2018’ click https://tmsnrt.rs/2FbaGb4)
The cheapness of China’s shares, despite the rally, is part of the appeal. The SSEC currently trades at 12.6 times earnings, compared with an earning multiple of roughly 18 for the Dow Jones Industrial Average.
(For a graphic on ‘China stocks low valuations appeal to investors’ click https://tmsnrt.rs/2FatCqd)
Foreign investors have splurged hundreds of billions of yuan snapping up A-shares, particularly after China promised more access for them by combining two inbound investment schemes.
The wall of money rushing in even forced global index provider MSCI to take off a stock from its index. MSCI said it would remove Han’s Laser Technology from its China indexes and slash the weighting of Midea Group Co, citing issues triggered by foreign ownership ceilings.
The ownership limit could become a bigger headache for overseas investors buying Chinese stocks, especially small- and mid-caps.
(For a graphic on ‘Industry leaders with heavy foreign ownership’ click https://tmsnrt.rs/2UuwT97)
Even pigs are “flying”.
Alongside the speculative frenzy that has seen many small cap stocks hitting fresh highs, shares in China’s leading pig producers have soared to record levels despite the industry facing one of its worst disease outbreaks in years, as investors bet on tightening pork supplies and strong government support for leading producers.
As of Tuesday, Wens Foodstuff Group, the biggest start-up firm and mainland China’s top hog farmer, had surged more than 60 percent since the end of the Lunar New Year holiday.
(For a graphic on ‘PIGS FLY: China’s hog producers soared amid African swine fever’ click https://tmsnrt.rs/2FaKwoM)
Retail borrowing to speculate in stocks is also back with a vengeance as regulators shift their focus back to growth after a lengthy clampdown on riskier types of financing.
Some investors have even turned to the gray market for financing as they tried to maximize their gains in the rally, although China’s securities watchdog is gradually tightening its scrutiny over this form of shadow lending.
(For a graphic on ‘China investors borrow more to buy shares’ click https://tmsnrt.rs/2UBbT0u)
(Editing by Vidya Ranganathan & Shri Navaratnam)
Source: OANN
FILE PHOTO: Employees inside the casino prepare for the opening of MGM Cotai in Macau, China February 13, 2018. REUTERS/Bobby Yip/File Photo
March 15, 2019
By Farah Master
HONG KONG (Reuters) – Macau, the world’s largest gambling hub, has extended casino licences for MGM China and SJM Holdings until 2022, bringing them on par with other operators, authorities in the Chinese territory said on Friday.
The Macau government said the MGM and SJM’s licences, set to expire in 2020, would be extended for another two years with both operators required to pay a one-off fee of 200 million patacas ($25 million).
The licence extensions in the only part of China where casinos are allowed will give authorities more time to consider how to diversify the gambling-dependent economy.
The expiry of the casino licences had been a major concern for investors, company executives and analysts as the government had provided little information until now.
Shares of both MGM China and SJM were suspended on Friday.
Macau’s other operators, which include Sands China, Wynn Macau, Galaxy Entertainment and Melco Resorts & Entertainment, will need to rebid for their licences scheduled to expire in June 2022.
With no information on the rebidding process, the licence situation will likely hang over the shares of the six operators, said Grant Govertsen, an analyst at Union Gaming in Macau.
“We believe the extensions have more to do with making the ultimate task of the licence rebid situation easier, while at the same time making sure the labour market remains stable,” he said.
GAMBLING DEPENDENT
Macau’s economy is heavily skewed towards casinos with over 80 percent of taxes coming from glitzy gambling halls. China’s government has issued strict warnings to the former Portuguese colony that it must diversify away from gambling.
Policy and regulatory changes are in focus with the election this year of a new leader in the special administrative region, who will work with mainland authorities for the next five years.
The two likely contenders are Ho Iat Seng, president of Macau’s Legislative Assembly, and Lionel Leong, the secretary for economy and finance, which oversees the gaming industry.
Macau is marking 20 years since its handover from Portuguese rule, with a slowing mainland economy, a weaker yuan and China’s trade war with the United States threatening to derail growth.
Casino licences were first awarded in a complex process in the early 2000s, resulting in a slew of legal battles with some still unresolved. The process remains controversial because little is publicly known about how the winners were chosen.
Initially concessions were given to Wynn, a Galaxy-Sands team and SJM. After Galaxy and Sands failed to reach an operational agreement, they split up with the government awarding Sands a subconcession licence. This paved the way for Melco and MGM to receive subconcessions.
SJM Holdings has multiple third party casino operators under its licence which run independent properties.
Many of these local casino operators have been publicly jockeying for a licence, with analysts and executives speculating that the government may permit additional licences to the existing six operators.
(Reporting By Farah Master; Editing by Himani Sarkar and Darren Schuettler)
Source: OANN
Chinese Premier Li Keqiang speaks at a news conference following the closing session of the National People’s Congress (NPC) at the Great Hall of the People in Beijing, China March 15, 2019. REUTERS/Jason Lee
March 15, 2019
BEIJING (Reuters) – China can use reserve requirements and interest rates to support economic growth, Premier Li Keqiang said on Friday, promising efforts to prevent a sharper deceleration as the world’s second-biggest economy expands at its slowest pace in almost three decades.
Li’s comments suggest Beijing will roll out more stimulus measures to ease the strain on businesses and consumers. China has already flagged billions of dollars in planned tax cuts and infrastructure spending, as economic momentum is expected to cool further due to softer domestic demand and a trade war with the United States.
The central bank has cut banks’ reserve requirement ratios (RRR) five times in the past year, with a two-stage RRR cut in January releasing a total of 1.5 trillion yuan ($223.23 billion) into the financial system.
Further cuts in the RRR had been widely expected this year, after fresh data pointed to persistently soft demand in the Asian economic giant, raising fears of a sharper slowdown.
Tax and fee cuts announced by the government will take effect from April 1, while social security fees will be reduced from May 1, Li told reporters at a news conference at the conclusion of the annual parliament meeting.
Value-added tax (VAT) for the manufacturing sector will be cut to 13 percent from 16 percent. VAT for the transport and construction sectors will be reduced to 9 percent from 10 percent.
Li also sought to soothe concerns that the tax cuts soon rolled out by the government will weigh on local finances, promising the central government will offer support to provinces in central and western China via payment transfers.
China is targeting a GDP growth range of 6 to 6.5 percent this year, down from 6.6 percent in 2018 – the slowest pace in 28 years.
(Reporting by Ryan Woo and Kevin Yao; Writing by Yawen Chen and Stella Qiu; Editing by Shri Navaratnam)
Source: OANN
FILE PHOTO: A worker stands outside the construction site of the new Best Sunshine Live casino at Saipan, a U.S. South Pacific island, November 21, 2016. REUTERS/Natalie Thomas/File Photo
March 15, 2019
By Farah Master
HONG KONG (Reuters) – Hong Kong-listed Imperial Pacific, the owner of a multi-billion Saipan gaming project, is being sued by former construction workers who say they were victims of forced labor and human trafficking on the U.S.-administered Pacific island.
Seven Chinese construction workers made the claim via a filing on Friday to the Federal Court in Saipan, part of the Northern Mariana Islands.
They are seeking unspecified monetary compensation for pain and suffering as well as punitive damages.
Imperial Pacific did not respond to a request for comment.
The lush mountainous island of Saipan, controlled by the United States since the end of World War Two, approved a casino in 2014, after which Chinese investment skyrocketed.
Imperial Pacific has the sole license to operate a casino in Saipan but has faced a slew of delays and setbacks to open its hotel resort.
Scrutiny of the project intensified after the death of a construction worker in 2017 and an FBI raid that found a list of more than 150 undocumented workers in a contractor’s offices, as well as a safe containing several thousand dollars in U.S. currency, several hundred Chinese yuan and employee pay stubs.
Several executives have resigned over the past year and worker protests have been a recurring theme as they claim unpaid wages and injuries.
The filing, which names Imperial Pacific as well as its contractors, MCC International Saipan Ltd and Gold Mantis Construction Decoration, alleges workers were required to work more than 12 hours a day and sometimes do a 24-hour shift.
It also accuses employers of withholding a portion of their wages and claims they often failed to pay them for weeks at a time.
MCC, which is owned by Metallurgical Corp of China, and Gold Mantis, a subsidiary of Suzhou Gold Mantis Construction Decoration, did not immediately respond to a request for comment.
The filing states Imperial Pacific knew about, or at a minimum, “recklessly disregarded its contractors’ exploitive and illegal practices” and that the company was repeatedly told about the use of unauthorized workers on the construction site.
Crammed into dormitories, often with no showers or air-conditioning, plaintiffs were made to work on a construction site that was extremely dangerous, it said.
“One Gold Mantis supervisor, who had already physically beaten another employee, threatened to kill plaintiffs if they disobeyed him,” it said in the filing.
All plaintiffs suffered injuries including a badly burnt leg, scalded hand and partially severed finger, according to the filing.
Saipan’s casino commission has extended the deadline for the completion of the resort to February 2021. Imperial Pacific was contractually obliged to open the casino in March 2017.
(Reporting by Farah Master; Editing by Nick Macfie)
Source: OANN
FILE PHOTO: Zhou Xiaochuan, President of China Society for Finance and Banking and former governor of the People’s Bank of China (PBOC) attends an interview with Reuters in Geneva, Switzerland, September 19, 2018. REUTERS/Denis Balibouse
March 14, 2019
(This March 12 story has been refiled to correct last year of Zhou’s governorship in 6th paragraph)
By Tom Arnold
LONDON (Reuters) – China needs to learn lessons from Japan’s lost decade to ensure the world’s second-largest economy does not suffer similar problems, former central bank governor Zhou Xiaochuan said on Tuesday.
Debt levels in China are too high, although the Chinese government is taking steps to try to de-leverage the economy, Zhou said in a speech at Chatham House in London.
“Japan had very fast development and later then a so-called lost decade,” he said. “The Chinese economy may have a similar over-leveraged problem, and we need to absorb the knowledge and lessons from what happened.”
The lost decade refers to the period of economic stagnation in Japan that began in the 1990s.
China’s gross domestic product last year expanded at its slowest pace since 1990, while corporate bond defaults hit a record high and banks’ non-performing loan ratio notched a 10-year high.
Zhou, who was the central bank governor from 2002 to 2018, making him the longest serving in that post, said he hoped high levels of household savings could be funneled into supporting the development of the equity market, although China’s gross savings rate would likely slip from around 45 percent of GDP to 40 percent or lower in the future.
China would continue its financial sector reform and further open its markets to foreign investors, enabled in part by the increasing internationalization of its currency, the yuan, he said.
“After so many years China is much more confident to have further reform and open-door policy,” Zhou said. But he acknowledged the pace of some reforms had been too slow and further overhauls were needed to help develop capital markets and revamp the pension system.
Expressing hope that China’s trade war with the United States would ease, he said: “We stand for free trade and investment and multilateralism.”
The governments of the world’s two largest economies have been locked in a tariff battle as Washington presses Beijing to address longstanding concerns over Chinese practices around technology transfers, market access and intellectual property rights.
(Reporting by Tom Arnold; Editing by Frances Kerry and Leslie Adler)
Source: OANN
FILE PHOTO: An investor looks at an electronic board showing stock information at a brokerage house in Shanghai, China September 7, 2018. REUTERS/Aly Song/File Photo
March 14, 2019
By Andrew Galbraith
SHANGHAI (Reuters) – By day, Yao Yu heads up risk control for an investment firm in the southern metropolis of Shenzhen. By night, he goes on the prowl for his own business, Ratingdog, sniffing out data that could bring clarity to China’s notoriously opaque bond market.
Yao and a team of about a dozen part-time analysts scour information from China’s exchanges and clearing houses to produce ratings, analyses and pricing models for new bonds. Their findings are then posted to a public WeChat account that bears Ratingdog’s logo – a smiling, sunglasses-wearing border collie.
Since Yao founded the service in 2017, Ratingdog’s free YY Rating, YY Valuation and YY Pricing products have become widely used points of reference for investors and analysts wary of unreliable credit ratings provided by official agencies in the world’s third-largest bond market.
“In China, for fixed income, we need these kinds of services,” said Shen Yi, chief executive officer of Shanghai ShenYi Investment Co, referring to companies such as Ratingdog. “There’s a lot of space in the market for good information.”
Two defaults this year highlight the gap between official ratings and the Shenzhen upstart, which investors say is the country’s leading provider of free, independent credit research.
(For a graphic on ‘China corporate bond defaults’ click https://tmsnrt.rs/2ChVjf7)
On Jan. 29, China’s state-backed Minsheng Investment Group, a private investment conglomerate, missed a deadline for a maturing 3 billion yuan onshore bond, belying its rock-solid AAA rating from Shanghai Brilliance Credit Rating, one of China’s four big agencies.
Ratingdog, however, had flagged Minsheng’s heavy debt burden and limited profit potential as early as 2017.
Then on Feb. 22, Qinghai Provincial Investment Group (QPIG), rated AA by three agencies including Dagong Global Credit Rating Co Ltd, became the first state-owned enterprise in decades to miss a deadline for an offshore bond coupon payment.
Ratingdog, however, had warned in 2017 of QPIG’s “very large susceptibility” to a downturn, giving it a speculative-grade rating of 7 out of 10.
Both Minsheng and QPIG subsequently made delayed payments.
(For a graphic on ‘Investors demand more from riskier debt’ click https://tmsnrt.rs/2ChWLOB)
IMPLICIT SUPPORT
While quantifying Ratingdog’s reach is difficult, Josh Sheng, chief investment officer at Shanghai Tongshengtonghui Asset Management, said a “large proportion” of domestic mutual funds and securities companies refer to its ratings and pricing. In contrast, many investors all but ignore official ratings, which rank most issuers as AA or higher, implying little default risk and giving little guidance on pricing.
That is despite efforts by Beijing to improve the quality of ratings and strengthen oversight, including freezing Dagong’s core ratings business last August for violating industry rules.
One reason for the preponderance of highly rated firms in China is an implicit assumption of state backing.
Jean-Charles Sambor, deputy head of emerging market debt at BNP Paribas Asset Management, said analysis of issuing companies has tended to focus on the likelihood of government support, rather than balance sheets.
“We basically don’t use official ratings for our investment decisions, and they’re not even very meaningful as a reference,” said Liu Xiaofang, head of investment research at Shanghai Fengshi Asset Management Ltd.
More than a month after Minsheng Investment’s technical default, and with the yield on a Shanghai-traded 4.88 percent Minsheng bond hovering above 13 percent, the company continues to boast an untarnished AAA issuer rating.
Ratingdog has rated Minsheng bonds at 7/10 since December, a level indicating “many credit issues” and a recommendation to avoid.
Shanghai Brilliance and Dagong did not respond to Reuters’ requests for comment.
ISSUER-PAY
Drawn in part by the imminent inclusion of Chinese bonds in global indexes, foreign rating agencies have been racing to set up shop in China.
S&P Global Ratings recently became the first global agency to receive a license to rate Chinese onshore bonds. Fitch Ratings, which has established a domestic entity, and Moody’s Investors Service have also applied for licenses.
Some investors hope that the international agencies will encourage greater ratings transparency.
However, S&P Global will follow an “issuer-pay” model in China, similar to the one that domestic agencies currently use. Many investors in China have been wary of the practice, whereby ratings are given to issuers enlisting the agency’s services.
S&P provides issuer-pay ratings in other markets and says it has measures in place to guard against potential conflicts of interest. Its ratings of some Chinese issuers of both onshore and offshore debt, including QPIG, are notably different from those of domestic agencies.
But, says Ratingdog’s Yao: “There’s a problem here, and it’s a problem with overseas agencies, too, and that is: In the end, who are you serving? Is it investors or issuers?”
‘DIFFERENT ROAD’
While interest is high for Ratingdog’s products, monetizing that demand may prove difficult.
Only companies officially licensed to rate securities are permitted to charge for rating services in China.
But Yao plans to press ahead anyway, by introducing investor-paid customised research alongside its free analysis.
“Charging for services is meant to help speed up our development and expansion, but it’s also to understand real market demand,” he said. “After all, the only real demand is demand that’s willing to pay.”
Ratingdog’s growth could pose problems for it in what Hayden Briscoe, head of Asia Pacific fixed income at UBS Asset Management, calls “a very licensed regime”.
“I would suspect that he wouldn’t last for very long unless he had a proper license,” Briscoe said of Yao.
A senior rating industry source, who follows Ratingdog on WeChat, said that regulatory requirements are “very strict”, including annual audits with on-site checks conducted by regulators.
“If you give a rating, you also need to bear responsibility for it,” he said.
Yao said he is following a “different road” and not seeking a rating license, but how to operate legally is “a long-term consideration.”
BOTTOM-UP SHIFT
Ratingdog is not alone in looking to feed the market’s hunger for information. Domestic brokerages and investment banks offer sell-side credit research, often bundled for free alongside equity research.
One bank even uses a Ratingdog-like canine theme for bond analysis in its proprietary app.
BNP’s Sambor said the rise of these alternatives indicates a broader shift.
“What policymakers are trying to achieve is to make sure that investors are looking at credit research from a bottom-up perspective rather than a top-down perspective,” he said.
A “massive repricing” of onshore corporate bonds in the past 18 months has followed attempts to introduce more credit risk into the market, encouraging differentiation and better price discovery, Sambor said.
The spread of riskier 5-year AA corporate debt over AAA debt of the same tenor was 101 basis points on March 12, 56 basis points wider than at the end of 2017.
Still, even after 2018 saw a record level of corporate defaults, Chinese issuers remain relatively unlikely to default.
The marginal default rate – the proportion of the value of defaulting bonds to that of total outstanding credit bonds – was just 0.07 percent in December, according to China Central Depository and Clearing Co.
With defaults comparatively rare, developing reliable ratings will take time, said Yao, noting that global agencies and markets have had more than a century of competition and experience.
(Reporting by Andrew Galbraith; Additional reporting by Samuel Shen; Editing by Vidya Ranganathan and Philip McClellan)
Source: OANN
China added to its official gold reserves for the third straight month in February as the country continues efforts to minimize its exposure to the US dollar.
The People’s Bank of China added 10 tons of gold to its horde last month. It has accumulated an additional 32 tons of the yellow metal since the beginning of the year. According to the Financial Times, at this rate, China will surpass Russia and Kazakhstan as the leading central bank buyers.
In December, the Chinese announced the first increase in their gold holding since 2016. China now officially holds 1,874 tons of gold.
The Chinese have also been selling off US Treasury holdings. Over the past year, the Chinese have shed more than $50 billion in US debt.
Army Veteran Tony Arterburn joins Harrison Smith on The War Room to discuss his fight to spread the truth.
A Chinese analyst told the Global Times that the moves are “due to the US diving creditability as a result of the ‘hegemon-like behavior’ that’s on the rise in the US.” Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times that China wants to minimize its exposure to the US dollar.
“Since the start of the China-US trade dispute, China has realized that there are risks in holding the US dollar, and it is taking action to increase holdings of other financial assets such as gold to replace its US dollar-denominated assets to guard against those risks.”
Dong Dengxin, director of the Finance and Securities Institute at Wuhan University, told the Global Times that there are also concerns about America’s “creditworthiness.”
“A common view has formed across the world that the decline in US creditworthiness, resulting from the ‘America First’ policy, the transition in US trade policy, and ‘flip-flopping’ of the US president, is hurting the global economy and destabilizing the global financial system. Therefore, many countries feel unsafe, and they are choosing to reduce dollar asset allocation to protect themselves from potential risks.”
The Chinese have a history of going long periods without any official announcement of its gold holding and then suddenly revealing a large increase in its reserves. In 2009, the People’s Bank of China stopped reporting its gold holdings. Then in June 2015, the Chinese central bank suddenly announced its gold hoard had grown by 57%.
For a little more than a year, the PBOC regularly announced additions to its gold reserves. Chinese gold holdings rose another 185 tons over the next 16 months before it suddenly went silent again. During this time period, China was pushing for inclusion of the yuan in the International Monetary Fund’s benchmark currency basket.
Many analysts believe China holds far more gold than it officially reveals. As Jim Rickards pointed out on Mises Daily back in 2015, many people speculate that China keeps several thousand tons of gold “off the books” in a separate entity called the State Administration for Foreign Exchange (SAFE). Given the political dynamics and the ongoing trade war, it seems unlikely the Chinese suddenly stopped increasing their gold reserves in 2016.
China isn’t alone in buying gold. The Russian central bank has also endeavored to reduce its exposure to the dollar over the last several years by buying gold and selling off US Treasuries. Russian gold reserves increased 274.3 tons in 2018, marking the fourth consecutive year of plus-200 ton growth. In February 2018, Russia passed China to become the world’s fifth-largest gold-holding country.
There have also been efforts to limit exposure to the US dollar by setting up alternative payments systems and financial channels that don’t rely on the greenback. The Russians have developed an alternative payment system that has reportedly surpassed SWIFT in popularity within the country. According to the Central Bank of Russia, 416 Russian companies and government organizations had joined the System for Transfer of Financial Messages (SPFS) as of September.
And it’s not just countries that have traditionally rocky relations with the US looking for alternatives. In September 2018, the EU announced plans to develop a special payment channel to circumvent US economic sanctions and facilitate trade with Iran.
Gold offers countries some measure of independence from the US dollar. That means more political and economic independence and stability. Gold could even play a key role in a strategy to dethrone the greenback.
An expert reveals what’s in store for America as major nations grab more gold.
Source: InfoWars
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