Of China, Bitcoin, football and innovative finance

This week was one when those who consider themselves to be the world’s elite wanted us to concentrate on events at the World Economic Forum in Davos. However this has gone rather wrong for them as the main news items this week turned out to be the Brexit speech given by Prime Minister May in the UK and of course the inauguration of Donald Trump as the new US President later today. These matters were referred to in Davos as George Soros explained how his profit and loss account would have been so much better except for those pesky voters in the UK and US. Bow down mortals, was the message there. The “open society” he proclaims seems to mean being open to agreeing with him.

China

We have found ourselves looking East quite a few times in 2017 and this morning we saw another instance of a thought-provoking action. From Ioan Smith.

#China | #PBOC has cut RRR 1% at Big 5 banks HAS CUT RRR BY 1% temporarily to ease “seasonal liquidity pressure” – source

So the People’s Bank of China has eased pressure in the monetary system by reducing the amount of reserves the big banks need to hold. Reuters has given us more detail on this.

The People’s Bank of China (PBOC) has cut the reserve requirement ratio (RRR) for the banks by one percentage point, taking the ratio down to 16 percent.It will restore their RRR to the normal level at an appropriate time after the holiday, according to sources……….The five biggest lenders are Industrial and Commercial Bank of China Ltd (ICBC), China Construction Bank Corp (CCB), Bank of China, Bank of Communications Co (BoCom) and Agricultural Bank of China.

 

This adds to other moves on the monetary system as I explained on the 5th of this month.

China’s efforts to choke capital outflows are beginning to pay off, with the offshore yuan surging the most on record as traders scrambled for a currency that’s becoming increasingly scarce outside the nation’s borders.

We have seen signs of this in two areas since. The first was the collapse in the price of Bitcoin as China applied capital controls. There has been more news about this in the last 24 hours. From the Wall Street Journal.

Chinese banking regulators said two bitcoin exchanges in Beijing improperly engaged in margin financing and failed to impose controls to prevent money laundering, a development that could hurt trading of the virtual currency in its biggest market.

The action by China’s central bank signals heightened government scrutiny of bitcoin trading on the mainland, which has been allowed to expand largely unfettered since 2013.

This chart of Bitcoin volumes is quite something.

Chinese marketshare of global #bitcoin exchange volume since PBoC investigated and suspended margin trading. pic.twitter.com/KuDmhhj41W

— Willy Woo (@woonomic) January 20, 2017

As ever there is debate about the exact numbers but I think we get the idea.

Also we have seen it in the world of football where after two extraordinary trades where £60 million was supposedly paid for Oscar and Carlos Tevez is being paid around £1 per second. Yet suddenly limits on foreign players suddenly were tightened and as a Chelsea fan I was very grateful for that! Plenty of food for thought there for Roman Abramovich as in essence football was how he got plenty of money outside Russia.

GDP

This morning the Financial Times tells us this.

China’s gross domestic product, the world’s second-largest in nominal terms but already the largest at purchasing power parity, grew 6.7 per cent for the full year and at an annual rate of 6.8 per cent in the fourth quarter in real terms, down from 6.9 per cent in 2015. It was the slowest full-year growth figure since 1990 but comfortably within the government’s target range of 6.5-7 per cent. The fourth-quarter performance topped economists’ expectations of 6.7 per cent, according to a Reuters poll.

It is extraordinary how quickly they come up with their GDP numbers, it is almost as if they make them up. This of course is a counterpoint to headlines of the number being a “beat”. I also note that China seems to have learned something from the western capitalist imperialists.

But housing was a bright spot. Property sales grew 22.5 per cent in floor-area terms, the fastest pace in seven-years, while prices in major cities soared, prompting warnings of a bubble. Analysts expect the housing market to slow in 2016, as the government moves to cap runaway house prices that are a source of popular anger.

That is an issue that has caused plenty of trouble in western countries. Also I see one economist has had a bad day.

“The excess money supply in 2016 created problems with bubbles. Going forward, more deleveraging will be necessary. Monetary policy can’t be loosened further,” said Zhang Yiping, economist at China Merchants Securities in Beijing.

Industrial Production and Retail Sales

The first was extraordinary and yet also represents a slow down. From Investing.com.

In a report, National Bureau of Statistics of China said that Chinese Industrial Production fell to 6.0%, from 6.2% in the preceding month.

Many countries would give their right arm for industrial production growth like that but for China the noticeable fact is that it is now less than GDP growth. Meanwhile the economy seems to have shifted towards consumption

In a report, National Bureau of Statistics of China said that Chinese Retail Sales rose to an annual rate of 10.9%, from 10.8% in the preceding month.

The rest of the world would quite like China to make such a switch as it would reduce its trade surplus but can it manage it?

Financial Innovation

We have come to be very nervous of the word innovation after its use by Irish financiers. But take a look at this from the South China Morning Post last week.

Step one: Pledge a mainland asset with a mainland bank for a standby letter of credit (SBLC) which is a promise by the bank to pay. Use the SBLC to get a HK$8.8 billion loan in Hong Kong.

Since it’s a deal to pay off a piece of land publicly auctioned by the Hong Kong government, approval from the mainland regulators will be easy.

Step two: Pledge the Kai Tak land with the banks in Hong Kong. Many may find the bid – 70 per cent above market estimate – rather risky. Yet, it won’t be too difficult to find banks to provide a HK$3 billion loan which is only 40 per cent of the land cost.

Step three: Pledge the HK$3 billion cash with a bank in Hong Kong for a SBLC.

Step four: Use the second SBLC as security at a mainland financial institution to purchase debentures and bonds with annual returns of over 6 per cent or above.

Step five: Pledge the HK$3 billion worth of debentures with mainland banks for another SBLC. Given a routine discount of 30 per cent for financial products, the bank will issue a promise to pay HK$2 billion.

Step six: Use the third SBLC as collateral and get a HK$2 billion loan in Hong Kong. Repeat step three to five and so on so forth.

These steps may sound a bit complicated. But in many cases, these steps are all done among the mainland and Hong Kong branches of the same bank, though occasionally several banks are involved to dodge regulatory hurdles.

By the end of it you can “have” up to 25 billion Hong Kong Dollars of which 14 billion have left China.

Comment

As you can see there is much to mull about China as for example we have a wry smile at this week’s claim at Davos that it is all for free trade. On the surface we are told that everything is fine yet beneath it there is ever more debt and a rush to send money abroad. Later this year the Yuan is likely to fall again and the whole cycle will begin again.

Later we will find out a little of what President Trump plans so it could be quite a day. We already seem to have moved from fiscal stimulus to cuts as we await some concrete policies.