Category: zerohedge

It would appear hell hath no fury like a menstruating Japanese woman scorned… As The Daily Star reports, women in Tokyo are threatening a sex boycott against any man who votes for the front-runner in this weekend's critical Abenomics-vote-of-confidence gubernatorial election. The reason? Yoichi Masuzoe, a 65-year-old former political scientist, stated that it would not be proper to have women at the highest level of government because their menstrual cycle makes them irrational. All 16 candidates in the poll are men, with many of them aged in their 60s or older. But Masuzoe's comments about women, as well as other controversial remarks on taxing the elderly, have triggered a backlash.

 

Via The Daily Star,

Women in Tokyo are threatening a sex boycott against any man who votes for the front-runner in this weekend's gubernatorial election, in protest at his claim that menstruation makes women unfit for government.

 

A Twitter campaign group based in the capital which bills itself as "The association of women who will not have sex with men who vote for (Yoichi) Masuzoe," has garnered almost 3,000 followers since it launched last week.

 

Although the founders have not identified themselves, in their profile they said: "We have stood up to prevent Mr. Masuzoe, who makes such insulting remarks against women…We won't have sex with men who will vote for Mr. Masuzoe."

 

…

 

In 1989, he told a men's magazine that it would not be proper to have women at the highest level of government because their menstrual cycle makes them irrational.

 

"Women are not normal when they are having a period… You can't possibly let them make critical decisions about the country (during their period) such as whether or not to go to war," he said.

 

Masuzoe has the backing of the conservative ruling party of hawkish Prime Minister Shinzo Abe and is seen as likely to pip his nearest rival, former prime minister Moriyoshi Hosokawa who is standing on an anti-nuclear platform.

 

All 16 candidates in the poll are men, with many of them aged in their 60s or older.

 

But Masuzoe's comments about women, as well as other controversial remarks on taxing the elderly, have triggered a backlash.

 

Another website was launched on Wednesday by a group of women also seeking to prevent Masuzoe from becoming Tokyo governor — that site has drawn 75,000 hits per day and 2,800 people have signed its petition.

 

"Masuzoe is an enemy of women…He doesn't love Japan. He loves only himself," said one comment on the site, by a woman who identified herself as Etsuko Sato.

 

…

 

There are very few women in senior political positions — Abe's 19-member cabinet has only two — and company boards are overwhelmingly male.

Of course, this will probably not be a big deal, since, as we noted previously, young Japanese people appear less and less interested in sex anyway.

As The Guardian reports, 45% of Japanese women aged 16-24 are "not interested in or despise sexual contact". More than a quarter of men feel the same way.

via Zero Hedge http://ift.tt/1o340vA Tyler Durden

Despite the short-term memory-losing recency-biased perspective that a 2-day rally in stocks has seemingly set in investors' minds, Citi's FX Technicals group remains concerned that the S&P 500 is stretched by historical standards. At this point, they add, the S&P is more stretched than in 2007 and a bit less stretched than 2000 with the line in the sand around 1,700.

 

Via Citi FX Technicals,

The S&P 500 is stretched by historical standards:

– At the peak on 15 Jan 2014 the S&P was 12% above the 55 week moving average which itself was 20% above the 200 week moving average

 

– At the peak in 2007 the S&P was 8.5% above the 55 week moving average which itself was 14.5% above the 200 week moving average

 

– At the peak in 2000 the S&P was 14% above the 55 week moving average which itself was 29.5% above the 200 week moving average

So at this point the S&P is more stretched than in 2007 and a bit less stretched than 2000. In both those instances you would have expected (and in fact got) a correction down to the 200 week moving average once support at the 55 week moving average was broken.

However, in both those instances we ended up going much further than the 200 week because of the knock on effects of another asset in the US (In 2000 it was the NASDAQ which saw an 80%+ drop and in 2007 it was the housing market which dominoed into a financial crisis).

Another dynamic at play here is the similarity between 1998-2000 and 2011-present:

– In 1998 the S&P saw a 22% high to low correction on the back of Russia’s default which was followed by a 68% into the 2000 high

 

– In 2011 the S&P saw a 22% high to low correction on the back of the European crisis/Greek defaults which was followed by a 72% rally into the high so far from January

At this point, though, we certainly do not expect the type of correction seen in 2000 but the parallel certainly speaks to just how stretched the move over the last few years in the S&P has been, especially when comparing the backdrop wherein the late 1990s saw low unemployment and high GDP growth compared to the more recent anemic recovery (and the potential beginning of the end of easy money by the Fed).

For now we have not seen the break of any significant levels which would suggest much lower levels are likely in the near-term; however, they are certainly on the horizon:

– Initially watch supports around 1672-1697, the converging 55 week moving average and 12 month moving average (see below for more).

 

– A break below there, should we see it, would open the way towards the 200 week moving average at 1387, 25% off of the highs

The 12 month moving average has been a significant level on a closing basis as can be seen by the rare breaks below (marked by black circles):

– August 1998: S&P closes below the 12 month moving average for the first time in 43 months and we saw a 22% high to low correction

 

– October 2000: S&P closes below the 12 month moving average for the first time in 24 months as the S&P begins a 50% high to low correction. After regaining the 12 month moving average in April 2003, the S&P stays above it until

 

– December 2007: S&P closes below the 12 month moving average as the S&P begins another 50%+ correction

 

– June 2010: S&P closes below the 12 month moving average and sees a high to low move of 17%

 

– August 2011: S&P closes below the 12 month moving average while posted a high to low decline of 22%

If we were to see a monthly close below the level, it would be in our view a very bearish break and suggests that we are in the process of a high to low double digit percentage correction with the obvious target being the 200 week moving average (if the 55 week moving average also gives way)

via Zero Hedge http://ift.tt/LFYXlg Tyler Durden

Despite the short-term memory-losing recency-biased perspective that a 2-day rally in stocks has seemingly set in investors' minds, Citi's FX Technicals group remains concerned that the S&P 500 is stretched by historical standards. At this point, they add, the S&P is more stretched than in 2007 and a bit less stretched than 2000 with the line in the sand around 1,700.

 

Via Citi FX Technicals,

The S&P 500 is stretched by historical standards:

– At the peak on 15 Jan 2014 the S&P was 12% above the 55 week moving average which itself was 20% above the 200 week moving average

 

– At the peak in 2007 the S&P was 8.5% above the 55 week moving average which itself was 14.5% above the 200 week moving average

 

– At the peak in 2000 the S&P was 14% above the 55 week moving average which itself was 29.5% above the 200 week moving average

So at this point the S&P is more stretched than in 2007 and a bit less stretched than 2000. In both those instances you would have expected (and in fact got) a correction down to the 200 week moving average once support at the 55 week moving average was broken.

However, in both those instances we ended up going much further than the 200 week because of the knock on effects of another asset in the US (In 2000 it was the NASDAQ which saw an 80%+ drop and in 2007 it was the housing market which dominoed into a financial crisis).

Another dynamic at play here is the similarity between 1998-2000 and 2011-present:

– In 1998 the S&P saw a 22% high to low correction on the back of Russia’s default which was followed by a 68% into the 2000 high

 

– In 2011 the S&P saw a 22% high to low correction on the back of the European crisis/Greek defaults which was followed by a 72% rally into the high so far from January

At this point, though, we certainly do not expect the type of correction seen in 2000 but the parallel certainly speaks to just how stretched the move over the last few years in the S&P has been, especially when comparing the backdrop wherein the late 1990s saw low unemployment and high GDP growth compared to the more recent anemic recovery (and the potential beginning of the end of easy money by the Fed).

For now we have not seen the break of any significant levels which would suggest much lower levels are likely in the near-term; however, they are certainly on the horizon:

– Initially watch supports around 1672-1697, the converging 55 week moving average and 12 month moving average (see below for more).

 

– A break below there, should we see it, would open the way towards the 200 week moving average at 1387, 25% off of the highs

The 12 month moving average has been a significant level on a closing basis as can be seen by the rare breaks below (marked by black circles):

– August 1998: S&P closes below the 12 month moving average for the first time in 43 months and we saw a 22% high to low correction

 

– October 2000: S&P closes below the 12 month moving average for the first time in 24 months as the S&P begins a 50% high to low correction. After regaining the 12 month moving average in April 2003, the S&P stays above it until

 

– December 2007: S&P closes below the 12 month moving average as the S&P begins another 50%+ correction

 

– June 2010: S&P closes below the 12 month moving average and sees a high to low move of 17%

 

– August 2011: S&P closes below the 12 month moving average while posted a high to low decline of 22%

If we were to see a monthly close below the level, it would be in our view a very bearish break and suggests that we are in the process of a high to low double digit percentage correction with the obvious target being the 200 week moving average (if the 55 week moving average also gives way)

via Zero Hedge http://ift.tt/LFYXlg Tyler Durden

While The White House’s Jason Furman glistened in the after-glow of a falling unemployment rate this morning (and a very modestly improving labor-force-participation rate) despite dismal real job creation (which must be due to the weather – but is not!), we thought it perhaps of note that a very large segment of American – White men aged over 20 saw their labor force participation rate drop to a new record low.

 

 

h/t @Not_Jim_Cramer

via Zero Hedge http://ift.tt/1gVg818 Tyler Durden

While The White House’s Jason Furman glistened in the after-glow of a falling unemployment rate this morning (and a very modestly improving labor-force-participation rate) despite dismal real job creation (which must be due to the weather – but is not!), we thought it perhaps of note that a very large segment of American – White men aged over 20 saw their labor force participation rate drop to a new record low.

 

 

h/t @Not_Jim_Cramer

via Zero Hedge http://ift.tt/1gVg818 Tyler Durden

From Fernando del Pino Calvo-Sotelo, published originally in Expansion

View from Spain: Running away from reality (pdf)

In a society that’s incessantly pulling all sorts of rights out of its hat, the right to not suffer is the father of them all. We feel entitled to keep our jobs, our health, our home and our leisure, demanding in fact to be carefree. We don’t want our lifestyle to depend on how hard we work or how much we save, and neither do we want our wrong decisions to have any consequences. In our delirium, we feel we have the right to know the future or even to decide when life should start (that of others, of course) and also when death should come (usually that of others as well). In brief, we want the security that we will be able to avoid pain. The problem is that, in life, pain is as undesirable as it is inevitable, and security, in the words of Helen Keller, is “a superstition that does not exist in nature”. However, man persists in his chimerical search for the security that will keep him free from suffering. Citizens demand that from their ruling classes, who promise ever more extravagant rights and certainties, constantly fleeing reality and truth. And in this hysterical, unbridled race to reach an evanescent security, liberty is thrown into the dust like a bothersome burden.

The free man must be responsible for his behavior without being able to blame anyone else when things go wrong. He must live in discomfort and uncertainty and accept the authorship of all his decisions. This is hard. That’s why as soon as the sweet illusion of freedom gives way for the bitter taste of responsibility and effort which that very freedom bears with it, man revolts against the latter. Some 3500 years ago, the Jewish people, having been oppressed for generations by slavery, was freed by Moses, who took them out of Egypt in order to lead them to the Promised Land. But just a few short days after their last minute’s escape from Pharaoh’s claws in the Red Sea, as the harshness of the desert started to put a dent in their spirit, the Jews forgot the humiliations, whippings, hardships and indignity of their slavery, cursed their freedom and blamed their liberator for freeing them, to the extent that Moses was nearly stoned: “Why did we not die at Yahweh’s hand in Egypt, where we used to sit round the flesh pots and could eat to our heart’s content!”. The security of a hot meal and a loaf of bread seemed worth more than the recently recovered freedom.

It goes without saying that throughout History all power seekers and power holders have taken good note of this story. They have come to realize that all they need to have the people surrender their liberty is to promise them security: a certainty – liberty – in exchange for a promise – security; an extremely valuable good in exchange for a chimera. And over and over again, the people have fallen into the same trap.

Today, under the disguise of a promise of physical security, governments treat each of us as if we were suspected criminals and not free citizens with rights: they record our conversations, intercept our mails, take our fingerprints and as many pictures as they deem necessary, do body searches and leave us half naked when we travel as if it were business as usual, and ruthlessly hunt down as traitors those who uncover these practices.

As far as economic security is concerned, totalitarian communism was an extreme of this barter: the people lost their liberty and never found any security, except for the certainty of being poor under a merciless tyranny. The fraudulent Welfare State proposed something similar (do you believe that the wording of Social “Security” is casual?): it promised a paradise of “free” pensions, healthcare and education in exchange for giving up our freedom to save (thus relieving us off the uncomfortable responsibility of doing so). We surrendered our savings to the politicians, those incurable squanderers, well known for anything but respecting either their word or other people’s money! And now that, even after burying us under a mountain of taxes and perpetual debts, public money is scarce and nearing extinction, where is the promised security to be found? We must understand once and forever more that security is not only liberty’s enemy, but an impediment to prosperity. In fact, security and prosperity are antonyms.

The 2008 financial crisis was mostly caused by politicians and central bankers wanting to avoid the suffering caused by economic cycles. Due to the irritating fact that pained voters tend not to reelect incumbent governments, what better promise could they make than that of trying to end recessions and live in a plateau of permanent prosperity? We still believe the charlatans who, in politics or in central banking, assure us that they can get rid of the uncertainty that terrifies us so much. We long for a control that simply does not exist, and these are the consequences: perversely, the chimeric search for security brings much more suffering than what it pretended to avoid in the first place.

In 1891, Pope Leo XIII prophetically forewarned us in his wise Encyclical Rerum Novarum about the evils that are now upon us: “To suffer and to endure, therefore, is the lot of humanity; let them strive as they may, no strength and no artifice will ever succeed in banishing from human life the ills and troubles which beset it. If any there are who pretend differently – who hold out to a hard-pressed people the boon of freedom from pain and trouble, an undisturbed repose, and constant enjoyment – they delude the people and impose upon them, and their lying promises will only one day bring forth evils worse than the present”.

We have to accept insecurity and pain as something inherent to human nature and promptly mistrust anyone promising the opposite, in the conviction that that promise only seeks to fool the unsuspecting. An economic and political system focused on avoiding the inevitable, promising an inexistent security, is due to fail and headed for poverty. That’s why we should make peace with the reality of uncertainty and suffering and not try to escape from both. Only from the deep acceptance of these realities, will the trembling, fragile ember of hope that has always raised the human being up from his falls catch fire again. The history of man is the successful story of a flexible adaptation to an ever changing, ever insecure environment. As a country, we should look suffering in the eye, without fear, and dedicate all our energies to adapting to the new reality instead of continuously running away from it.

via Zero Hedge http://ift.tt/1g4sqR8 Tyler Durden

As an increasing number of FX traders are disappearing from bulge bracket banks (for "entirely unrelated to the FX probe" reasons), the WSJ reports that European and US regulators are expanding the scope of the manipulation probe. In the course of sifting through mountains of documentation, banks have found an array of apparent misconduct, according to people involved with the investigations and now the FX options market has come under scrutiny. "It's the banks saying, 'oh God, look what we've uncovered, there's a whole lot of issues'," a person familiar with the investigation said.

Via WSJ,

A regulatory probe that flamed up in one corner of the vast foreign-exchange market is now engulfing the entire industry.

 

The latest conflagration: concerns about a type of foreign-exchange derivative that is widely used by financial institutions and companies world-wide, according to a person familiar with the matter.

 

…

 

These contracts, which banks often sell to clients, pay out in the event that exchange rates reach certain levels. They are heavily traded: A notional $337 billion changes hands in the overall FX options market each day, according to the Bank for International Settlements.

 

Behind the scenes, though, banks often buy or sell currencies aggressively to prevent those levels from being breached, according to traders and banking executives. That may be to the detriment of clients, who would otherwise potentially receive a payment, these industry officials say, although banks see it as a way to protect their cash. Such tactics are commonplace, traders say.

 

…

 

As part of banks' internal reviews into their foreign-exchange businesses, some recently have found potential problems with trading involving the options, according to the person familiar with the matter.

 

…

 

One former trader at Deutsche Bank in New York was fired after chat room messages showed he joked about his ability to affect the price of a barely-traded currency—the Argentine peso—people familiar with the matter say. The bank has fired three other executives, including at least one in Latin America, in connection to trading practices not related to the London fix, according to a person familiar with the matter.

 

…

 

Authorities are also looking into whether some foreign-exchange bankers inappropriately traded in their personal accounts. This practice is forbidden at some banks, though there is not a blanket ban across the industry. It is frowned upon because of the possibility traders could use privileged information for their own profit.

 

In all, about 20 traders and bankers including some in New York, London and Tokyo have now been suspended or fired since authorities started to investigate the foreign-exchange markets.

As a gentle reminder, here is the original uncovering of at least one of the manipulations:

 

The same pattern — a sudden surge minutes before 4 p.m. in London on the last trading day of the month, followed by a quick reversal — occurred 31 percent of the time across 14 currency pairs over two years, according to data compiled by Bloomberg. For the most frequently traded pairs, such as euro-dollar, it happened about half the time, the data show

via Zero Hedge http://ift.tt/1baBgOC Tyler Durden

As an increasing number of FX traders are disappearing from bulge bracket banks (for "entirely unrelated to the FX probe" reasons), the WSJ reports that European and US regulators are expanding the scope of the manipulation probe. In the course of sifting through mountains of documentation, banks have found an array of apparent misconduct, according to people involved with the investigations and now the FX options market has come under scrutiny. "It's the banks saying, 'oh God, look what we've uncovered, there's a whole lot of issues'," a person familiar with the investigation said.

Via WSJ,

A regulatory probe that flamed up in one corner of the vast foreign-exchange market is now engulfing the entire industry.

 

The latest conflagration: concerns about a type of foreign-exchange derivative that is widely used by financial institutions and companies world-wide, according to a person familiar with the matter.

 

…

 

These contracts, which banks often sell to clients, pay out in the event that exchange rates reach certain levels. They are heavily traded: A notional $337 billion changes hands in the overall FX options market each day, according to the Bank for International Settlements.

 

Behind the scenes, though, banks often buy or sell currencies aggressively to prevent those levels from being breached, according to traders and banking executives. That may be to the detriment of clients, who would otherwise potentially receive a payment, these industry officials say, although banks see it as a way to protect their cash. Such tactics are commonplace, traders say.

 

…

 

As part of banks' internal reviews into their foreign-exchange businesses, some recently have found potential problems with trading involving the options, according to the person familiar with the matter.

 

…

 

One former trader at Deutsche Bank in New York was fired after chat room messages showed he joked about his ability to affect the price of a barely-traded currency—the Argentine peso—people familiar with the matter say. The bank has fired three other executives, including at least one in Latin America, in connection to trading practices not related to the London fix, according to a person familiar with the matter.

 

…

 

Authorities are also looking into whether some foreign-exchange bankers inappropriately traded in their personal accounts. This practice is forbidden at some banks, though there is not a blanket ban across the industry. It is frowned upon because of the possibility traders could use privileged information for their own profit.

 

In all, about 20 traders and bankers including some in New York, London and Tokyo have now been suspended or fired since authorities started to investigate the foreign-exchange markets.

As a gentle reminder, here is the original uncovering of at least one of the manipulations:

 

The same pattern — a sudden surge minutes before 4 p.m. in London on the last trading day of the month, followed by a quick reversal — occurred 31 percent of the time across 14 currency pairs over two years, according to data compiled by Bloomberg. For the most frequently traded pairs, such as euro-dollar, it happened about half the time, the data show

via Zero Hedge http://ift.tt/1baBgOC Tyler Durden

Submitted by Nicholas Borst via The Peterson Institute blog,

Shadow banks in China come in a variety of forms and guises. The term is applied to everything from trust companies and wealth management products to pawnshops and underground lenders. What surprising is that China’s biggest shadow bank is actually a creation of the central government and receives billions in financing directly from the banks.  Even more interesting, this shadow bank recently pulled off a successful international IPO where it raised billions of dollars.

First, let’s deal with the terminology. The “shadow” in shadow banking doesn’t imply nefarious doings, although it frequently involves a bit of regulatory arbitrage. At the most basic level, shadow banking is borrowing funds and extending credit outside of normal banking structures.

So what is this mysterious shadow bank that has such tight government connections? It’s none other than Cinda Asset Management Company, a creation of the Ministry of Finance (MoF) and the beneficiary of a recent 2.5 billion U.S. dollar IPO in Hong Kong.  In terms of total assets, Cinda is more than 15 times as large as any of the country’s trust companies.

The normal business of a distressed asset management company (AMC) is not shadow banking. It involves purchasing troubled loans at a discount and trying to collect a higher amount from the debtors. Cinda was one of the four AMC’s created by the central government to bailout the banking sector in the 1990s. The initial round of bad debt purchasing was policy-directed, starting in the late 1990s and lasting through the mid-2000s. In the second half of the 2000s, the big four AMCs began to purchase NPLs from banks on commercial terms and in the process tried to transform themselves into market-oriented businesses.

Over the last three and a half years, Cinda’s business has diverged from this model. In addition to purchasing bad debts from banks and other financial institutions, it has accumulated a vast stock of distressed debt assets directly from non-financial corporations.

 

These non-financial enterprises distressed assets (NFEs) include overdue receivables, receivables expected to be overdue, and receivables from corporates with liquidity issues. In effect, Cinda has become a huge source of financing for companies facing financial distress.

It comes as no surprise that real estate developers have been the primary recipient of this emergency funding. Squeezed by central government efforts to dampen the housing boom, real estate developers are frequently cut off from formal bank loans.  As is the case with the growth of shadow banking in other parts of the financial system, Cinda has found a way to circumvent these restrictions by offering credit to property developers through the NFE channel. The Cinda IPO prospectus states that 60 percent of distressed receivables are attributable to the real estate sector.

What makes the whole situation a bit dubious is that Cinda has financed these purchases through a massive borrowing spree at below market rates. Over the last 3.5 years, the size of CINDA’s borrowings increased 13x, while the interest on these borrowings has fallen dramatically (paid interest was less than three percent). Despite the claim from the IPO prospectus that the borrowing was primarily from “market-oriented sources,” it seems unlikely that any market-oriented actor would loan out funds at a rate significantly below inflation and less than half of the benchmark lending rate.

The cost of funding issue is important because while Cinda’s distressed asset business is profitable, its profitability is dependent on low borrowing costs. In 2012 total interest expense is equal to 50 percent of its net income. A large increase in borrowing costs could wipe out the company’s profitability.

Why would financial institutions make such cheap loans to Cinda? One possible explanation is that the company’s tight relationship with the MoF makes it a low credit risk. MoF’s support of Cinda has been immense.  MoF has allowed Cinda’s corporate tax payments to be used to pay down the bonds it issued to China Construction Bank. MoF also gave Cinda a 25 billion renminbi capital injection with a delayed payback period. The odds that MoF would let Cinda go belly up are exceedingly low.

The other reason that financial institutions might be willing to loan to Cinda on the cheap is that the company has come to play a very useful role for them.  Commercial banks face constant pressure from regulators to reduce their non-performing loan (NPL) ratio. The strikingly low reported NPL rates throughout the past several years stands in stark contrast to a slowdown in economic growth and fluctuating credit conditions. Shadow lenders like Cinda play a role behind the scenes in extending credit to companies short on cash who are in danger of defaulting on their bank loans. Having this type of lender of last resort helps banks avoid increases in their NPL ratios. It doesn’t, however, reduce the exposure of banks to these distressed companies as they are still on the hook through their loans to Cinda.

The IPO prospectus of Cinda has made clear that the company has rapidly transformed itself from a traditional distressed asset manager to a provider of emergency financing.  Though we lack similar disclosure, it is likely that the other three national asset management companies are proceeding along similar lines. China’s AMCs are an important part of the shadow banking system and an enabler of large-scale regulatory arbitrage.

via Zero Hedge http://ift.tt/1gV3ork Tyler Durden

Submitted by Nicholas Borst via The Peterson Institute blog,

Shadow banks in China come in a variety of forms and guises. The term is applied to everything from trust companies and wealth management products to pawnshops and underground lenders. What surprising is that China’s biggest shadow bank is actually a creation of the central government and receives billions in financing directly from the banks.  Even more interesting, this shadow bank recently pulled off a successful international IPO where it raised billions of dollars.

First, let’s deal with the terminology. The “shadow” in shadow banking doesn’t imply nefarious doings, although it frequently involves a bit of regulatory arbitrage. At the most basic level, shadow banking is borrowing funds and extending credit outside of normal banking structures.

So what is this mysterious shadow bank that has such tight government connections? It’s none other than Cinda Asset Management Company, a creation of the Ministry of Finance (MoF) and the beneficiary of a recent 2.5 billion U.S. dollar IPO in Hong Kong.  In terms of total assets, Cinda is more than 15 times as large as any of the country’s trust companies.

The normal business of a distressed asset management company (AMC) is not shadow banking. It involves purchasing troubled loans at a discount and trying to collect a higher amount from the debtors. Cinda was one of the four AMC’s created by the central government to bailout the banking sector in the 1990s. The initial round of bad debt purchasing was policy-directed, starting in the late 1990s and lasting through the mid-2000s. In the second half of the 2000s, the big four AMCs began to purchase NPLs from banks on commercial terms and in the process tried to transform themselves into market-oriented businesses.

Over the last three and a half years, Cinda’s business has diverged from this model. In addition to purchasing bad debts from banks and other financial institutions, it has accumulated a vast stock of distressed debt assets directly from non-financial corporations.

 

These non-financial enterprises distressed assets (NFEs) include overdue receivables, receivables expected to be overdue, and receivables from corporates with liquidity issues. In effect, Cinda has become a huge source of financing for companies facing financial distress.

It comes as no surprise that real estate developers have been the primary recipient of this emergency funding. Squeezed by central government efforts to dampen the housing boom, real estate developers are frequently cut off from formal bank loans.  As is the case with the growth of shadow banking in other parts of the financial system, Cinda has found a way to circumvent these restrictions by offering credit to property developers through the NFE channel. The Cinda IPO prospectus states that 60 percent of distressed receivables are attributable to the real estate sector.

What makes the whole situation a bit dubious is that Cinda has financed these purchases through a massive borrowing spree at below market rates. Over the last 3.5 years, the size of CINDA’s borrowings increased 13x, while the interest on these borrowings has fallen dramatically (paid interest was less than three percent). Despite the claim from the IPO prospectus that the borrowing was primarily from “market-oriented sources,” it seems unlikely that any market-oriented actor would loan out funds at a rate significantly below inflation and less than half of the benchmark lending rate.

The cost of funding issue is important because while Cinda’s distressed asset business is profitable, its profitability is dependent on low borrowing costs. In 2012 total interest expense is equal to 50 percent of its net income. A large increase in borrowing costs could wipe out the company’s profitability.

Why would financial institutions make such cheap loans to Cinda? One possible explanation is that the company’s tight relationship with the MoF makes it a low credit risk. MoF’s support of Cinda has been immense.  MoF has allowed Cinda’s corporate tax payments to be used to pay down the bonds it issued to China Construction Bank. MoF also gave Cinda a 25 billion renminbi capital injection with a delayed payback period. The odds that MoF would let Cinda go belly up are exceedingly low.

The other reason that financial institutions might be willing to loan to Cinda on the cheap is that the company has come to play a very useful role for them.  Commercial banks face constant pressure from regulators to reduce their non-performing loan (NPL) ratio. The strikingly low reported NPL rates throughout the past several years stands in stark contrast to a slowdown in economic growth and fluctuating credit conditions. Shadow lenders like Cinda play a role behind the scenes in extending credit to companies short on cash who are in danger of defaulting on their bank loans. Having this type of lender of last resort helps banks avoid increases in their NPL ratios. It doesn’t, however, reduce the exposure of banks to these distressed companies as they are still on the hook through their loans to Cinda.

The IPO prospectus of Cinda has made clear that the company has rapidly transformed itself from a traditional distressed asset manager to a provider of emergency financing.  Though we lack similar disclosure, it is likely that the other three national asset management companies are proceeding along similar lines. China’s AMCs are an important part of the shadow banking system and an enabler of large-scale regulatory arbitrage.

via Zero Hedge http://ift.tt/1gV3ork Tyler Durden