Noble Apex eNewsletter Issue 817- Chinese private enterprises face crisis of confidence

2019-07-17 02:43
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15 July 2019 Issue 817

Global Market Commentary

Equity

  • US: US Federal Reserve Chairman Powell hinted that the Fed will cut interest rates at this month’s interest rate meeting. However, the US employment data is better than expected, the market worried that the extent of Fed’s interest rate cuts will be affected. For the entire week, the Dow rose by 1.52% to 27,332.03. The S&P 500 index rose by 0.78% to close at 3,013.77. The Nasdaq rose by 1.01% to 8,244.14.
  • Europe: The market is worried that the US government may intervene in the drug prices, dragging down the price of European pharmaceutical stocks. Over the week, the UK’s FTSE 100 index fell by 0.62%, the German DAX index fell by 1.95%, and the French CAC40 index fell by 0.37%. The STOXX 600 index fell by 0.84% ​​to 386.85 points.
  • Asia: The number of new non-agricultural jobs in the United States increased by 224,000 in June, far exceed the market expectation of 162,000 new jobs. The market worried that the extent of interest cut in the US may be affected. For the whole week, the Nikkei 225 index fell by 0.28% to 21,685.90 points. The MSCI Asia Pacific Index fell by 0.84% ​​to 160.33.

Bonds

  • US: The number of new non-agricultural jobs in the United States increased by 224,000 in June, far exceed the market expectation of 162,000 new jobs. The market worried that the extent of interest rate cut in the US may be affected. For the whole week, the yield on the US 10-year government bond rose by 9 basis points to 2.106%.
  • Europe: The Conference Board data showed that Germany’s Conference Leadership Indicator (LEI) in May fell for four consecutive months with a 0.4% decrease month-on-month. For the whole week, the German 10-year bond yield rose by 15 basis points to -0.212%.

Commodity

  • Oil: US oil inventories fell for four consecutive weeks. Also, the Gulf of Mexico storm caused the market to worry about crude oil supply. Over the week, New York oil futures rose by 4.69 percent to close at $60.21 a barrel.

Currency

  • US dollar: US Federal Reserve Chairman Powell hinted that the Federal Reserve will cut interest rates at this month’s interest rate meeting, dragging down the US dollar index. For the whole week, the Dollar Index fell by 0.493% to 96.810.
  • China: The dovish speech of US Federal Reserve Chairman Powell dragged down the US dollar. For the whole week, the yuan rose by 0.174% against the US dollar to 6.882.

 

Economic-related News

  • US: Sino-US relations seem to be tense again. Trump said that China devalued the yuan and subsidized the company to reduce the impact of the extra 25% tariff. Moreover, it is reported that China will not purchase large quantities of US agricultural products until the trade negotiations have made concrete progress.
  • US: The Sunday Telegraph reported that Trump administration’s negotiators hinted that if the UK hopes to reach a trade agreement with the United States after the Brexit, it will depend on whether it is willing to maintain the same tough policy stance with the United States on Huawei issue.
  • U.S: Federal Reserve Chairman Powell said that the Fed has room for monetary easing, and monetary policy may be too tight now given that the neutral interest rate is lower than expected.
  • Euro-zone: The minutes of the European Central Bank’s meeting in June showed that policymakers generally believe that they need to be prepared for policy easing, despite there are still different views on which tools to be used.
  • Euro-zone: The Conference Board data showed that the UK’s Leading Economic Indicator(LEI) in May fell for 10 consecutive months to 93, with a 0.4% decline rate month-on-month, hitting the lowest level within recent years.
  • Euro-zone: The President-elect of the European Commission said that he hoped Britain would change its mind and eventually choose to stay in the EU. If the UK chooses to leave, it must leave with the best possible conditions, with a clear indication that she will try to prevent the UK from no-deal Brexit.
  • Japan: Samsung Electronics has received an emergency supply for the three key materials that blocked by Japanese export restrictions, avoiding the production line crisis.
  • Japan: South Korea’s Ministry of Trade said that it plans to raise the issue of “unfair” export control measures that Japan imposed on South Korea at the World Trade Organization (WTO) General Council meeting on the 23rd – 24th July.
  • India: Statistics from the Indian Bureau of Statistics show that the growth rate of Indian Industrial Production Index (IIP) in May has slowed to 3.1% year-on-year, slightly worse than the market expectations of a 3.2% increase.
China Market Commentary
Economic-related news
• Chinese Finance Minister Liu Kun said that he believe China’s economic growth rate will remain in the range of 6% to 6.5%. China is reforming the financial system to attract more capital.
• Mao Shengyong, director and spokesperson of the National Bureau of Statistics of China, said that according to the current UN classification criteria, China is at the level of middle-income countries. And he pointed out that the income per capita level is still relatively low in China.

Chinese private enterprises face crisis of confidence

Default is not the worst word when investing in Chinese assets. Crimes, falsification of documents, etc., make the recovery rate of default almost zero, which are more terrible results. In the past few weeks, Chinese private companies have once again faced a crisis of confidence. The chairman of one real estate company was arrested, and a Chinese wealth management company fell into a supply chain financial default. Lack of confidence in private companies to make the money more cautious, along with the crackdown on non-standard P2P wealth management companies, private companies face refinance risks.

Default means total lost

Defaults are no stranger to mature markets and institutional investors. The article “secured? A key factor in the return of interest rates” in the, mentioned that the senior mortgage bond has an average recovery rate of 62.3% over the past 30 years, meaning that default is not equal to zero value. However, this situation is not suitable for Chinese companies.

The financial company’s supply chain financial products defaulted last week, which may involve in crimes. According to media reports, wealth management companies sell the company’s accounts receivable packaged securities to clients. Since many SMEs have difficulties in financing, they will use the accounts receivable certificates issued by some well-known enterprises such as e-commerce leaders to finance. This breach of contract is not an e-commerce inability to pay, but the evidence provided by the company may be faked.

The default involved amounted to RMB 3.4 billion. Because the issuer does not recognize the liability, the wealth management company wants to recover the loss, which may require a long legal process. Due to disputes over creditor’s rights, it is not easy to obtain evidence. The expected recovery rate is not optimistic.

Guaranteed return no longer exists

According to HSBC research, in the exchange-traded bonds, 128 issuers have defaulted since 2014, and only 28 can be fully repaid face value to investors. A total of 216 billion defaults, only 31 billion can be repaid, the recovery rate is only 14%.

Private companies have a worse track record. 17 state-owned enterprises defaulted and 41% can be able to repay investors. Of the 111 private companies that defaulted, only 19 were able to repay investors. Local governments will try their best to save local state-owned enterprises, but private companies are not in their target.

Raise funding is difficult for private companies in deleveraging

Despite the slowdown in China’s economy, China continues to limit the growth of shadow banking loans. Private enterprise financing is more difficult in an environment when overall bank loan growth is stable. In the past year, the Chinese government has targeted the P2P field that has emerged in recent years. The total size of P2P fell from 1.3 trillion in June 2018 to 751 billion in February this year. At the same time, the number of P2P borrowers fell to 14 million in 2017, from the record high of 43 million. These borrowers need to find new financing channels.

As an investor, a popular investment product may be an opportunity, but it may also be a trap. Investors in Chinese companies or assets, especially private companies, need to pay attention to corporate governance. Investors who lack sufficient experience and time should use active investment tools or focus on state-owned enterprises to avoid default risk of Chinese private companies under deleveraging.

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