Chimerica Roaring: Chinese Banks, Corporate Debt and Floating Rate Bonds

Two Chinese banks sold nearly $2 billion worth of shares on the Hong Kong stock market today; their low valuation reflects the “growing wariness toward Chinese banks and…doubts about the health of the country’s financial system.”  Local governments in China have been barred from taking loans or issuing bonds directly from banks but they have managed to create “financing vehicles;” holding companies that allow them to continue on their bankrolled spending spree.  “At the end of June, total bank debt accumulated by these local government financing vehicles amounted to…about 13% of all bank loans in China [and] only 53 percent of them [have] enough cash available to meet their debt and interest payment obligations.”  Meanwhile, rising corporate debt may be reaching dangerous levels across the globe.  High-yield corporate bonds in Europe are 50% higher this year ($90 billion) than last year.  This, coupled with a continued decline in bank lending to the corporate sector has become a headwind for the Eurozone recovery.  Emerging Market economies have seen higher levels of corporate debt as well.  While a greater portion of the growth in corporate debt in emerging markets has been considered “high-grade,” much of it is increasingly denominated in foreign currency, therefore exposing them to higher levels of currency risk.  Also, the US Treasury has announced that it will begin selling floating rate Treasury bonds(Alt); the first time it has done so since 1997.  Floating rate bonds should provide investors’ portfolios some protection against a rising rates environment; expect high demand.  Finally, Carmen Reinhart discusses debt, GDP growth and history in this article; she shares an omen for Paul Krugman and others : “People like to believe that crises happen to other people in other countries at other times.  Because we are now so smart, what happened again  and again in history won’t happen to us – or so we suppose.”

Maybe its time we got the “Chimerica” in Economic Rehab?

 

Bubble Watch: Art as Investment

Sales at Christie’s art auction(Alt) on Tuesday night were nearly 25% lower than the lowest estimates initially made by the auction house.  “Observers at the evening said the combination of sky-high valuations and mixed quality had weighed more heavily on the purchasing decisions of dealers and collectors than in previous years.”  Is this a sign that the frothy art market may finally be breaking down?  Meanwhile, authorities in Munich have stumbled upon a former Nazi’s treasure trove of art.  After traveling by train with $12,000 undeclared in cash, Cornelius Gurlitt, son of German art collector Hildebrand Gurlitt, was flagged for tax evasion.  In a routine investigation, German police uncovered the hoard of Nazi-era art among dirty plates and rotten food.

 

USA: Vice Index Predicts a Sober Holiday Season

SouthBay Research’s Vice Index tracks spending on things like prostitution, liquor sales and gambling, which, according to SouthBay, “provides a window into the true state of the economy.”  Vice Index came in at 104 in September; its lowest reading since February 1996.

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