vampire-squid-illustration-se41Chinese Shadow Banking: Less Securitization Means Less Shadows Means Less Risky?

Meet Cinda Asset Management Company, China’s largest “shadow bank.”  The term is used loosely here, however, as Cinda is in reality a distressed asset management company created by the Ministry of Finance (MoF) that basically exists to purchase troubled loans at a discount from other Chinese banks.  But more recently, Cinda has expanded into non-financial enterprises such as receivables (“shadows”).  Not only that, but “the Cinda IPO prospectus states that 60 percent of distressed receivables are attributable to the real estate sector,” combine that with the fact that “roughly 65 percent of China’s household wealth is sitting in real estate” and you got a major house of cards on your hands.  But here’s where it gets real tricky: “Cinda has financed these purchases through a massive borrowing spree at below market rates.”  Furthermore, “the cost of funding issue is important because while Cinda’s distressed asset business is profitable, its profitability is dependent on low borrowing costs.”  So if its borrowing costs go up?  Cinda crashes.  And then all the non-performing loans on (and off) banks’ books everywhere become a big problem.  So that’s bad, but the MoF is highly unlikely to let this happen.  All in all, this structure of shadow banking may be preferable to the American brand : “China’s non-bank lending does not involve genuine securitization. In the U.S., risk got fully dispersed from bank balance sheets and collateral was used multiple times further down the securitization chain for funding. Of course, during the 2008-09 crisis, U.S. banks were forced to take many non-performing assets back on balance sheet. The difference in China is perhaps that banks have no illusions about the ultimate recourse to them. Measured in these terms, China’s systematic risk remains within reasonable limits.”

A Closer Look At World Trade: American Imports, Japanese Exports

Yesterday’s GDP report “reveals an odd feature of this recovery: as the economy has expanded, imports have not grown more rapidly.  That means expansion in the U.S. is providing less benefit to other economies than expected.”  Some reasons for this are probably 1) shale oil and gas revolution has led to a dramatic decrease in imports, 2) manufacturing activity is onshoring, therefore: less materials imports, 3) global trade has slowed.  Meanwhile, Japan’s current economy is experiencing kinda the same thing but opposite: “since Japan’s economy started expanding at the end of 2012, output has rebounded on consumer demand for items such as smartphones and houses.  The volume of exports, however, has not recovered much.”  For example, in December, “on an unadjusted basis, export volumes rose 2.5% on year, compared with a 7.3% rise in production.”  Also, Markit’s Japanese PMI “rose to a seasonally adjusted 56.6 in January from 55.2 in December.”  So Japan is chugging along on domestic demand but the population is shrinking, so they will probably “have to incorporate the growth of emerging countries” to continue.  Finally, the explanation for these “odd features” of the current global economic recovery might be more easily explained by this: “if banks are less willing to finance international trade, less trade will take place.”  But big banks in the United States and Europe are “beginning to loosen their tight grip on lending, creating a new opening for consumer and business borrowing” so global trade may be heating up again soon.

Haters Gonna Hate: Danes, Libyans and Goldman Sachs

Goldman Sachs would like to invest $1.45bn in Denmark’s Dong Energy, a state-owned utility, in exchange for a seat on the board, veto power over the CEO and no, they’re gonna go ahead and pass on the taxes, thanks.  So the Danish government said, “Ok?” and then it collapsed.  Also, the Libyan Investment Authority is suing GS for helping them lose $1.2bn in stock options in 2008.  Which seems silly and immature, except this is bad: “the complaint is largely the story of how Goldman North Africa salesmen Youssef Kabbaj did his job buttering up Libya” with “small gifts, such as aftershaves and chocolates.”  Also, “both the LIA board of directors and employees did not properly understand whether the Disputed Trades involved direct equity investments, or a species of quasi-share ownership, or constituted an entirely synthetic financial instrument; and/or misunderstood the true position.”  So yeah, people still kinda hate Goldman Sachs (more proof), but GS loves them some Lloyd Blankfein: “Blankfein’s bonus and $2 million salary amount to $3 million more than what JPMorgan paid CEO Jamie Dimon.”

No Oil Is A Problem For Big Oil; Keystone On The Horizon

“In a way, the world’s major oil companies all suffer from some version of the same problem: they’re spending more money to produce less oil.  The world’s cheap, easy-to-find reserves are basically gone; the low-hanging fruit was picked decades ago.  Not only is the new stuff harder to find, but the older stuff is running out faster and faster.”  “But what about the shale oil revolution?” you say.  Listen: “Part of the problem for the biggest oil companies is that they came late to America’s shale revolution…when horizontal drilling methods started bearing fruit, the smaller independents were in shape to snatch up assets on the cheap, all over North America.”  Speaking of which, give it up to NPR for creating the most uncomfortable motion picture portrayal of the oil boom that you’ve ever seen.  Also, rumors are “sweeping Washington” that the State Department might release their review of the Keystone Pipeline project sometime later today, and the environmentalists may not like what they get…

Detroit: New Plan: Divide And Conquer

EM: Australia Looks Like An Emerging Market

USA: Food Stamps Cuts To Hit Wal-Mart’s Profits

Presumably because their customers would have less to spend, not because their cost of labor could increase?

Bernanke: The Financial Media Is Getting All Weird About Bernanke Leaving Them

USA: Labor Costs Rise In Fourth Quarter; Consumer Spending Rises In December, Income Flat; Consumer Sentiment Dips In January

EU: Eurozone Inflation Drop In January Gives ECB Fresh Headache

JPN: Inflation Quickens To Over Five-Year High, Output Rebounds


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