Tag Archives: finance

China’s P2P Lenders Are Failing At An Accelerating Pace

REGARDLESS OF MEASURES to ease credit markets to offset any slowing of GDP growth, authorities continue to crack down on the more risky parts of the financial system.

Few pieces of it are as hazardous and ill-regulated as peer-to-peer (P2P) lending.

China has the world’s largest P2P lending industry, worth approaching $200 billion (assets, i.e. loans outstanding) flowing through (now) some 2,000 platforms with 50 million registered users.

The ranks of the P2P platforms are thinning fast, as individual operations fail — some 80 in June (a then monthly record) and around a further 120 so far this month, taking the cumulative number of failures since 2013 above 4,000 according to the Yingcan Group, a Shanghai-based research firm that tracks P2P finance.

Savers are pulling their money from many of the remainder and investors have little confidence many will survive, both factors compounding the accelerating pace of failures. Meanwhile, authorities will be worried about the pick up in the pace of failures over the past week.

Their challenge is to stop a so-far contained panic spilling over into other parts of the $10 trillion shadow banking industry and thence into the main financial system.

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China’s Financial Reform: ‘Making Progress While Maintaining Stability’

Chinese Premier Wen Jiabao (front) attends the National Financial Work Conference in Beijing, Jan. 7, 2012. (Xinhua Photo)

There were no great expectations of the fourth quinquennial national financial work conference that has just ended in Beijing. And it seems to have met them.

These two-day meetings set broad policy objectives for the coming five years. In the past they have provided a blueprint for significant financial-system reform. But with a leadership transition already underway, the start of a new five-year plan and growing nervousness among policymakers and political leaders about the volatile outlook for the global economy and the potential implications for China’s growth, there is no great appetite for much beyond keeping a steady ship.

“Risk-aversion should be the lifeline of our financial work,” said Prime Minister Wen Jiabao, seen in the Xinhua photo above arriving for the start of meeting with the men and woman in whose hands so much rests. Wen also said that there would be greater supervision of the banks, which, he said needed to improve their governance and risk management.

Risk control and prudent macroeconomic management were the order of the day, as they were at last month’s annual economic work meeting. “Making progress while maintaining stability,” is the mantra. The emphasis is currently on the stability.

More detail about the financial work meeting will likely drip out over the coming days. The post-meeting statement dealt in generalities, but two leading topics of discussion were the currency and interest rates. Moves towards more market oriented interest rate mechanisms are necessary if China is to become more efficient at capital allocation, as it needs to be as its economy develops from its invest and export model of the past three decades. But steps have been tentative in the face of some vested interests who have thrived on cheap and ready bank loans. We expect the equally tentative steps to develop bond markets to be given priority over interest rate liberalization, with provincial and local governments being given more scope to sell bonds to firm up their finances. However, when it comes to developing a corporate bond market, don’t underestimate the political task in getting the big state owned enterprises to be supportive of a new source of credit that will be more demanding of their performance.

The internationalization of the yuan is also likely to continue at a measured pace, while the exchange rate against the dollar won’t be allowed to drift much higher. Policymakers feel that with the trade surplus shrinking the currency is at the right sort of level. It has risen by a third since the peg with the U.S. dollar was first broken seven years ago. Wen said China “will steadily proceed with efforts to make the renminbi convertible under capital account to improve its management of the foreign-exchange reserves”–though that is pretty much boilerplate.

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China’s Surprise Rate Hike Heralds More And Higher Yuan

The Chinese central bank’s move to raise interest rates was unexpected. Policymakers are getting more nervy about the inflation risk and inflows of hot money.

The rate rises, the first since before the global financial crisis hit in 2008, lift the one-year lending rate a quarter of a percentage point to 5.56% and the deposit rate by a similar amount to 2.5%. We would not be surprised if they turn out to be the first of a series of modest rises over the coming year to 18 months as the central bank starts to mop up the excess liquidity that fueled the re-acceleration of growth following last year’s slowdown. Last week, the central bank increased reserve ratios for selected banks.

The next set of monthly figures are likely to show consumer prices rising at their fastest pace in a couple of years at 3.6% for September and that the third-quarter GDP figure may be stronger than the 9.5% growth expected, but the rate increases are better considered as part of the attempt to dampen a prospective asset bubble, particularly in real estate where we have seen a number of recent measures to curb demand and reduce the obdurately high levels of loans still flowing into property markets. Negative real interest rates would only exacerbate the flow of money out of bank savings and into hard assets, so the central bank has to get ahead of the inflation figures with its deposit rates.

But what is given to policymakers with one hand is taken away with another. Higher rates will encourage more capital inflows from abroad, inflows the People’s Bank of China is already concerned will be swollen by the U.S. Federal Reserve’s expected second round of quantitative easing. And that will put more pressure on the yuan for an upward revaluation, adding further layers of both economic and political complexity to the management of the economy.

It does, however, provide Beijing with a convenient excuse for letting the currency move up ahead of next weekend’s G-20 finance ministers’ meeting without appearing to be bowing to international pressure to do so. We can only wish, too, that  it will also help the world get away from the sterile debate over currency wars.

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China Takes Another Step To Internationalise The Yuan

The decision to broaden foreign banks’ access to the $2.9 trillion domestic interbank bond market is part of China’s attempt to internationalise its currency. The People’s Bank of China says foreign central banks, lenders in Hong Kong and Macao that already clear yuan and foreign banks involved in cross-border yuan trade settlement have been invited to join a pilot project to “encourage cross-border renminbi trade settlement” and “broaden investment channels for renminbi to flow back”. The goal is to cut China’s dependency on the U.S. dollar for trade and to promote the yuan’s standing as a potential reserve currency.

Less than one fifth of one percent of China’s foreign trade is denominated in yuan. If foreigners are going to use the yuan more widely, trade alone won’t do it; they have to have somewhere to invest in yuan. So for the first time non-resident firms will be able to buy and sell yuan-denominated government and corporate debt directly (there is already limited ability to do so indirectly via exchange-trade securities). There will, however, be quotas on volumes. How quickly those are expanded will be a measure of of how well the central bank thinks the experiment is going.

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London Quietly Calling Capital

Amidst the megashare offerings recent and coming to the Shanghai and Hong Kong exchanges, some Chinese companies have been slipping quietly off to Europe.

Xinhua quotes Chris Lu, a managing partner of accountants Deloitte, saying that since 2006 there have been seven initial public offerings by Chinese firms in London, two in Frankfurt and one at the Paris-based Euronext. China Medical System Holdings and China Central Properties were two that listed in London in June, for example. Lu says the purpose of Chinese companies’ listings is to “to build brand awareness and seek new talent aside from raising money”.

The European listings coincide with expanding Chinese direct investment in Europe, which now tops $1 billion a year, or 5% of China’s outbound investment.

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