Shadow Banking Under Pressure as Households Search for Yield

One of the most significant anomalies in China’s recovery from the COVID outbreak has been the anemic pace of household and consumer spending. An unexamined piece of this puzzle is household asset allocation preferences, which have meaningfully shifted, with PBOC survey data indicating households are reducing spending to try to accumulate wealth through higher-yield investments. Their preferred investment vehicles have changed from shadow banking products such as wealth management products (WMPs) and trust loans, toward equities and fund management firms, in part because the implicit guarantees on shadow banking products no longer appear solid. This shift is positive for the equity market in the long term, but also will bring more volatility. More defaults and credit events on shadow banking products are likely as those channels face new regulations and tighter liquidity conditions.

Posted April 9, 2021
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Inflows and a Recovering World

The debate over the short-term path of China’s currency concerns a tug-of-war between strong fundamental inflows and a global environment becoming less favorable for capital flows to emerging markets, and China in particular. A few conclusions from the Q4 2020 balance of payments details:

  • Inflows will likely carry the day over the next few months as goods trade surpluses stay high. Travel from China remains limited, reducing the services trade deficit, and keeping the RMB under pressure to appreciate.
  • However, the medium-term diversification of China’s household and corporate savings driving RMB depreciation is a powerful force, and domestic debt pressures should drive China’s interest rates lower, reducing inflows.
  • The data on banks’ external lending is increasingly contradictory. Q4 2020 details show both banks increasing their outbound lending, and corporates repaying foreign loans in volumes similar to the period of RMB depreciation in 2015-2016. In an environment of expected RMB appreciation, both phenomena are unusual, particularly when China’s overall foreign debt increased in the last two quarters.
Posted April 9, 2021
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Property Market Chartbook, March 2021

Headline property indicators rose by large margins in the first two months of the year, with data flattered by comparisons to last year’s virus outbreak. However, new starts and land sales were actually below 2019 levels, pointing to a weaker pipeline of future construction. Sales in major cities were especially strong, but did not prevent credit events in the sector from proliferating. Local governments are taking their own initiative to limit speculative housing purchases, particularly in larger cities.

Posted April 9, 2021
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