2014-04-22

Ye Tan's Commentary on Xiaoshan: Get Government Out of Credit Markets

(Ye Tan commentary at the end)

One hot commentary off the front page of CSJ today is making the rounds after being picked up by ForexLive: Large-scale property price declines won’t have a significant impact on banks. Author is Zhang Min. Original here: 张敏:让房地产市场充分调整

Another commentary says the worst trade numbers are in the past: Hui Ya: China's foreign trade "worst" moment has passed (辉亚:中国外贸“最差”时刻已经过去)
2014 a quarter of China's macroeconomic transcripts have been released, GDP growth slowed down slightly again; in China's economic growth in the troika, if the degree is widely expected slowdown in investment and consumption are still in the market, then the depth of the decline in exports in the macro data in the entire first quarter was particularly harsh, seems to provide a megaphone for those voices mouthing Chinese economy.

......Such trade can not help but feel the results looked really worried, but just last year the world's first station on Trade in Goods of China's foreign trade position, really will start a recession cycle?

......The author estimates based on the latest data, if weed out factor arbitrage, March overall growth rate of China's imports and exports should be able to reach 5% to 7%, of which exports but also faster than imports. As the global economic recovery remains the domestic economy as a whole is running smoothly, import and export growth recovery still has a favorable external environment and internal factors, so just the name of the export growth of China's economy would look empty even badmouth China's foreign trade, but also premature.

On the external environment, a moderate recovery in the global economy has not changed. EU acceleration in economic growth, as the weather improved in most parts of the U.S. economy has shown signs of growth, Japan's Abe economics Overall stimulating effect on the economy is still there. America, Europe and the three major developed economies (and China's major trading partners) economy continues to improve, not only to help boost Chinese exports, providing a more global economy to maintain growth momentum, will promote China's foreign trade gradually bottom out.

Another warns of the risk from deleveraging, citing Misnky and Fischer. : Mo Nan Zhang: Financing & Credit double decline background; the balance sheet is not optimistic

Zhang Monan
Zhang Monan is a fellow of the China Information Center, a fellow of the China Foundation for International Studies, and a researcher at the China Macroeconomic Research Platform

Commentary from CSJ:
Social financing scale in March was 2.07 trillion yuan, down 479.4 billion yuan, in addition to term entrusted loans and equity financing, the negative growth in the year are; trust loans added 95 billion yuan, down 341 billion yuan. M2 growth rate is lower than the beginning of the established growth target of 13% is less than 13% or less for the first time, M2 growth fell of course affected by the high base last year, but it also reflects the "deleveraging" promotion, trust loans and acceptances contraction of bank assets, such as lower interbank money creation. Financing and money growth continued to decline for nearly a year, and the recent volatility in financial data reflects China's overall balance sheet is not very optimistic about the trend toward change.

Reaction to economic fluctuations in the financial system more consistent since 2008. According to the American economist Minsky elaborated on financial instability, periodic financial crisis is actually mobility between physical and financial sector imbalances dynamically configured and gradual process. Minsky paid special attention to the impact of debt expansion of financial fragility. His body according to the relationship between economic cash flow from operations and debt financing structure will be divided among three categories: solid financing, speculative finance and Ponzi financing, and that the incidence of financial fragility is dependent on changes in the financing structure.

Endogenous see from the financial law, in general, an increase in the economic cycle period, easing the financial markets, ample liquidity, economic agents to continuously improve leverage. Then, the original debt subject began with a modest speculative, turned into speculative financial managers, accustomed to the subject of speculative financial economy of scale is expanding, the need to complete the payment on the debt rolling into Ponzi financing. According to the Bank for International Settlements data, as of the end of 2012, China's non-financial corporate debt ratio is 140% GDP in the world have comparable data for 26 major countries and regions ranked fourth among the debt burden.

Simply can not sustain a high level of debt, debt settlement urgent requirement, which is called the American economist Fisher's "debt - deflation theory."

Further analysis of the economic downturn led to a deterioration of the government and private sector balance sheets, increasing the main debt default fears rise will lead to market sentiment and rising financing costs. "Deleveraging" effect will make the balance sheets of various departments to further shrink sharply lower money multiplier, resulting in insufficient market liquidity decreased investor confidence, resulting in amplification of capital risk premium borrowing ability. Due to changes in risk appetite, "cash is king" has become a people more choices. As the public began to storage of cash, the velocity of money fell, causing the decline in nominal interest rates, but inflation is likely to fall faster, so the actual interest rates rise, adding to the debt burden of borrowers.

Faced with such a vicious cycle, monetary policy must be "micro adjustments" necessary to maintain the overall sound monetary policy, but also to implement targeted, quantitative and regular moderately loose monetary policy tools of innovation, monetary policy fine-tuning open space. Currency operations to be more proactive, timely, targeted and flexible. By "put short-long suppression" methods of operation, to ensure that short-term money market liquidity stable, long-term liquidity while locked properly. In addition, you can operate the central bank balance sheet, for different institutions and even the real economy sector, directly or indirectly, liquidity management.

Revitalize the stock of money to improve the effectiveness of monetary policy. Unconventional monetary policy is mainly quantitative regulation. Traditionally, central banks usually through credit control to adjust the money supply. With the diversification of sources of supply of money, funds non-credit sources put the gradual expansion of the central bank to control the money supply has been weaker, in this case, monetary policy channels may be through commercial banks or financial institutions excess reserves and excess reserve rate to influence interest rates and liquidity.

Excess reserves of commercial banks to deal with the daily existence of funds ready to pay the central bank. Super savings rate represents the bank's capital adequacy idle since last June, the excess reserve ratio of financial institutions and super-scale storage will remain at 2.1% and 2 trillion yuan level, which means that, if necessary, adjust the excess reserve scale is in the premise does not relax monetary, balance of the money stock by changing the configuration of inefficient assets, thereby increasing the effectiveness of monetary policy.

Finally another one from Ye Tan (Weibo), a frequent writer of commentary on finance and economics: Ye Tan: Interconnected mutual aid has destructive impact
The largest bank in private enterprises encounter difficulties is decline in the value of collateral, guarantees ring collapse. Bank financing of private enterprises must establish a credit system in other ways, otherwise difficult to get out the risk cycle.

  Recently, the "First Financial Daily" and other media reports appeared Xiaoshan financial risk, corporate or bulk hundred deaths chain guarantees become chains of death.

  As a large district of Hangzhou, China, Xiaoshan was once famous top ten counties, in 2013 of the top 500 private enterprises in China, 28 enterprises are in Xiaoshan, accounting for 5.6% of the country, respectively, 15.1% in Zhejiang Province, Hangzhou, number one in Zhejiang many times; China's comprehensive strength hundred District City area selection, Xiaoshan has GDP of 161.72 billion, per capita GDP of 105,375.61 ranked fifth.

  Market economy developed land, have not been able to cultivate effective market-based financing system, there is no selection for the Chinese market and efficient grassroots credit evaluation system, indicating that the current financial system can adapt to economic upward cycle, but not in the economic down cycle an enterprise through the crisis. This phenomenon will not only exist in Xiaoshan, had also appeared mutual interconnection circle incident in Wenzhou and other places.

  Local government to get tough on banks prohibit large enterprises, promising companies pumping loans to ensure that local businesses will not wreck the event. This is certainly not an effective way to build business credit, but it is the only strategy local government can think of. In the game between the local government and banks, regardless of who wins, the financial market is no longer in the game, it has nothing to do with the establishment of a credit system.

  The hands of the government intervention in the market, increased market volatility. Monetary easing stage companies to get easy money, just as suddenly upstart wealthy, gamble beyond their ability gamblers, holding a lot of money do fake diversification and mergers; once monetary policy is stable, the diversified bubbles collapse one by one, assets are pledged mutual interconnected with each other to become framed even have some anti-risk ability of enterprises are also difficult to escape the whirlpool. At this point the local government to come forward, prohibit banks from calling loans, defend the stability of the local economy, but if they cannot change the nature of the business gambler then they cannot build new suitable market development system increase trust, future financial credit fixed pricing system will worsen.

  China's financial market is to develop and establish a true credit system, the government must withdraw its hand from the market, whether it is small or micro-private central enterprises, how their credit, how to price, financial institutions can only call the shots, not a substitute for financial institutions to make government choice, not government endorsement of credit for businesses, reduce financing costs.

  Pledge of assets of financial institutions and mutual interconnection, is the way barbaric growth era of financial relief credit not been apparent. Assuming enterprise risk uncontrollable, unpredictable business owners all the credit, assets pledged essence was "spared the temple monks run away", the Internet is a relative mutual neighbor even sit way reflected in the financial markets.

  These modes can not help the banks have credit selection, there is the prospect of good business, especially the way the concept of mutual interconnection is to get involved with everyone, with great destructive effect, when the economic downturn across the manufacturing sector overcapacity time, corporate guarantees in excess of the funds required business turnover, mutual interconnection pattern is to bring disaster, whether good bad business enterprise, there are no credit business credit companies, sank together. At this point the inevitable shot of local government, the risk is passed to financial institutions from corporations, financial institutions cocoon.

  Since the interconnected mutual economic system gives financial institutions huge risk and credit risk can not be reduced, it should be thrown away.

  China already has more control over where private enterprise financial risk approach, these approaches rooted in local, high efficiency and bad debt rate is not high, the key is to be able to filter out the good faith, promising companies fundamentally improve China's Soil Soil and credit economy.

  The first model is the Internet small loans mode, you can use big data analytics to solve electricity providers, commercial enterprises on a large scale downstream business lending problems. The second mode is Luqiao rural cooperative banks, adhere to service local small and micro enterprises, local farmers on credit control, through local social acquaintances, sending the local native officers investigating credit, in each village are stationed investigators, using deposit points system to attract customers. They occupy most of the local financial market share, far more than the workers and peasants in the construction and other large banks in the local market share, because turnover is quick, high interest rates, making the margin remained at a high level. These two modes conclusive data to prove their ability to control risk and profitability.

  Abandon the traditional mutual interconnection risk control, abandoned the pre-modern system, allow a different financial structure for different businesses, use large data analysis and social acquaintances risk control, then can you solve the root problem of local financing for private companies.

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