EM… what a headache

EM… what a headache

Ukraine has become a real chess game between Russia and US/EU.  Russian troops are in Crimea which shows Russia’s determination to take the driving seat.  Global stock markets got sold off on the back of the Ukraine situation but not for long.  The US S&P 500 Index and Eurostoxx 50 bounced back hard reflecting the institutional investors are not yet worried about a Ukraine led global crisis.  The Russian stock market is not so lucky being in the middle of US sanctions.  Moscow’s MICEX is down 14% year to date as of 21 March.  US sanctions include freezing the personal assets of about 40 officials, some from Ukraine.  Bank Rossiya, Russian’s 17^th biggest bank, has been added to the US sanctions list which raised more eyebrows.  The EU sanction list does not include companies as a trade war with Russian is like starting a food fight in your own kitchen.  The EU does not fancy hurting an already faltering Russian economy.  The credit rating companies are queuing up to downgrade Russian’s sovereign credit rating which would probably increase Russian companies borrowing cost.

Another giant Emerging Market, China, has a very different set of problem.  It has a very sad massacre in Kunming in the first weekend of March and a plane flying to Beijing went missing in the second weekend.  The smaller issue is the Renminbi dropping sharply against the USD since late February. It has depreciated by 2.8% in 2014 against USD, reversing all its gain in 2013.  The People’s Bank of China has also increased the daily movement limit from 1% to 2% to let the currency swing wider against USD.  Some said People’s Bank of China used the slide in Renminbi and the increase in volatility to drive speculators from going long the Yuan.  Many corporates and trading companies in China have been borrowing USD offshore to fund its bill in Renminbi in China.  Many could borrow USD in, say, Hong Kong at around 3% while the borrowing rate in China is 7%.  Considering the Renminbi has been strengthening against the USD every year for the past 5 years, it has become a habit for many exporters to borrow USD to fund its expenditure in Renminbi.  Well, party ends when everyone is on the same trade.

China has a debt crisis or some even worry about a Lehman moment.  There is a corporate bond that is listed in the Exchange and it missed an interest payment.  The name of the company is Shanghai Chaori Solar Energy Science and Technology Company.  Interestingly, Suntech Power Holdings Corp was the world’s biggest solar-panel maker in 2011 and it went bankrupt in 2013.  The stock is listed in the OTC Exchange in US and as of 21 March, it still has USD 67 million market capitalization.  If Suntech can go under, there should be no surprise of another solar company in China failing to make interest payment.  Well, the domestic investors were surprised that there was no white knight from local government or government friendly’s business partners.  After all, clean energy is encouraged by government policy.  This corporate bond default episode confirms the government change of gesture in shifting from protected economy to market economy.  While this is long term positive, short term jitters in the market is necessary.

Banks’ funding cost in China has been affected by mobile platforms.  Alipay which is similar to Paypal has jointed up with a Money Market Fund called YueBao.  It was launched in June 2013 and as of end of February 2014, YueBao has become the biggest fund in China and the 7^th biggest fund in the world with over USD 80 billion asset under management.  YueBao has successfully captured the long tail to beat the head.  The minimum investment about is CNY 1 which is less than 10 pence.  The interest it pays is around 5% with daily subscription and redemption.  Bank’s 7 days deposit is paying less than 3%.  YueBao has more investors than the entire China stock market.  Without saying, one can guess YueBao has drawn “spare changes” from bank accounts.  Hence it reduces banks’ deposit amount and in turn, increases what banks need to pay to attract deposit.  When banks feel tight, they have reduced lending appetite and increase borrowing rate to compensate.  The success of YueBao has induced negative pressure on the corporate funding market.

Another acid test on the sentiment in China is the Jewelry Shops in Hong Kong.  Last year when Gold touches USD 1200 per ounze, the Jewelry Shops were packed with tourists buying gold.  The Dragon and Phoenix gold bracelets were sold out in the entire Hong Kong.  Since Chinese New Year in February, the tourists have slowed and the Jewelry Shops are probably at least 50% less busy than last year.  China is slowing down, really.