Thread by @Trinhnomics

The United States has authorized the voluntary departure of U.S. government employees and their family members from Hong Kong in light of the outbreak of a deadly coronavirus...

😬

reuters.com/article/us-chi…

My HKG-LAX route postponed till 24 April 2020 & also the long HKG-Dallas. American is the largest airline (fleet size) in the world & also One World (key for club pts).

I think Cathay is still open 🤞🏻

No daily coronavirus update b/c CEIC didn't. No one has the latest #s yet. Delayed today!!!

Meanwhile, let's look at some of the news. As you know, in Beijing roughly only 13% of the shops are open & in Wuhan obvs even lower. And that means activities grind to a halt.

So, the ones tend to be most hurt are SMEs as more domestic demand oriented w/ weaker balance sheet.

Most of Chinese employment are in SMEs (80% of urban employment, account for 60% of GDP in China) so not a rounding error here. Gov says to roll over the loans & help.

Key questions:

a) Will the SMEs actually get the funds needed to ensure survival?
b) Consequence for banks?

Consequences of the corona virus:

1) Businesses shut (hurting SMEs & domestic-oriented firms most as export driven still got outside markets)
2) SMEs are 60% of GDP & 80% of urban employment & based on a survey by Tsinghua & Peking Uni, only 18% can survive w/ 3 months closure

3) Decision time for SMEs not getting cashflow/income: a) reduce costs (employees, roll over debt or refinance w/ lower rates, etc); b) need more $ to get going - banks anyone?
4) Gov says to banks to LEND or ROLL OVER DEBT or LOWER rates
5) Assuming banks comply (they may not)..

6) Note that banks already don't like to lend to SMEs & prefer larger corps. Anyway, so say banks comply (I mean, from banks' perspective, u're lending to rather risky customers here at supposedly lower rates b/c gov wants these rates lower too)...

So the math for the banks...

7) Say there is a fresh injection of liquidity - can't imagine all SMEs getting this. Liquidity injected & rolled over etc. For banks, they are basically extending loans (assets on their book) or rolled over loans (without income from payments) for borrowers that look very risky.

8) At this pt, assuming that the banks are going to shoulder the costs (can't imagine them willingly doing this w/ great enthusiasm), and EARNINGS don't recover enough for these SMEs to cover their debt & so the banks are sitting on a lot of assets that are well...

OK, the PBOC

S&P estimates that non-performing loans (NPL) will rise 3 times in China because of this to 6% from 2%.

Not rocket science to conjecture that help is needed & what that means is that if more yuan is going to be injected & rates lower etc then that CNY can't be too strong vs USD

@FT has a great article on this today on the impact of SME decline of earnings & thereby lower ability to repay debt & thereby infecting their lenders (esp if they are forced to roll over debt/lower rates when RISKS HIGHER!)

Banks most exposed to SMEs👇🏻😬
ft.com/content/deb2f1…

@FT The PBOC stress testing w/ diff scenarios:

Note that the WORST case was 4.2% GDP growth...

👇🏻👇🏻👇🏻

@FT Look, no matter what kind of scenario/math calculation u do, the key pt from the decline of economic activity is that someone has got to pay for it. That means it SHOWS UP IN THE BALANCE SHEET SOMEWHERE. If the PBOC does a massive injection, what do u think happens to the yuan?