Alf Profile picture
Sep 20, 2021 13 tweets 4 min read Read on X
Evergrande panic? I can almost hear you asking for it...here is your Chinese thread!

From a panoramic macro perspective, chances that a widespread financial market panic unfolds are relatively low - it will mostly depend on the Chinese authorities reaction.

1/n
The chart below shows the % of Chinese households wealth in real estate - 74%, quite high.
For comparison, US households own <30% of their wealth in real estate.

This tells us:

- The Chinese economy is not very financialized
- Real estate matters for the CH household

How much?
74% of wealth concentrated in real estate is quite a lot, yes.
But 74% of what?

The chart below shows Chinese HH net assets (value of assets - liabilities).

In 2019, Chinese household net assets were RMB 500 trn = approx. 70k USD net wealth per each Chinese adult.

Pretty solid
So, how did China achieve this 15.5% CAGR in households net worth?

If you follow me, you probably know the answer already: credit creation.

China alone created more credit than ROW together over the last 20 years.
Credit creation = increase of private sector wealth.
Now, back to Evergrande.

If credit creation increases the net wealth of the private sector, credit destruction does the exact opposite - it drains resources and net wealth from the private sector.

The Chinese private sector war-chest is solid, but deleveraging is tough business
Chinese authorities hold the keys here: what will be their response?

So far, they have come up with reverse repo liquidity injections. The PBOC lends cash (well, bank reserves) to banks at a fixed rate and for a fixed period in exchange for securities.

Cool, but does nothing.
Banks don't lend reserves (yes, it works the same way in China too)
They expand credit when there is a decent risk/return in doing that, and now there is not.

The credit impulse in China is unlikely to head north unless Chinese authorities intervene differently.
Basically, the CCP needs to ''encourage'' state-owned enterprises to borrow and banks to lend a bit more forcefully - they have done it big times in the past, it wouldn't be news.

That would spur credit creation and push up economic activity and asset prices.
For context, that's how the Chinese credit impulse was looking like before entering the Evergrande saga.

Sizeable action is needed.
What about worldwide contagion?

The Chinese economy has still high entry barriers for foreign investors.

For instance, foreign investors % allocation to Chinese stocks is in the low single digits despite China accounting for a large share of global earnings and growth.
As the domestic economy is not highly financialized and foreign investors are still underinvested, the chances for global widespread contagion are not incredibly high.

Amundi and UBS are amongst the biggest European owners of Evergrande (and Chinese) bonds...
...and today they are down, but only slightly more than what their usual beta to the Eurostoxx 600 would suggest.

Amundi is down 4% (beta 1.05) while the Eurostoxx 600 is down almost 3%.
Chinese CDS is on the rise, high-beta risk assets are suffering, DXY is heading north.
All classic signs of a moderate risk-off.

Watch the CCP reaction to closely understand how deep the sell-off and damage to the Chinese consumer demand can be.

The end.

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More from @MacroAlf

Apr 27
The odds of a Fed intervention to calm down the bond markets have increased substantially.

These policies would be akin to Yield Curve Control (YCC), something not seen in the US since the 1940s.

Thread.

1/
In April, the long-end of the bond market went ballistic for a few trading sessions.

30-year bond yields moved from 4.30% to 5.00% in 3 trading sessions.

Such a sell-off in only 3 trading sessions is very rare to witness:

2/ Image
On April 11th, Fed's Collins released an interview stating that the ''Fed is absolutely ready to intervene to stabilize markets''.

But why would the Fed get involved to stop a long-end sell-off if driven by government policies?

Well, because there was more than that...

3/
Read 11 tweets
Mar 19
Central Banks are slowly but surely diversifying away from the US Dollar into Gold.

This is one of the most interesting and potentially disruptive macro trends since the pandemic.

Thread

1/ Image
Foreign Central Banks have been sending a clear message to US policymakers: we intend to diversify away from the US Dollar.

The chart above shows the % of total foreign exchange reserves held in USD (blue), EUR (white) and gold (orange).

2/
Before you get too excited: please remember the chart uses market values for Gold and other currencies.

The recent, massive appreciation in Gold skewes the % for Gold on the upside - but even after correcting for that, there has been a clear move away from USD into Gold

3/
Read 9 tweets
Feb 25
The market is signalling a big growth scare.

Should you be worried or fade it?

Thread

1/
First - how can we quantify the ''growth scare'' driver behind the current market dynamics?

A) Yields down
B) Equity sector rotation
C) Stock markets down despite yields down

Effectively, you can summarize this with the following...

2/
Markets are pushing yields down in a parallel fashion, expecting a slow Fed dovish reaction which won't be enough to restore growth.

So as yields fall, equity valuations don't get a boost but rather EPS expectations get revised down and people prefer defensive sectors.

3/
Read 8 tweets
Feb 20
Fed officials are discussing ending Quantitative Tightening (QT) soon.

Let's discuss what this means for liquidity and markets.

Thread.

1/
First of all, some basics.

The Fed has been running QT for years now, in an attempt to reduce their balance sheet and drain reserves (''liquidity'') out of the system.

In short, here are the mechanics behind QT...

2/
Step 1: the Fed doesn’t reinvest maturing bonds and therefore destroys reserves - also known as ‘‘liquidity’’’

Step 2: the government needs to roll-over its funding, so banks now need to step up and absorb more of the newly issued securities

3/
Read 11 tweets
Feb 14
A deep understanding of the mechanics behind fiscal and monetary operations will be an important skill to navigate markets.

Here is a quick guide to help you master the topic.

Thread.
The table below can be used as a Cheat Sheet to quickly assess what impact a certain monetary/fiscal mix can have on markets and the economy.

Let's go through 2 quick examples: Image
1️⃣ QE + Fiscal Deficits

- Fiscal deficits inject new money for the private sector; when the government cuts your taxes or sends you a cheque, all of a sudden you have more spendable money!

- The Fed creates new reserves (QE) and absorb bond issuance, leaving banks free of that burden and with more ''liquidity'' (reserves)Image
Read 9 tweets
Feb 9
Global bond markets are adjusting to Trump policies, the new Fed stance, and diverging economic fundamentals.

Let's look into it in today's thread.

1/
Starting from the US, this is what markets are implying for Fed Funds over the next 2 years.

Fed Funds are seen around 4% by December (~1.4 cuts), and the terminal rate sits around 3.95% with no more cuts in 2026-2027.

2/ Image
2-year inflation swaps have started to price some risk premium around tariffs.

At 2.72%, they have reached new highs:

3/ Image
Read 9 tweets

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