Friday, January 25, 2019

Updated: Zerohedge: China Quietly Announces Quasi QE To "Keep Ponzi Scheme Afloat"

RE: China's ponzi scheme
Date: Jan 25, 2019 at 5:50 PM

yes...they are out of ALLLLLLLL value....and they all still have an astronomical bill that they cannot ever repay...not to mention all the other bills they have to pay :)

-----Terran 1/25/2019 12:36 PM wrote:


Bloomberg has a "paywall" article on the collapse of Singapore real estate...

....and then there's this from Zero Hedge... they be out of money!

China Quietly Announces Quasi QE To "Keep Ponzi Scheme Afloat"

Profile picture for user Tyler Durden
by Tyler Durden
Fri, 01/25/2019 - 11:37

On Thursday, to little fanfare, China's central bank announced its latest liquidity injection scheme, which many analysts saw as a quasi Quantitative Easing program and a potential precursor to full-blown QE.

Just like QE in the US, where financial system liquidity was boosted by the Fed injecting reserves into banks in exchange for sales of Treasurys and MBS, which fungible liquidity was then used for a variety of purposes including directly investing in risk assets as the JPM London Whale fiasco demonstrated, the PBOC announced that it will allow China's primary dealers to swap their holdings of perpetual bonds for central bank bills, and directly use those bonds as collateral to access certain PBOC liquidity operations.

By directly intermediating in the market, and effectively backstopping securities issued by local banks, this measure will increase the appeal of perpetual bonds to be issued by banks making them riskless for all intents and purposes, which can then be used to bolster capital cushions and thereby help relax a key current constraint on credit supply.

In other words, the PBOC just unveiled a roundabout way of injecting even more "risk-free" liquidity directly into the system, or as Rabobank's Michael Every (more below) writes "Chinese banks, desperate for cash to keep the Ponzi scheme afloat, can issue perpetuals that nobody in their right mind would want to hold; and the PBOC will swap them for its bills."

* * *

First, some background: In December, China's financial authorities permitted banks to issue perpetual bonds as a way to bolster their capital base, and on Thursday Bank of China, the country's fourth largest lender, launched the first ever batch of perpetual bonds - which are the functional equivalent of preferred equity as they never have to be repaid - issued by Chinese banks, with an officially approved quota at 40 billion yuan and yielding 4.5%. These bonds count toward banks' (non-core) tier 1 capital, thereby boosting the bank's capital cushion and allowing the bank to issue more loans into China's increasingly cash-starved system.

Why did Beijing take this aggressive step? Because as Goldman explains, banks' increased consideration of their capital cushion had weighed on monetary policy transmission and loan extension. So, by adding to the banking system's capital buffer, the issuance of perpetual bonds should in turn help ease a main current constraint on credit supply.

But that wasn't enough, and just to make sure there is sufficient demand for "perpetual bonds" issued by banks, the PBOC launched the Central Bank Bill Swap (CBS), which just like QE, is an asset swap where the central bank injects high powered liquidity to backstop bank balance sheets, enabling them to pursue riskier credit transformation operations, in this particular case, issue more loans with the intention of reflating the system.

Below we summarize some of the key features of these Bill Swaps:

  • The new tool works by giving primary dealers bills that can be used as high-quality collateral in exchange for perpetual bonds purchased from banks
  • China Banking and Insurance Regulatory Commission will also allow Chinese insurance firms to invest in banks’ tier 2 capital debt and capital bonds without fixed terms
  • Capital charges will be applied on perpetual bond holdings on Chinese banks’ balance sheet, even after they swap the securities for central bank bills using a new PBOC tool.

Regarding the PBOC's measures, the duration of the central bank bill swap was initially set at three years.  While the swapped central bank bills cannot be directly converted into cash, and can only be used as collateral for borrowing from the PBOC (e.g., via OMOs) or other financial institutions, once said repo operation takes place, the proceeds from the CBS are effectively the equivalent of cash as banks face no further limitations on what to do with the funds received from the perpetual bonds issuance. There are some modest limitations on eligible collateral: the perpetual bonds that qualify for CBS need to be issued by banks that meet some minimum prudential requirements (such as CAR not lower than 8%) but generally this operation is meant to be inclusive and allow as many banks as possible to participate. As Goldman notes, more implementation details such as the risk weight of this new tool are still not released yet.

And just to make sure enough liquidity reaches the banks, the PBOC will also allow perpetual bonds that are rated AA or above to be used as collateral for MLF, TMLF, SLF, and relending monetary operations, i.e., once the bank issues the PBOC-backstopped perpetuals - which makes them the risk-equivalent of cash for downstream investors thanks to their central bank backstop - it can use the proceeds for pretty much anything.

Of course, this is not full-blown QE because the announced move are not monetary measures per se, in that they do not involve creation of money; they do however involve the central bank backstopping a bond-like instrument, which then has all the functional equivalents of money. Meanwhile, as Goldman also notes, the CBS "does not mean that the PBOC is indirectly providing capital to banks, as the CBS is of limited duration", which while true, does provide banks with virtually risk-free capital for a period of three years, so the "limited duration" argument in a world where investors only care about day to day liquidity is somewhat naive.

* * *

Naturally, with China launching such a "novel" mechanism to boost liquidity in the system, there were quite a few analyst reactions, and courtesy of Bloomberg, we present some of these:

Ming Ming, head of fixed income research at CITIC Securities

  • The new policies addressed two issues that had been major obstacles for the development of banks’ perpetual bonds: the poor liquidity of perpetual bonds and the need to include insurance firms, who are key investors for long-term bonds, as eligible perp buyers
  • There could be three possible ways to boost bank perps liquidity:
  • Investors who buy bank perps can sell the securities to primary dealers, who are able to swap the perps into central bank bills
  • Primary dealers could use central bank bills as collateral for repurchase transactions with other institutions
  • Primary dealers can borrow from PBOC against perpetual bonds or central bank bills

Li Qilin, chief economist at Lianxun Securities

  • The introduction of Central Bank Bill Swap brings PBOC into the market as a buyer, boosting liquidity of perpetual bonds
  • The ultimate goal of such a new tool is to expand credit supply. Perpetual bonds can replenish banks’ capital, therefore helping expand their loan books
  • There are about 65 banks whose perpetual bonds can be eligible for central bank bill swap. The total loan size of the 65 banks makes up over 65% of that of all financial institutions

Ji Linghao, analyst at Huachuang Securities

  • It makes primary dealers more willing to buy perpetual bonds and ensures successful issuance of such debt
  • Allowing insurance firms to buy perpetual bonds helps diversify the investor base for such securities, making it easier to sell those notes
  • Allowing primary dealers to swap perpetual bonds into central bank bills effectively means that PBOC throws itself behind such securities, easing market concern over risks of perpetual bond
Liu Li Gang, at Citigroup
  • The new Central Bank Bill Swap may make itself both a market player and a regulator, potentially leading to conflict of interests
  • It may be better for the PBOC to "play just a facilitating role together with other market players"

PBOC may have been "over reaching" in the market, and such interventions could make China’s monetary policy implementation extremely complex, monetary policy less transparent and policy transmission less effective

But the best, if also most cynical recap, of what quietly took place in China, comes from Rabobank's Michael Every, which we present below:

China just announced "US banks can start operating there in six months." I am sure useful-idiot headline-followers will say China is opening up. They probably won’t notice the PBOC also announced a Central Bank Bills Swap that will give primary dealers bills they can use as collateral in exchange for a flood of new perpetual bonds that Chinese banks are about to issue, following the lead of the Bank of China (which is offering CN Yuan 40 bn at around 4.5% for people who never want to get their money back). 
In other words, Chinese banks, desperate for cash to keep the Ponzi scheme afloat, can issue perpetuals that nobody in their right mind would want to hold; and the PBOC will swap them for its bills. Add that to MLF operations already underway and chatter of outright QE and one finds it hard to see where the real business model for Wall Street is in China, or to argue the part of Soros’ speech where he underlines how fragile China really is (which is why it needs that Wall Street cash-flow).

And, as Every hints, should the Bill Swap fail to boost credit creation and/or sentiment sufficiently, there is always good, old "outright QE" to fall back on...

Mortgage Lending Plunges


RE: Mortgage lending plunges
Date: Jan 25, 2019 at 1:37 PM

All have moved all of existence, to completely shift from..."It is what it is. It's complicated." ~ DJT... 


"It is what it is. It's simple." ~ All 

----Terran on 1/25/2019 10:21 AM wrote: 

Curious this has a dual byline of China Daily/Reuters .... 



Americans stopped buying homes in 2018, mortgage lenders are getting crushed, and an economic storm could be brewing 

Alex Morrell Jan 25, 2019 | 8:30 AM ET

It's too soon to panic, but a deeper drought in housing is bad news for just about everybody.

China Daily/Reuters

The US housing market took a dark turn in 2018, as homebuying fell off a cliff and mortgage lenders saw a steep decline in applications, originations, and profits.
Interest rates are partly to blame for the slide in housing, but that's only half of the equation, according to analysts.

It's too soon to panic, but a deeper drought in housing is bad news for just about everybody, not just the banks.
Significant housing declines have foreshadowed nine of the 11 post-war US recessions, according to UBS

As 2018 headed toward its close, Americans' appetites for buying homes fell off a cliff.

In December, the rate of existing US home sales cratered to 4.99 million, 10.3% below the mark from the year-ago period, according to data released earlier this week by the National Association of Realtors.

That's the steepest decline in more than seven years, and it followed year-over-year declines of 7.8% in November and 5.1% in October.

Home sales dropped in every month in 2018 except February, but the trend grew more aggressive in the final quarter of the year.

The decline has been broad, affecting every region in the US. Even home sales in the the posh Hamptons got battered in 2018.
Banks with large mortgage-lending businesses felt the homebuying malaise take a bite out of their bottom lines last week during fourth-quarter earnings results.

At two of the largest bank mortgage originators and servicers in the US, the numbers were more pronounced.
At Wells Fargo, mortgage banking revenues fell 50% to $467 million in the fourth quarter, while originations declined 28% to $38 billion.
JPMorgan, meanwhile, saw mortgage income fall to $203 million, a 46% drop from the same period last year.

Originations fell 30% to $17.2 billion.

These ugly housing numbers have raised red flags for Wall Street investors and analysts, who are concerned that "the deterioration in housing and its intensification since mid year raise the possibility of underlying weakness in the household sector," according to a note issued this week by UBS economists.

It's too soon to head to the panic room, as this trend could prove a small bump that smooths over throughout 2019, but a deeper drought in housing is dark news for just about everybody, not just the banks.

Significant housing declines have foreshadowed nine of the 11 post-war US recessions, according to another note by UBS from December examining the housing slowdown.

"The housing market usually does not slowdown in a vacuum and a falling housing market may well be the first indication of broader economic weakness," the bank's analysts wrote.

What's to blame?

The US economy has been exceptionally strong the past year - we've had wage growth, low unemployment, and low delinquency rates, among other positive drivers that should auger well for real-estate investing, UBS notes.

So what happened to the housing market? The most glaring explanation is that mortgage rates increased, convincing prospective homebuyers the market had become unfavorably expensive.

The Federal Reserve hiked its benchmark interest rate four times in 2018; the rate on a 30-year mortgage hit 4.94% in November - the highest mark since 2011 - before falling down to 4.45% by year's end.

That November figure may not seem a gigantic increase from the average rate of 3.65% just two years ago, but for a $250,000 home, the difference in the monthly payment is $190 and the lifetime cost is greater by nearly $70,000..

But interest rates don't tell the full story - UBS analysts estimate rates account for roughly half of the slow down.

Home prices have also been ascending for years. The median existing-home price in December was $253,600, a 2.9% increase from 2017 and the 82nd straight month of year-over-year gains, according to NAR.

"We saw a cooldown because buyers couldn't afford these homes anymore," Daryl Fairweather, chief economist at real-estate brokerage Redfin, told Business Insider.

Cash-strapped and saddled with student loans and other debts, millennials - a generation of more than 70 million in their 20s and mid-30s - have delayed buying a home later than their parents, but their participation is crucial to buoying home sales.

They may be balking at the higher monthly payments commanded for increasingly pricier homes and deciding they're better off renting.

"They need to be in the housing market to keep things going, but they face real affordability challenges," said Jody Shenn, a VP in structured finance at Moody's. "Just being able to get a house they can afford on a monthly basis with a mortgage is on the challenging side at this point."

But the debt-burdened millennial didn't materialize in 2018. That long-standing trend is likely contributing to the overall slowdown, though it doesn't necessarily explain the precipitous drop in fourth-quarter home sales.

Other factors that may have had an impact but are harder to pin down: rising construction costs, a reduction in the mortgage deduction in the new tax law, tightening credit standards by some lenders, and less flexibility in underwriting.

If profits are down, why are lenders rejecting more mortgage applications?

Curiously, despite less homebuying demand and falling revenues, the rate of mortgage and refinancing application rejections also shot up in the second half of the year, according to data from the Federal Reserve Bank of New York.

In its "Credit Access Survey" - a quarterly report on US borrowers - the Fed found in October that even as mortgage applications among those surveyed fell from 9.2% to 6.7% over the previous year, the portion of respondents who experienced a mortgage application rejection increased from 15.6% to 19%, the highest mark in the survey since February 2015.

Why would lenders, already facing headwinds in their mortgage businesses, start denying more applications?

Two Moody's analysts Business Insider spoke with said they hadn't noticed tightening lending standards for residential mortgages. Home-lending standards have actually been loosening of late, they said.

Charge-offs have been on the downswing, though, suggesting lenders have been doling credit out responsibly in recent years.

"The squeeze on mortgage originators is encouraging them to move down the credit spectrum, but it's a slow, measured shift," Warren Kornfeld, a senior vice president covering financial institutions at Moody's, told Business Insider.

But it could still be the case that lenders experienced an influx of applications from borrowers they deemed too risky to lend to. The Fed has telegraphed its rate hikes, so savvier and more credit-worthy borrowers may have taken action early on to get a cheaper mortgage rate.

Borrowers applying at the peak were "probably more desperate," according to Fairweather, and banks don't typically like to lend to people in desperate situations who have a higher chance of defaulting on their loan.

"My interpretation of this is that there was a decrease in the quality of applicants at this time," Fairweather said.

Overall lending standards may not be any stricter, Shenn added, but "it could be the mix of who's coming in the door has changed."

Riskier borrowers may have grown more interested in buying a home, but in general the number of consumers who think it's a good time to buy has been declining since 2014, according to surveys from the University of Michigan and Fannie Mae.

The number of consumers who believe it's a favorable time to buy a home has fallen below the number who think it's a good time to sell a loan - a foreboding signal.

As UBS points out, that's only happened twice in the 26 years those survey questions have been asked - and those instances preceded our two most recent recessions.
There's no quick fix for consumers feeling stretched too thin to buy a home, according to Kornfeld and Shenn at Moody's.. Costs and rates have to fall, or wages need to increase, or some combination thereof.

Mortgage lenders face a bleak horizon this year. Their profit outlook fell for the ninth straight quarter and reached an all-time low to close out 2018, according to Fannie Mae's Mortgage Lender Sentiment Survey.

But a housing collapse is by no means imminent, especially in light of the strong economic fundamentals at play right now.
Consumer spending hasn't flatlined elsewhere, and as previously mentioned, unemployment and wage growth are trending in the right direction.

Fairweather anticipates another strong year for the economy in 2019, and she's optimistic that buyers will have an easier time and more leverage in negotiations this year.

Still, amid a steady housing decline and following the especially ugly numbers from the fourth quarter, analysts are on alert, and UBS says it will be tracking the trend closely this year.

"The incongruity of the spending on housing with the rest of the economy is a red flag," the bank's analysts wrote.

"Unwillingness to spend on large, long-lasting items like housing may signal susceptibility of consumer confidence and spending to adverse shocks."