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Chinese Liquidity, EM Debt, and Slowing ISM - September 3, 2019

“This Is A Bigger Bomb”

 While the US and China maintain their respective economies are fine amidst the trade war, cracks are beginning to show in the façade. The latest sign of stress in China was the announcement by Bank of Jinzhou, a regional Chinese lender, that they were planning to suspend dividend payments on some dollar securities. In this Bloomberg article, the bank is “one of several smaller banks in China that have come under pressure as the economy has slowed and loans have turned sour”. More worryingly, as Reuters covered earlier this year, liquidity problems and weakness at Jinzhou could act as a “trigger for problems at other banks in northeast China”.

 China’s “Opaque Overseas Lending”

 If China feels a liquidity pinch, the after-effects would likely ripple well across its borders. In China’s Overseas Lending, Sebastian Horn, Carmen Reinhart, and Christoph Trebesch “establish the size, destination, and characteristics of China’s overseas lending”. The authors document China’s transformation into the “largest official creditor, easily surpassing the IMF or the World Bank” and find that the majority of the loans ”go to low- and middle-income countries”. The downside is that while “official creditors have typically lent to developing countries at concessionary terms with long maturities and at below-market interest rates. China, instead, often lends at market terms (with risk premia), shorter maturities, and partly with collateral clauses that secure repayment through commodity export proceeds, in particular from oil”. The authors find that about half of China’s loans to developing countries are hidden, and believe that the size of the debt obligations and the nature of the loans from China “have important implications for debt sustainability in recipient countries”.

Emerging markets could face additional problems if the dollar continues to strengthen. As a recent Bloomberg article explained, dollar strength “creates headwinds for large swaths of debtors in the developing world, where companies and governments rely on foreign funding for growth”.

 “Starting To Show Signs Of A Broad Slowdown”

 On the domestic front, while the Personal Spending data from last week was better than expected, today’s ISM data showed signs of trouble ahead. August manufacturing data marked the end of an “expansion that spanned 35 months” as New Orders, Production, Employment, Supplier Deliveries, and Prices all declined. The headline number, 49.1, was the first “Contracting” reading since August of 2016. However, validating respondents “concerns about the economy and tariffs”, the New Export Orders Index dropped to the lowest level since 2009 and the lowest level on record outside of the GFC. Adding to signs of malaise were the recent University of Michigan Survey of Consumers results. The Consumer Sentiment Index saw the largest monthly decline since December 2012. The survey’s writers concluded that “the data indicate that the erosion of consumer confidence due to tariff policies is now well underway” and warn of increased “likelihood that consumers could be pushed off the ‘tariff cliff’ in the months ahead”.

 

Figure 9. World map of external debt to China.png