Aurelia Butler

Routine month-end demand for cash in China’s banking system snowballed into a scramble on Oct. 31 that pushed short-term funding rates as high as 50% in some cases, an incident that authorities are now investigating. Six participants in the market say a confluence of factors drove fear and confusion across trading rooms in Shanghai and Beijing by late afternoon on that day. Eventually, the People’s Bank of China (PBOC), its affiliated China Foreign Exchange Trade System (CFETS) and bond clearing houses stepped in, directing lenders, extending trading hours and holding meetings with institutions to calm markets.The contributing factors were the usual month-end demand for liquidity, cash hoarding in the lead up to a big government bond sale and a market where the biggest banks were already reticent to lend because of a mandate to counter pressure on the yuan.”It was an accident,” said Xia Chun, chief economist at wealth manager Yintech Investment Holdings, calling it an unforeseen consequence of the government’s heavy hand in financial markets.”Banks were grudging in lending, leaving non-banks asking each other for money in afternoon trade,” he said. “Borrowing rates surged as a result, with some willing to take any price.”The reasons for the spike in interest rates and the ensuing market chaos are detailed here for the first time. Participants say that the vulnerability exposed will stay as long as capital outflows keep the system under pressure.Most of them requested anonymity as they were not authorised to discuss a sensitive topic publicly. The PBOC told Reuters that CFETS was probing “abnormal” trades on Oct. 31 involving some accounts repeatedly borrowing and lending money at “extremely high interest rates” near the end of trading hours. ‘COMBAT MOOD’Short-term financing markets, such as overnight repurchase agreements, or repos, are crucial to the daily business of banks, insurers and other financial institutions.They affect foreign exchange movements since the markets are the major avenue for the supply of money.Funds and non-banks borrow and roll over loans that finance their investments and trades in the repo market. The month-end is also when banks and other finance-sector participants have to square their books and comply with rules on capital buffers. Disruptions, therefore, can threaten financial stability.Seeds of trouble were sown in October when China approved one trillion yuan ($137.32 billion) in sovereign debt sales, to be rolled out – according to sources familiar with the plans – by sticking to the issuance schedule for the fourth quarter but increasing the size of each tranche.Typically, said one fund manager in Shanghai, in such situations the PBOC would offset the cash drain from the extra bond issuance with extra funding support – for example by relaxing bank reserve requirements.But putting extra cash into the system would risk adding downward pressure on the yuan – which has lost over 5% against the dollar this year – and undercut months of efforts to stabilise the currency. “The inaction by the central bank is mainly due to its concern over yuan depreciation,” said the fund manager, who declined to be identified as he was not authorised to talk to media.On trading floors that Tuesday, the scramble for short-term funds became a stampede.Even repo rates between banks, normally stable and the main gauge of short-term funding costs, flew from an overnight rate of 2% a day earlier to as high as 8% on Oct. 31.DESPERATE BORROWERSAt 4 p.m. (0800 GMT) the state banks that normally lend to desperate last-minute borrowers were missing, according to three market participants.The absence left a couple of desperate borrowers paying 30%-50% – rates not seen since defaults at China Everbright (OTC:CHFFF) Bank and Industrial bank Co Ltd a decade ago – to secure the loans they needed.At 5 p.m. markets closed with positions unfunded and trades incomplete.”No one left the trading desk, as you don’t know how things will go … the whole trading room was in combat mood,” said one fund manager in Beijing. “If you need to square your positions in such an environment, and want to avoid default, you need to borrow at high rates,” the fund manager said. “For each individual, it’s rational behaviour.”The PBOC stepped into the breach, asking state banks to supply funds while the China Central Depository & Clearing Co (CCDC) and Shanghai Clearing House both reopened settlements at 6 p.m in an emergency response. By 8.30 p.m., crisis was averted and the market cleared and closed again.DO NOT ‘BE EMOTIONAL’At a follow-up meeting with banks and brokers the next day, sources said the PBOC told institutions their behaviour was “disturbing the market” and that they should not “be emotional.”The money market operator CFETS told traders to keep a 5% ceiling on repo transactions and said anyone involved in high-rate deals closed on Oct. 31 would need to explain themselves to regulators, according to sources who received the notice. Fear subsided with overnight rates falling back below 3%. To be sure, most see the danger as having passed.But analysts have turned to the backdrop – intensifying control over China’s currency – as an underlying source of tension.China’s economic rebound from the COVID-19 pandemic has been a disappointment. Together with rate rises around the world, it has fanned capital outflows and the yuan has suffered.And yet, after dropping 5% on the dollar over the year to mid-August, the exchange rate has been conspicuously steady since as efforts from state-bank buying to new rules discouraging short selling have been deployed to support it.Tighter liquidity is another method.”If the pattern of money supply and liquidity provision remains unchanged, the whole system remains fragile. Another liquidity shock is always possible,” said the Beijing-based fund manager.Others see less risk, but expect tightness will stay as long as there is pressure on the currency. Broad dollar weakness has helped the yuan lately, but at 7.28 to the dollar it is not far from September’s 16-year low of 7.351.($1 = 7.2822 Chinese yuan) More

Financial markets worldwide pay close attention to the wage trends in the world’s third-largest economy. The Bank of Japan regards sustainable pay increases as important for unwinding its ultra-loose monetary stimulus.Inflation-adjusted real wages, a barometer of consumer purchasing power, dropped in September by 2.4% from a year earlier after a revised 2.8% fall the month before, data from the Ministry of Health, Labour and Welfare showed.The consumer inflation rate officials use to calculate real wages, which includes fresh food prices but excludes owners’ equivalent rent, slowed to 3.6%, the lowest since September last year.Still, nominal pay growth in September was 1.2%, after a downward revision of 0.8% in August and only slightly better than in July. Japan’s largest labour organisation Rengo is expected to demand pay increases of 5% or more, while the largest industrial union, UA Zensen, will seek a 6% wage increase in negotiations early next year.Prime Minister Fumio Kishida’s government last week drew up a 17 trillion yen ($113.72 billion) economic stimulus package that includes slashing annual income tax and other taxes by 40,000 yen ($267.58) per person and paying 70,000 yen to low-income households.Special payments fell 6% year-on-year in September after a revised 6.3% decline in August. The indicator tends to be volatile in months outside the twice-a-year bonus seasons of November and January and June to August.Base salary growth in September advanced by 1.4% year-on-year, from a revised 1.2% increase the previous month, the data showed.Overtime pay, a gauge of business activity, went up in September by 0.7% year-on-year, after a revised 0.2% gain in August.SLUGGISH SPENDING Household spending decreased 2.8% in September from a year earlier, falling for seven months in a row, separate data on Tuesday showed, roughly in line with the median market forecast for a 2.7% decline.On a seasonally adjusted, month-on-month basis, household spending climbed 0.3%, versus an estimated 0.4% fall.Expenses in eating out, transportation and automobile-related spending went up due to an increase in outings, while spending on food, housing, furniture and household goods decreased partly due to rising prices, a government official said. Major companies agreed to average pay hikes of 3.58% this year, the highest increase in 30 years. Average Japanese workers’ wages had remained virtually flat since the asset-bubble burst in the early 1990s until this year. More

NEW YORK (Reuters) – Federal Reserve Bank of Minneapolis President Neel Kashkari said on Monday that the U.S. central bank likely has more work ahead of it to control inflation. “The economy has proved to be really resilient even though we’ve raised interest rates a lot over the past couple of years. That’s good news,” Kashkari said in an interview on the Fox News television channel. But he added: “We haven’t completely solved the inflation problem. We still have more work ahead of us to get it done.” Kashkari’s comments suggested he is still leaning toward raising interest rates again. The Fed met last week in a gathering that kept its overnight short-term interest rate target unchanged at between 5.25% and 5.5% and preserved the option to raise rates again as inflation is still well above its 2% target.But with price pressures falling, many in markets believe the Fed is done with raising rates.Kashkari said recent inflation data has been good and moving lower, which he welcomed. But he added: “I’m a little nervous about declaring victory too soon,” noting he wants to see more data before deciding what he thinks the Fed should do next. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is a senior fellow at Carnegie ChinaWhile Chinese policymakers debate over whether or not debt levels will limit their country’s ability to maintain many more years of high, investment-driven economic growth, it’s not just internal constraints that matter. External ones will count just as much, even if they are less discussed both inside and outside China and less well understood.Some simple arithmetic is useful here. Investment accounts for roughly 24 per cent of global gross domestic product, and consumption the remaining 76 per cent. Even in the highest investing economies, the actual investment share of GDP rarely exceeds 32-34 per cent, except for short periods of time.China, however, is an extreme outlier. Investment last year accounted for around 43 per cent of its GDP, and has averaged well over 40 per cent for the past 30 years. Consumption, on the other hand, accounts for roughly 54 per cent of China’s GDP (with its trade surplus making up the balance).Put another way, while China accounts for 18 per cent of global GDP, it accounts for only 13 per cent of global consumption and an astonishing 32 per cent of global investment. Every dollar of investment in the global economy is balanced by $3.2 dollars of consumption and by $4.1 in the world excluding China. In China, however, it is offset by only $1.3 of consumption.What is more, if China were to grow by 4-5 per cent a year on average for the next decade, while maintaining its current reliance on investment to drive that growth, its share of global GDP would rise to 21 per cent over the decade, but its share of global investment would rise much more — to 37 per cent. Alternatively, if we assume that every dollar of investment globally should continue to be balanced by roughly $3.2 dollars of consumption, the rest of the world would have to reduce the investment share of its own GDP by a full percentage point a year to accommodate China.Is that likely? Probably not, given that the US, India, the EU and several other major economies have made very explicit their intentions to expand the role of investment in their own economies. But without this kind of accommodation from the rest of the world, any major expansion in China’s share of global investment risks generating much more global supply than demand. That will be especially painful for low-consuming economies, that will be competing producers, even perhaps for China itself.The imbalance may be an even bigger problem when we consider that since 2021 China has been shifting investment away from the bloated property sector towards manufacturing. In the past two years, while investment in China’s property sector has declined — and is expected to decline further — total investment hasn’t. This is in part because of an increase in the amount of investment directed by Beijing into industry and manufacturing. The result has been — after a decade of decline — a rising manufacturing share of China’s GDP.But if China’s share of global GDP rises over the next decade, driven by a continued reliance on manufacturing, how easily can the rest of the world absorb the country’s expansion? Currently, the manufacturing sector globally comprises roughly 16 per cent of the world’s GDP, and as little as 11 per cent of the US economy. China is once again an outlier, with a manufacturing share of GDP at 27 per cent, higher than that of any other major country.If its economy were to grow over the next decade at 4-5 per cent a year even without a further increase in the manufacturing share of the country’s GDP, China’s share of global manufacturing would rise from its current 30 per cent to 37 per cent. Can the rest of the world absorb such an increase? Only if it is willing to accommodate the rise in Chinese manufacturing by allowing its own manufacturing share of GDP to decline by half a percentage point or more.The point is that without a major, and politically difficult, restructuring of its sources of growth — away from investment and manufacturing and towards an increasing reliance on consumption — China cannot raise its share of global GDP without an accommodation from an increasingly reluctant rest of the world. Without that contentious accommodation, the global economy would find it extremely difficult to absorb further Chinese growth.Many more years of high growth in China are only possible if the country were to implement a major restructuring of its economy in which a much greater role for domestic consumption replaces its over-reliance on investment and manufacturing.   More

(Reuters) -U.S. pipeline operator Kinder Morgan (NYSE:KMI) said on Monday it would acquire NextEra Energy (NYSE:NEE) Partners’ gas pipelines in South Texas for $1.82 billion.The oil and gas pipeline business has seen increased consolidation this year as U.S. production grows and persisting problems related to permits for new pipelines have made existing operators more valuable.NextEra Energy Partners’ (NEP) Texas natural gas pipeline portfolio, STX Midstream, primarily consists of seven pipelines which provide natural gas to Mexico and power producers and municipalities in South Texas. The pipelines together have a transport capacity of 4.9 billion cubic feet per day.”Initially, we plan to fund the transaction with cash on hand and short-term borrowings,” Kinder Morgan said in a statement.The deal is expected to close in the first quarter of 2024.Shares of NEP, a unit of NextEra Energy created to acquire, manage and own contracted energy projects, have lost about 44% of their value since Sept. 27 when the company trimmed its distribution growth forecast through at least 2026.Higher interest rates have raised project costs for NEP, hurting its growth, according to analysts.”Upon closing, the proceeds would be sufficient to pay off the outstanding project-related debt,” NextEra Energy Partners’ CEO John Ketchum said in a statement.The sale price represents an about 10 times multiple on the estimated calendar-year 2023 adjusted core profit for the Texas natural gas pipeline portfolio, NEP said.”The valuation falls in line with recent trading multiples for midstream sector constituents and below some of the transaction marks,” analysts at Guggenheim Securities said.However, the deal provides some flexibility in credit metrics, the analysts added. More