Cross-Asset Liquidity Strategist, CrossBorder Capital

Michael J. Howell

Cross-Asset Liquidity Strategist

Implementing Research Using Alt Data & AI

CrossBorder Capital

CrossBorder Capital is a London-based independent investment advisory firm. Founded in 1996, it exploits a gap in the investment arena by focusing on Central bank liquidity. 

It specialises in the monitoring and analysis of global liquidity flows - an important determinant of asset prices, from currencies through to bonds, equities and real estate.

CrossBorder Capital implements its investment strategy and currently manages over US$ 350m.


Cross Asset Strategy

<ul>
<li>
 China’s economy is not anything like as ‘bad’ as being reported by the popular media. Yet, there are deep structural challenges which will hinder future economic growth</li>
<li>Monetary policy makers have recently been constrained by the weak Yuan (CNY)
</li>
<li>
 Liquidity is now being re-injected aggressively. More liquidity boosts economic activity. The cost could be a CNY of RMB8/ US$</li>
</ul>



 China’s economy is not anything like as ‘bad’ as being reported by the popular media. Yet, there are deep structural challenges which will hinder future economic growth
Monetary policy makers have recently been constrained by the weak Yuan (CNY)


 Liquidity is now being re-injected aggressively. More liquidity boosts economic activity. The cost could be a CNY of RMB8/ US$


China Is Adding to World Liquidity, But At A Cost…

<ul>
<li>
 EM Liquidity remains low but again pushed higher in November and looks set to rebound strongly in 2023, helped easier Chinese monetary conditions 
</li>
<li>
 World economy skidding badly and probably already in recession. EM investor positioning data already discounts much of this drop. Capital outflows becoming far less negative.</li>
<li>
 Weaker US dollar likely to add support to EM, gold and commodities in 2023. Many commodity-rich EMs look attractive.</li>
</ul>



 EM Liquidity remains low but again pushed higher in November and looks set to rebound strongly in 2023, helped easier Chinese monetary conditions 


 World economy skidding badly and probably already in recession. EM investor positioning data already discounts much of this drop. Capital outflows becoming far less negative.

 Weaker US dollar likely to add support to EM, gold and commodities in 2023. Many commodity-rich EMs look attractive.


Emerging Markets Could Outperform in 2023?

<ul>
<li>Investors are overly pessimistic, but China may already be a contrarian ‘buy’ 
</li>
<li>Latest economic data show positive surprises. GDP momentum is rising but investor positioning data evidence another big cut in exposure to China</li>
<li>Monetary policy stable and supportive. No sign of credit bust, or boom. Great potential for policy ‘pivot’ later in 2022
</li>
</ul>


Investors are overly pessimistic, but China may already be a contrarian ‘buy’ 

Latest economic data show positive surprises. GDP momentum is rising but investor positioning data evidence another big cut in exposure to China
Monetary policy stable and supportive. No sign of credit bust, or boom. Great potential for policy ‘pivot’ later in 2022



Founder of Antler Capital

Stanley Tsai, CFA

Macroeconomics

<ul>
<li>In the absence of an outright LPR cut later this month, the latest RRR move's impact on the real economy may be rather modest. </li>
<li>Assuming CNY500bn of MLFs will be withdrawn in the coming months, the net injection this time around is CNY700bn, about 40% of an average month's new loans.</li>
<li>We would watch out for a potential bubble in the onshore credit market before incremental liquidity benefits the broader economy.</li>
</ul>


In the absence of an outright LPR cut later this month, the latest RRR move's impact on the real economy may be rather modest. 
Assuming CNY500bn of MLFs will be withdrawn in the coming months, the net injection this time around is CNY700bn, about 40% of an average month's new loans.
We would watch out for a potential bubble in the onshore credit market before incremental liquidity benefits the broader economy.


China Macro: RRR Cuts' Diminishing Impact

Monthly Newsletter | Jul 2021
The PBOC's decision to relax required reserve requirements was a bit of a surprise to us in terms of the cross-section of the banking system it covered. The move came on the heels of a set of TSF numbers that were weaker than what the headlines suggest. But we believe the impact of the RRR cut is somewhat limited and we shouldn't expect the central bank to loosen again any time soon.  
The RRR cut is only mildly positive in view of the expected uses of liquidity.  A significant portion of the ~CNY1tn released will likely be used to pay down medium-term lending facilities that will fall due in 2H21. The mini-peak in tax payment in July - along with the strong pipeline of local government bond issuance - will also put a damper on new financing and crowd out funding sources available to the private sector.
Headline TSF beat expectations thanks to strong loan growth. However, net of the contraction in off-balance sheet credit - of which trust loans to property developers are a substantial part - the growth in debt financing was just around 10% y/y. The underlying trend is more or less in line with the central bank's guidance for credit expansion to match nominal GDP growth (Exhibit 1).
Robust loan data were buoyed by a surge in bills financing. Renewed demand for short-term liquidity may be attributable to the impact of elevated factory gate prices on small and medium-sized companies. The growth in long-term corporate loans that will drive capital investments and productivity gains is much less pronounced. At the same time, mortgage loans saw a significant contraction y/y as regulators try to rein in the property market boom (Exhibit 2).
Overall, we believe the PBOC's rhetoric remains unchanged. In our view, Beijing will continue to push through deleveraging measures in the real estate market and ratchet up its efforts to tame commodities prices. On the other hand, more funding will be channeled to small businesses and the services sector. That should provide some support to the next leg of the recovery, as capital-intensive industries face progressively tighter funding conditions.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 373.003px;">Exhibit 1: Key Components of New TSF (CNY bn)</td>
<td style="width: 373.003px;">Exhibit 2: Key Components of New CNY Loans (CNY bn)</td>
</tr>
<tr>
<td style="width: 373.003px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/218/092/original/image_681652188101626125722784.png?1626125723" class="editor-image img-responsive" data-smartkarma-image-id="218092"></figure>
Note: Off b/s items include trust loans, entrusted loans and undiscounted bills; TSF shown excludes ABS and balancing items, which are yet to be available

Source: PBOC, Our analysis
</td>
<td style="width: 373.003px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/218/087/original/image_2669466651626120112187.png?1626120112" class="editor-image img-responsive" data-smartkarma-image-id="218087"></figure>




Source: PBOC, Our analysis
</td>
</tr>
</tbody>
</table>
Related Insights
<ul>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-and-cpi-have-reached-inflection-points" target="_blank" data-smartkarma-citation="insights:54261" rel="noopener">China Macro: PPI and CPI Have Reached Inflection Points</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/pork-price-rebound-what-it-means-for-china-s-inflation" target="_blank" data-smartkarma-citation="insights:54187" rel="noopener">Pork Price Rebound: What It Means for China's Inflation</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-profits-flowing-gently-down-the-stream" target="_blank" data-smartkarma-citation="insights:53726" rel="noopener">China Macro: Profits Flowing Gently Down the Stream</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-operation-twist-the-deposit-version" target="_blank" data-smartkarma-citation="insights:53435" rel="noopener">China Macro: Operation Twist | The Deposit Version</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
</ul>

Monthly Newsletter | Jul 2021
The PBOC's decision to relax required reserve requirements was a bit of a surprise to us in terms of the cross-section of the banking system it covered. The move came on the heels of a set of TSF numbers that were weaker than what the headlines suggest. But we believe the impact of the RRR cut is somewhat limited and we shouldn't expect the central bank to loosen again any time soon.  
The RRR cut is only mildly positive in view of the expected uses of liquidity.  A significant portion of the ~CNY1tn released will likely be used to pay down medium-term lending facilities that will fall due in 2H21. The mini-peak in tax payment in July - along with the strong pipeline of local government bond issuance - will also put a damper on new financing and crowd out funding sources available to the private sector.
Headline TSF beat expectations thanks to strong loan growth. However, net of the contraction in off-balance sheet credit - of which trust loans to property developers are a substantial part - the growth in debt financing was just around 10% y/y. The underlying trend is more or less in line with the central bank's guidance for credit expansion to match nominal GDP growth (Exhibit 1).
Robust loan data were buoyed by a surge in bills financing. Renewed demand for short-term liquidity may be attributable to the impact of elevated factory gate prices on small and medium-sized companies. The growth in long-term corporate loans that will drive capital investments and productivity gains is much less pronounced. At the same time, mortgage loans saw a significant contraction y/y as regulators try to rein in the property market boom (Exhibit 2).
Overall, we believe the PBOC's rhetoric remains unchanged. In our view, Beijing will continue to push through deleveraging measures in the real estate market and ratchet up its efforts to tame commodities prices. On the other hand, more funding will be channeled to small businesses and the services sector. That should provide some support to the next leg of the recovery, as capital-intensive industries face progressively tighter funding conditions.



Exhibit 1: Key Components of New TSF (CNY bn)
Exhibit 2: Key Components of New CNY Loans (CNY bn)




Note: Off b/s items include trust loans, entrusted loans and undiscounted bills; TSF shown excludes ABS and balancing items, which are yet to be available

Source: PBOC, Our analysis







Source: PBOC, Our analysis




Related Insights


China Macro: PPI and CPI Have Reached Inflection Points 

Pork Price Rebound: What It Means for China's Inflation 

China Macro: Profits Flowing Gently Down the Stream 

China Macro: Operation Twist | The Deposit Version 

China Financials: Silver Linings Playbook 


Glut and Famine: Jul '21 | Don't Expect a Bazooka from the PBOC

China

The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The index was developed on December 19, 1990 with a base value of 100. 

Shanghai Stock Exchange Composite Index (SHCOMP INDEX)

Shanghai Stock Exchange Composite Index (SHCOMP INDEX)

China Is Adding to World Liquidity, But At A Cost…

Chinese policy makers have recently been constrained by the weak Yuan. Liquidity is now being re-injected aggressively. More liquidity boosts...

Michael J. Howell

Emerging Markets Could Outperform in 2023?

EM Liquidity looks set to rebound strongly in 2023, helped easier Chinese monetary conditions Weaker US dollar likely to add support to EM, gold...

Michael J. Howell

Is It Time To Buy China?

Media pessimism about China has become exaggerated. The economy is not strong but latest data show acceleration, and the monetary backdrop is...

Michael J. Howell

China Macro: RRR Cuts' Diminishing Impact

In the absence of an LPR cut, the impact of the latest RRR move may be limited. We estimate that net of MLF maturities, the liquidity boost is...

Stanley Tsai, CFA

Glut and Famine: Jul '21 | Don't Expect a Bazooka from the PBOC

The RRR cut was a bit of a surprise, but its impact is limited. The PBOC’s rhetoric is unchanged and the June aggregate financing data continue to...

Stanley Tsai, CFA