☀️☕ All Hail Didi! China tech's back under control

17 January 2023

Happy Tuesday!

📊 In the Markets

• All Hail Didi! China tech's back under control

• US banks expect loan defaults surge in 2023

• China might keep the world out of recession

📝 Focus

• Japan to scrap Yield Curve Control and hike rates?

📊 In the Markets

US markets were closed on Monday for the Martin Luther King Jr holiday, but Japan's stock market sank for the second day running on expectations that interest rates could go sharply higher, with the Bank of Japan's yield curve control (YCC🎓) policy in danger of cracking. And this would be while investors in other developed markets are looking for a pivot or at least a plateauing of interest rates. (See Focus story.)

All Hail Didi! China tech's back under control

In another sign that Beijing’s regulatory campaign to curb the power of the country’s internet titans is drawing to a close, ride-hailing giant Didi Chuxing has been granted permission to sign up new customers again. This comes after an 18-month investigation that effectively banned its 25 apps, ostensibly regarding platform safety, data security and national cyberspace security. Didi will still need to make it back onto domestic app stores. The Alibaba, Tencent and Softbank-backed company ran afoul of China's regulators when it went ahead with its June 2021 listing in NY against the regulator's wishes, resulting in a painful delisting in June last year that wiped out around US$70 billion of market value. Plans to relist in HK had stalled but may be revived.

Didi became the unwilling poster child of China's tech crackdown, though Beijing had started to question the power wielded by the country's most valuable companies (and some of their high-profile leaders) starting in October 2020. The focus was on the tech giants' abuse of market power and the impact on competition. The crackdown spread from e-commerce and social media to ride-hailing and online education.

Of course, this comes days after it was revealed that China had acquired "golden shares" ("Special Management Shares", minority stakes with special rights over certain business decisions) in two domestic units of tech giant Alibaba -- and a week after control of Ant Financial, the Alibaba affiliate which runs the Alipay payments network, was wrested from Alibaba founder Jack Ma. The FT reported that the "golden shares" were for Beijing to tighten control over content at Alibaba's streaming video unit Youku and web browser UCWeb. (Mark Zuckerberg and Evan Spiegel also have super voting rights at Meta and Snap. Same same, but different.)

The FT also reported that the government may take golden shares in key subsidiaries of WeChat owner and gaming giant Tencent Holdings (which last month got approval to launch new games.) It already has such shares in TikTok owner ByteDance's China unit Douyin and news aggregator Jinri Toutiao, Kuaishou (short video-sharing mobile app and social network) and Weibo (Twitter-like microblogging, thankfully without Elon Musk), all of which gather enormous amounts of customer data.

US banks expect loan defaults surge in 2023

Back on the giant US bank results from last Friday: Analysts were expecting a combined US$5.7 billion in "provision for credit losses" in the fourth quarter of last year for the four banks combined. In fact, their total loan loss reserves were boosted by US$6.2 billion (JPM $2.3bn, C $1.9bn, BAC $1.1bn, WFC $1bn) or 2.6 TIMES the level set aside the year before and the largest reserve build since 2013 (excluding the Covid quarter.)

Reserves are not actual losses made on loans that don't get repaid (which happens in a recession) but money set aside as provisions in relatively good times ahead of an expected increase in defaults. Loans that do go bad ("non-performing loans" or NPLs) are then charged against those reserves at a future date.

The scale of increase in reserves with "provisions for credit losses" deducted from the banks' earnings shows the caution the banks' senior management feels about the economy in 2023.

China might keep the world out of recession

The IMF Managing Director Kristalina Georgieva said that the adjustment period of China’s virtually overnight pivot from Covid Zero to the free movement of people was very likely the single most important factor for global growth in 2023. She added that China used to deliver 35-40% of total global growth, but last year, for the first time, China might have subtracted a little. If China stays the course and does not back off from reopening, the IMF expects that "by mid-year or there around, China will turn into a positive contributor to average global growth."

Though circumstances are now vastly different, it's worth looking back at the role that China played in the aftermath of the Global Financial Crisis of 2008, which may be a consideration for the timing of Beijing's recent policies, which seem to be aimed at improving the frayed diplomatic ties of recent years, besides boosting the domestic economy, which had been strangled by three years of the Zero Covid policy.

One of the key ways China helped after the GFC was through its domestic stimulus package, which boosted growth and created jobs at home. This had a ripple effect, as Chinese demand for goods and services from its trading partners, particularly in Asia, helped to support their economies as well. Another important factor was China's large-scale infrastructure investment. By pouring money into projects like highways, railways, and airports, the Chinese government helped to drive demand for commodities like steel and copper, supporting prices and boosting the economies of commodity-exporting countries such as Brazil and Australia. And its large foreign exchange reserves allowed it to play a stabilizing role in the global financial system, helping to prevent a more severe global recession.

📝 Focus

Japan to scrap Yield Curve Control and hike rates?

All eyes are on the Japanese bond market on Wednesday at the Bank of Japan meeting. Will they or won't they "tweak" the controversial Yield Curve Control 🎓 (YCC) further? Bond prices are sinking and the Japanese Yen is rising, so traders are clearly placing their bets.

Basically, less than a month ago the BOJ widened the trading band for 10-year Japanese Government Bonds (JGBs) from 0.25% either side of 0.0% to 0.50% on either side, in order to alleviate the pressure the BOJ was feeling as yields bumped up against the top of the previous band and as a step taken to improve market function.

When bond prices go down because of bondholders selling, yields go up. So to keep bond yields 🎓 from going up by too much and breaking through the upper limit, the BOJ signals loudly that it will basically just sit there with its arms open buying everything coming its way... so don't bother. Don't even think of it.

But traders are thinking, after the December band widening, that it's just a matter of time before yields shoot up and JGB prices collapse. With traders speculating that this Wednesday could be when it all happens (or starts to happen), the BOJ's had to buy even more JGBs than it already had bought during the YCC, which started back in 2016. The BOJ now owns more than half the market including 90% or more of some series issues of 10-year bonds, making the JGB bond markets even less functional.

While JGB 10-year yields have broken just a little above the top of the band, 10-year tenor interest rate swaps, which in normal markets closely track government bonds, traded to over 1% on Monday, while the Yen has continued its impressive rally against the US Dollar. Interestingly, higher government bond yields are also being seen in other markets, particularly in Australia and several other European government bond markets.

The BOJ has kept rates this low (with short-term rates negative) specifically to stimulate lending, growth and inflation. As we wrote in last Thursday's MFM, Japan WANTS wage inflation to drive economic growth, and higher interest rates could threaten any domestic recovery. "Raising wages by 3% or more annually is a core goal of PM Kishida's, while the Bank of Japan is targeting 2% inflation... the world’s third-largest economy has stagnated for decades... the BOJ has tried to stimulate growth by getting consumers to spend more, but with little success because... once a deflationary mindset kicks in, consumers are inclined to reduce or delay discretionary spending in anticipation of future price declines, rather than bringing forward their purchases, which creates a negative demand and price feedback loop."