- The MoneyFitt Morning
- ☀️☕️ China: Shadowy "Shadow Bank" Zhongzhi Goes Under
☀️☕️ China: Shadowy "Shadow Bank" Zhongzhi Goes Under
📊 Also: European inflation is FAT; Strong US jobs; Antitrust Apple; Boeing; More Maersk; Spot Bitcoin ETFs this week? 🎓 Shadow Banking
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Shadowy “Shadow Bank” Zhongzhi Goes Under
📊 In the Markets
European inflation is FAT; Strong US jobs; Antitrust Apple; Boeing; More Maersk
Spot Bitcoin ETFs this week?
📖 MoneyFitt Explains
🎓 Shadow Banking
💸 Personal Finance Corner
Shadowy “Shadow Bank” Zhongzhi Goes Under
Zhongzhi, the largest single player in China's enormous $3 trillion shadow banking🎓 industry, rather abruptly declared bankruptcy with debts of Rmb460 billion compared to assets of just Rmb200 billion, stating that it was not just insolvent but “severely insolvent” (while management had “run wild” after the 2021 death of its founder.)
Zhongzhi declared bankruptcy due to insufficient assets to cover its massive debt burden, according to a Beijing court statement, but its wealth management division was already under investigation by authorities.
..... ▷ Back in November, the company admitted insolvency with debts reaching $64 billion thanks to its exposure to China's real estate sector. Shortly after that, police in Beijing initiated a probe into suspected criminal activities linked to Zhongzhi, involving numerous suspects.
The firm operates within China's shadow banking🎓 system, where wealth managers often divert retail investors' funds from wealth products to real estate and other sectors, operating under fewer regulatory constraints than commercial banks.
Over three decades, Zhongzhi had built up a complex web of investments in listed companies and developers, and the liquidity crunch in that space has long been expected to show up in multiple places, among which the shadow banking sector was the most obvious. Well, here it is.
..... ▷ Traditional bank deposit rates in China are often relatively low, leading many retail investors, including some more sophisticated ones, to seek higher returns outside the regulated banking system. Shadow banking products can offer potentially higher returns, attracting individuals and businesses looking to grow their wealth.
While not officially condoned, shadow banking has historically thrived on a perception of implicit government support, particularly for activities within state-owned enterprises. This perception encourages taking outsize risks to get better returns, further fueling the growth of the sector.
On the other side, formal credit from the traditional banking system tends to be impacted by central and regional government policy considerations (e.g. directing capital towards strategic sectors), as well as excessively strict requirements, leading smaller businesses and individuals struggling to access loans. Shadow banking provides alternative sources of credit, albeit usually with higher interest rates.
🇸🇬 Singapore: Let’s Get MoneyFitt!
📊 In the Markets
US markets just about eked out gains on Friday despite Asian and European markets greeting their opening with another down day. Japan and the Yen managed a second up-day despite the waning likelihood of rapid rate cuts in the US and EU (and the effect on interest rate differentials for the year.)
Eurozone inflation popped back up, hitting 2.9% in December from 2.4% the previous month, driven by a rapid rise in the prices of FAT (food, alcohol and tobacco, the essence of Continental life). This was partially offset by the continuing, but less rapid, fall in energy prices, down 6.7% (from a lower comparison base last December) after an 11.5% fall in November.
You are expecting ECB rate cuts soon, hein? P'têt non! - Image credit: The Kids in The Hall / CBC via Tenor
In another classic good news (for normal people) is bad (for Wall Street) day, more Americans finding jobs than expected in December (and getting paid more, too!) sent markets down. Nonfarm payroll growth of 216,000 jobs last month handily trounced the forecast of 170,000 jobs in a Reuters survey of experts. Stronger growth while inflation remains above target suggests the rapid easing of interest rates becomes less likely.
But Wall Street then rallied on signs of a weaker economy, with data from the Institute for Supply Management (ISM) services sector weaker than expected (still some growth, but only barely) suggesting that maybe the Fed would, indeed, cut rates sooner, since services make up two-thirds of the US economy.
Something for everyone!
The ferocious rally in the final weeks of 2023 based, apparently, on hopes of a faster easing of interest rates took many by surprise. Anything undermining that narrative has been a cue for profit-taking.
Meanwhile, Boeing’s 737 Max, with a software fault causing two catastrophic fatal crashes in 2018/19, saw a sort-of door “plug” fall off as an Alaska Airlines flight was gaining altitude. Thankfully, the skilled pilots managed to guide the stricken aircraft to safety. The parts supplier was initially implicated, but there could be more involvement from Boeing than meets the eye. The US FAA has grounded 171 other similar aircraft. There is (allegedly) some question over whether the aircraft is really a newer version of the original 737 launched in 1968 or an all-new aircraft given an older name to circumvent 100%-new-aircraft licensing regulations.
Meanwhile, The New York Times reported that the US Department of Justice is preparing an antitrust lawsuit against Apple, targeting how the Apple Watch works exclusively with the iPhone, the Apple-to-Apple-only iMessage service and potentially Apple Pay, its payments system.
Amid heightened attacks by Houthi militants in Yemen, AP Møller-Maersk of Denmark, the world’s largest container shipping company, extended its temporary plan to reroute ships around Africa to "the foreseeable future." These longer voyages, bypassing the shortest route from Asia to Europe via the Suez Canal, effectively tighten ship availability, effectively cutting global capacity by 20%. Rates have already more than doubled on the key Shanghai-Rotterdam route to $3,100 per standard 40-foot container from $1.400. Shipping firms are obvious beneficiaries, with Maersk ‘B’ up 33% and German #2 Hapag-Lloyd up 55% since mid-December lows after initial attacks at the start of the month. (MFM: “Houthi New Year for Maersk”)
Economists expect fresh inflationary pressures from the rerouting if disruptions persist, potentially delaying interest rate cuts. (MFM: “Cold Water Fed”)
Spot Bitcoin ETFs by late Tuesday or Wednesday?
Investment firms, stock exchanges and the SEC discussed crucial wording changes in spot bitcoin ETF filings, potentially securing approval this coming week, according to Reuters.
..... ▷ There have been a series of rejections by the SEC for spot bitcoin ETF applications since 2013, but now fourteen firms, including BlackRock, Fidelity, and WisdomTree, await the SEC's decision after submitting applications last year, with the Ark/21Shares ETF first in line.
..... ▷ But while this does sound like a significant boost for Bitcoin, it’s been anticipated for so long that much of the upside may have been priced in, with Bitcoin up 160% in the last year. Is the old Wall Street saying “buy on rumour, sell on news” applicable this time, or is “NOW” the answer to the crypto enthusiast’s classic, soul-searching question: “Wen Moon?”
📖 MoneyFitt Explains
🎓 Shadow Banking
Shadow banking, also known as non-bank financial intermediation, refers to a network of financial institutions that engage in lending, borrowing and other financial activities outside the traditional regulatory framework of commercial banks.
Shadow banks (non-bank financial institutions) play an increasingly significant role in the modern economy by providing credit and liquidity to businesses and individuals that traditional banks don’t lend to. Examples of shadow banks include hedge funds, money market funds, asset-backed commercial paper (ABCP) conduits and, increasingly, private credit funds run by traditional asset managers and private equity firms.
The growth of shadow banking can be attributed to several factors, including the deregulation of the financial sector in the 1980s and 1990s, the search for higher yields in a low-interest-rate environment, and the increasing complexity of financial instruments. It has also been driven by tighter lending standards imposed on banks by regulators after successive crises amplified by unsound lending.
While shadow banking has its benefits, it also poses potential risks to financial stability.
One of the main dangers of shadow banking is its lack of transparency and regulation. This opacity makes it difficult for policymakers to monitor and assess the risks within the shadow banking system, increasing the likelihood of financial crises.
Additionally, shadow banks often engage in leverage and interconnectedness, amplifying the potential for contagion and systemic instability.
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