“Zhongrong’s troubles can be viewed as a ripple effect of the intensifying cash crunch faced by property developers like Country Garden as the government continues to deleverage the sector,” - Shen Meng, director, Chanson & Co.
Property downturn updates: China's property giant Evergrande revealed in July that it had lost $81b in the past 2 years and recently filed for US bankruptcy protection as it seeks to restructure its debt around the globe. This comes after Country Garden disclosed its own repayment troubles and halted the trading of its bonds on Chinese exchanges.
Shadow banking crisis sparked by defaulting property developers: Analysts also questioned whether China was having its "Lehman moment" when state-backed Zhongrong Trust, one of China's largest shadow banks, missed payments to corporate investors. Close to 11% of Zhongrong's managed assets in 2022 were in real estate.
Chinese yuan volatility: This week, Chinese officials instructed state-owned banks to increase their involvement in the currency market, aiming to curb any sharp fluctuations in the yuan's value. High-ranking authorities are also contemplating the utilization of measures like reducing foreign-exchange reserve requirements for banks, with the intention of averting a swift decline in the currency's value. The request came as the yuan fell toward 7.35 per dollar — heading for the weakest level since 2007.
PBOC cut rates: PBOC lowered rates on its one-year loans by 15 bps to 2.5%, the steepest cut in 3 years. The move came shortly before the release of July data that showed weak consumer spending growth, sliding investment and rising unemployment. Bank loans plunged to a 14-year low last month while deflation is setting in and exports are contracting. Yet, market’s reaction to a surprise rate cut shows investors aren’t looking for half measures, but a major stimulus.
"It's putting a bunch of plasters on to try to survive until the first set of elections... every devaluation comes with higher inflation and the currency ebecomes more uncompetitive" - Edwin Gutierrez, Head of EM sovereign debt, Abrdn
Context: Argentina's economy has been in dire shape for some while, with inflation of >100% per year, 40% of people living in poverty, and a recession looming.
Shocking presidential primary win and its impacts: Anti-establishment candidate who admires Trump, Javier Milei, achieved a significant victory in the August 2023 Argentine primary elections, emerging as the top-voted candidate. While Milei is appealing to fed up Argentines, investors are worried about his economic plans. Prices for consumer goods rose by double digits overnight as the government devalued the peso and raised interest rates to 118% (21 percentage points hike) a year in a desperate bid to restore confidence.
His plans if he wins include the following:
#1 Shutting down the central bank: Eliminating Argentina’s central bank, which he believes is the “worst garbage that exists on this Earth.” and "has no reason to exist".
#2 De-dollarization: Dollarization involves the transition of the domestic currency from pesos to the US dollar. Notably, the Argentine government attempted a comparable approach in the 1990s, which ultimately led to a catastrophic outcome. However, dollarization has demonstrated some degree of success in countries like Ecuador and El Salvador.
#3 Austerity: Cutting government spending by shutting down public programs like the health, environment, and education ministries and making citizens pay for the public healthcare system.
