The Economist: July 1st – 7th, 2017

China’s “regulatory storm” hits four of its most global companies

Chinese regulators want banks to check their loans to HNA (海航集团), Dalian Wanda, Fosun, Anbang, and also Zhejiang Rossoneri (owner of AC Milan).

The regulator’s instructions were simply that the banks take a closer look at loans to these companies to guard against risks… but it was unusual for it to specify the firms by name.

How to explain?

the government has ratcheted up capital controls since last year… 

 and

HNA, Wanda, Fosun, and Anbang have been some of China’s most aggressive investors abroad

According to the Economist:

Within ICBC, China’s biggest bank, an internal e-mail about the order does not mention the companies’ domestic operations.  Rather, it focuses on what the government has termed “irrational outbound investments”, referring to highly leveraged deals, especially in industries such as property, hotels, entertainment and sport…

More broadly, there has been a sharp decline in international deals:

Chinese firms announced about $45bn of overseas investments in the first half of 2017, down from nearly $140bn during the same period in 2016

Britain and Diego Garcia

Diego Garcia is the largest island in the Chagos archipelago.  In 1965, Britain detached the Chagos archipelago from the British colony of Mauritius for inclusion in the newly created British Indian Ocean Territory (BIOT).  In December 1966, the US and UK executed an agreement which permits the US to use the BIOT for defense purposes.

On June 22nd, 2017, the United Nations General Assembly voted in favor of referring the territorial dispute between the UK and Mauritius over the Chagos islands to the International Court of Justice (94 in favor, 15 against, with 22 EU members abstaining).

The importance of the vote should not be exaggerated.  It refers the case to the ICJ, whose opinion will be non-binding.

Still:

Other far-flung British territories, such as the Falkland Islands, might face new challenges from rival claimants.

and Richard Whitman, director of the Global Europe Centre at the University of Kent says:

“If you’re an Argentinian diplomat, you may start recomputing how much international support Britain has”

Liberia

Liberia was pulverized by civil wars between 1989 and 2003.  Since 2006, Liberia has been run by Ellen Johnson Sirleaf, Africa’s first elected female leader.  In 2010, Ms Sirleaf won a colossal write-down of Liberia’s debts under the Heavily Indebted Poor Countries program.

Almost as soon as Ms Sirleaf formed a government, foreign aid began to pour in… the West resolved… where possible, aid would flow through poor-country bureaucracies…

However:

Only 12% of aid to Liberia in the 2015-2016 fiscal year was “on-budget”.

Although the civil service is gradually improving, it cannot draw the most talented Liberians.  Starting salaries are too low… aid agencies and charities pay about three times as much…

Clarence Moniba, a minister who chairs the Philanthropy Secretariat… says the state has little sway over the roughly 330 charities working in Liberia.  “They come and tell us what they are doing, and we agree.”

A single education scheme paid for by USAID and delivered by a Boston-based charity, which aims to reach 48,000 out-of-school children, has a budget of $34m.

The capitol building in Monrovia, which is being enlarged, is plastered with China Aid signs.

The most tangible thing aid has done in Liberia is a smooth 250km Chinese-built road from Monrovia to Ganta… paid for from an infrastructure trust fund overseen by the World Bank and the government

Borrowers have the whip hand in the credit markets

Once upon a time, corporate loans had many covenants offering safeguards for lenders if the debtor’s financial position deteriorated.

2005-06 saw the emergence of “covenant-lite” loans in which such restrictions were virtually non-existent.

In 2008, when the financial crisis hit, companies scrambled desperately to get the financing they needed.

The cycle has turned again.  Analysis by Moody’s… shows that the proportion of the loan market that is “covenant-lite” has risen from 27% in 2015 to more than two-thirds in the first quarter of this year.

Why?

Investors.. are desperate to earn some kind of yield on their assets

Have we reached another period of speculative excess?

It is hard to escape the feeling that the market is being kept aloft by the actions of central banks.  The European Central Bank (ECB) and the Bank of Japan are still buying tens of billions of dollars’ worth of assets every month.  That keeps yields down and prompts investors to seek alternatives.

BRICS threaten to rebel against the ratings agencies

Brazil, Russia, India, China and South Africa plan to set up an “independent” ratings agency that is likely to be launched at their BRICS summit this September in Xiamen.

According to Bloomberg, in 2016 three agencies took a record 1,971 negative actions on the debt of emerging-market government and related entities.

A World Bank study last year, on the ratings of 20 developing countries between 1998 and 2015, found that a downgrade to junk raised the yield on a country’s short-term bonds by an average of 1.38 percentage points. 

Did Asia learn the lessons of its financial crisis?

According to Hyun Song Shin of the Bank for International Settlements, countries with floating exchange rates and little visible foreign-currency debt can still suffer financial strain if their companies’ foreign subsidiaries borrow too much.

IMF research shows that from 2009-2013 firms from middle-income countries both raised a lot of offshore debt and expanded their onshore deposits, leaving their home-country banks flush with cash.

Unfortunately, when the Federal Reserve tightens, the dollar strengthens and the offshore markets become less accommodating… Multinationals that suddenly cannot raise money abroad make greater demands on domestic banks, withdrawing deposits and requesting loans.  This tightens financial conditions, even if the local central bank…has not itself raised interest rates.

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