Independent Asian Credit Research, Bondcritic

Warut Promboon

Independent Asian Credit Research

Asian Fixed Income/Frontier Market Research

Bondcritic

Bondcritic, established in 2009, is designed to be an independent credit research voice that helps investors gain insights and unbiased analyses on Asian fixed income market. Our mission is to discover deep-value Asian high-yield and distressed bonds with a bottom-up approach, together with the help of our proprietary ESG (Environmental, Social Development, and Governance) model. At the same time, we focus on bringing investment cases of unrated and unloved issuers to the general public.

Macroeconomics

<p style="text-align: justify;"><a href="https://www.smartkarma.com/entities/china-treasury" target="_blank" data-smartkarma-citation="entities:22879:1" rel="noopener">China Treasury (CHINA GOVT)</a> ’s Q3 GDP data on 19 October show that the China economy is still in process of a weak recovery. EXHIBIT 1 shows that the Chinese economy grew at 4.9% in Q3, 2020, almost reaching its pre-COVID-19 level. In our view, China may be the only major economy in the world that will experience positive growth in 2020. The Chinese consumers in September for the first time spent on (real) consumption more than last year.</p>

China Treasury (CHINA GOVT) ’s Q3 GDP data on 19 October show that the China economy is still in process of a weak recovery. EXHIBIT 1 shows that the Chinese economy grew at 4.9% in Q3, 2020, almost reaching its pre-COVID-19 level. In our view, China may be the only major economy in the world that will experience positive growth in 2020. The Chinese consumers in September for the first time spent on (real) consumption more than last year.

Deputy Chief Economist

Sharmila Whelan

Independent and original Asian investment research

Aletheia Capital

Aletheia Capital (HK) Ltd. (previously known as Asianomics) combines the extensive knowledge of its experienced team with technology and regulatory changes to disrupt Global Markets business in Asia. The firm is completely independent with no conflicts of interest either on Investment Banking advisory or Capital Markets execution.

<p style="text-align: justify;">India is between a rock and a hard place. The pandemic still rages and yet as a middle-income developing country it simply cannot afford another national lockdown. The economy, which was slowing well before the current crisis, has been severely hit. A quick economic recovery is not in the cards and the next investment-led business cycle upswing has been further delayed. Rising banking-sector NPLs and a burgeoning budget deficit pose additional downside risks. However, the government’s latest labour market and agriculture sector reforms have laid the foundations for a strong and resilient recovery, when it does take root.</p>

India is between a rock and a hard place. The pandemic still rages and yet as a middle-income developing country it simply cannot afford another national lockdown. The economy, which was slowing well before the current crisis, has been severely hit. A quick economic recovery is not in the cards and the next investment-led business cycle upswing has been further delayed. Rising banking-sector NPLs and a burgeoning budget deficit pose additional downside risks. However, the government’s latest labour market and agriculture sector reforms have laid the foundations for a strong and resilient recovery, when it does take root.

<p><strong>Economic disruptions due to Covid-19 reduced global US dollar purchasing power by US$3.8trn in the first half of the year. Compared with advanced economies, developing Asia has fared better, relatively speaking. Asian exports have rebounded as the China’s economy  has normalised and as lockdown restrictions in the US and Europe eased over the summer. August regional trade data suggests that the best is behind for Asian exporters though. While one month’s worth of data does not constitute a trend,  there are good reasons to be cautious.  The post- Covid-19 recovery is petering out. The number of infection cases are once again rising in the US and Europe while US restrictions on Chinese technology companies are tightening Notwithstanding another round of government enforced national lockdowns in advanced countries, we expect Asian export growth to moderate from here. </strong></p>

Economic disruptions due to Covid-19 reduced global US dollar purchasing power by US$3.8trn in the first half of the year. Compared with advanced economies, developing Asia has fared better, relatively speaking. Asian exports have rebounded as the China’s economy  has normalised and as lockdown restrictions in the US and Europe eased over the summer. August regional trade data suggests that the best is behind for Asian exporters though. While one month’s worth of data does not constitute a trend,  there are good reasons to be cautious.  The post- Covid-19 recovery is petering out. The number of infection cases are once again rising in the US and Europe while US restrictions on Chinese technology companies are tightening Notwithstanding another round of government enforced national lockdowns in advanced countries, we expect Asian export growth to moderate from here. 

Ping An Digital Economic Research Center

Zheng Zeng

Ping An Digital Economic Research Center (DERC)

Ping An - DERC

Ping An Digital Economic Research Center (DERC) utilizes more than 50 TB of high frequency data points, more than 30 years of historical data and more than 1.5 billion data points to drive research on the “AI + Macro Forecast” and provide insights and methods towards precise macroeconomic trends. 

Ping An DERC is a research center for Ping An Insurance (Group) Company of China, Ltd. (“Ping An”) is a world-leading technology-powered retail financial services group. With over 204 million retail customers and 534 million internet users, Ping An is one of the largest financial services companies in the world.

<div class="content-highlight">
<p><strong>China SME Financing Report Series Report II by Fudan-Ping An Research Institute for Macroeconomy</strong></p>
</div>
<div>As the coronavirus pandemic keeps worsening outside China and sends shock waves across the global economy, <strong>the central government of China has increased financial support for micro, small and medium enterprises (MSMEs, or SME for short in this report) following the “Two Sessions” meeting</strong> in May. This includes: (1) reducing loan rates; (2) asking large state-owned banks to increase their lending to small businesses by no-less-than 40% this year; (3) using a re-lending program of RMB400 billion (US$5.8 billion) to incentivize local banks to make unsecured loans to small businesses; and (4) encouraging financial institutions to make concessions of RMB1.5 trillion to all types of companies.</div>
<div></div>
<div>
<div>
<strong>However, difficulties in discerning the use of the loans and supervising post-lending funding have led to a dilemma when implementing these relief policies.</strong> On one hand, if SME loan policies are too generous with rates too low and covenants too loose, regulatory arbitrage may arise, with funds flowing to the real estate and capital markets, aggravating resource misallocation and encouraging a pivot away from the real economy. On the other hand, if SME funding costs are too high and issuing conditions too demanding, small businesses may be unwilling to borrow to maintain production and operations, and instead they will lay off employees and reduce investments to deal with the pandemic.</div>
<div></div>
</div>
<div>Evidence suggests that：</div>
<div>
<ul>
<li>Some companies have used loan subsidies granted by local fiscal authorities to <strong>profit from interest margins</strong>.</li>
<li>
<div>Due to increased risks, small businesses are<strong> less willing to borrow</strong> to restore operations in the absence of low-cost loans. </div>
</li>
</ul>
<p>To ensure relief funds are funneled directly to small businesses in need, and to avoid<br>arbitrage and circular funding, we recommend that all local governments <strong>set up an indicator </strong><strong>system comprising 29 items under five dimensions</strong> to monitor local SME financing, and speed up data integration and information sharing based on the local small and medium enterprise financing platform, precisely measuring the SME financing gap and monitoring the flow of loan funds based on data from multiple sources.</p>
</div>
<p></p>
<blockquote>
<p style="text-align: center;"><strong>Dilemma of SME financing relief policies in Charts</strong></p>
</blockquote>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/847/original/image_546907858361600399388597.png?1600399390" class="editor-image img-responsive" data-smartkarma-image-id="159847"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/845/original/image_378457837341600399357441.png?1600399360" class="editor-image img-responsive" data-smartkarma-image-id="159845"></figure>


China SME Financing Report Series Report II by Fudan-Ping An Research Institute for Macroeconomy

As the coronavirus pandemic keeps worsening outside China and sends shock waves across the global economy, the central government of China has increased financial support for micro, small and medium enterprises (MSMEs, or SME for short in this report) following the “Two Sessions” meeting in May. This includes: (1) reducing loan rates; (2) asking large state-owned banks to increase their lending to small businesses by no-less-than 40% this year; (3) using a re-lending program of RMB400 billion (US$5.8 billion) to incentivize local banks to make unsecured loans to small businesses; and (4) encouraging financial institutions to make concessions of RMB1.5 trillion to all types of companies.



However, difficulties in discerning the use of the loans and supervising post-lending funding have led to a dilemma when implementing these relief policies. On one hand, if SME loan policies are too generous with rates too low and covenants too loose, regulatory arbitrage may arise, with funds flowing to the real estate and capital markets, aggravating resource misallocation and encouraging a pivot away from the real economy. On the other hand, if SME funding costs are too high and issuing conditions too demanding, small businesses may be unwilling to borrow to maintain production and operations, and instead they will lay off employees and reduce investments to deal with the pandemic.


Evidence suggests that：


Some companies have used loan subsidies granted by local fiscal authorities to profit from interest margins.

Due to increased risks, small businesses are less willing to borrow to restore operations in the absence of low-cost loans. 


To ensure relief funds are funneled directly to small businesses in need, and to avoid arbitrage and circular funding, we recommend that all local governments set up an indicator system comprising 29 items under five dimensions to monitor local SME financing, and speed up data integration and information sharing based on the local small and medium enterprise financing platform, precisely measuring the SME financing gap and monitoring the flow of loan funds based on data from multiple sources.



Dilemma of SME financing relief policies in Charts




China: Speeding up Data Integration to Solve the Dilemma of SME Financing Relief Policies

FX & Rates

<div>This report aims to resolve problems in forecasting long-term interest rates in China.</div>
<div></div>
<div>
<div>
<strong>Traditional convergence theory cannot satisfy current forecasting requirements.</strong> The long-lasting downward trend of China's economic growth is well known, and the decline in growth is bound to cause a decline in rates of return. It must be noted that convergence theory can only provide insight into issues like “the continual declining trend of economic growth”.</div>
</div>
<div></div>
<div>
<div>
<strong>Current demographic analysis makes it possible to forecast the long-term fluctuation trend of interest rates.</strong> Since there is already academic research on demographics and asset prices, based on this, we performed quantitative optimization by applying Grid Search. Data again confirmed the economic theory that the ratio of the population group aged between under 30 to over 40 is highly correlated with long-term trends in interest rates.</div>
</div>
<div></div>
<div>
<div>
<strong>Demographic trends, together with wavelet analysis, can provide a more detailed dualcycle model to forecast long-term interest rates.</strong> Firstly, we employed the Hermite interpolation method to increase the population data frequency. Then, with the interest rate wavelet cycle, we came up with a model that could better fit the overall trend of interest rates. This dual cycle model could explain why these two interest rate cycles have been asymmetric since 2012: because China's long-term population structure has been rapidly flattening since 2012.</div>
</div>
<div></div>
<div>Figure 17: Interest Rate Forecast After adding the Dual Cycle</div>
<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/159/579/original/image_99006239091600314108033.png?1600314111" class="editor-image img-responsive" data-smartkarma-image-id="159579"></figure>
</div>
<div>
<div style="text-align: left;" class="content-caption">Source: OECD, Ping An DERC</div>
<div>Given the current data, the terminal interest rate is still trending downward, and the sharpest fall in rates of return will appear around Q2 next year.</div>
</div>

This report aims to resolve problems in forecasting long-term interest rates in China.



Traditional convergence theory cannot satisfy current forecasting requirements. The long-lasting downward trend of China's economic growth is well known, and the decline in growth is bound to cause a decline in rates of return. It must be noted that convergence theory can only provide insight into issues like “the continual declining trend of economic growth”.




Current demographic analysis makes it possible to forecast the long-term fluctuation trend of interest rates. Since there is already academic research on demographics and asset prices, based on this, we performed quantitative optimization by applying Grid Search. Data again confirmed the economic theory that the ratio of the population group aged between under 30 to over 40 is highly correlated with long-term trends in interest rates.




Demographic trends, together with wavelet analysis, can provide a more detailed dualcycle model to forecast long-term interest rates. Firstly, we employed the Hermite interpolation method to increase the population data frequency. Then, with the interest rate wavelet cycle, we came up with a model that could better fit the overall trend of interest rates. This dual cycle model could explain why these two interest rate cycles have been asymmetric since 2012: because China's long-term population structure has been rapidly flattening since 2012.


Figure 17: Interest Rate Forecast After adding the Dual Cycle




Source: OECD, Ping An DERC
Given the current data, the terminal interest rate is still trending downward, and the sharpest fall in rates of return will appear around Q2 next year.


“Dual Cycle” Forecast Model Of Long-Term Interest Rates

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China: Speeding up Data Integration to Solve the Dilemma of SME Financing Relief Policies

Fudan-Ping An Research Institute for Macroeconomy

Ping An - DERC

“Dual Cycle” Forecast Model Of Long-Term Interest Rates

This report aims to resolve problems in forecasting long-term interest rates in China. Traditional convergence theory cannot satisfy current...

Ping An - DERC

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52-week Range

Market Cap (USDm)

P/E

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