After the Bank Run, Where Is the Future of Chinese Wealth Management?

Central Bank

Commodity

Summary:

Since the financial run issue, credit bonds have been very risky, perhaps the redemption of wealth will not stop, but why is it happening? Before November it was the asset shortage, and now it suddenly becomes a debt shortage, wealth stampede redemptions, the decline is huger than equity, and few investors can stand it!

Behind the Bank Run

Yesterday Bloomberg news revealed that the regulation suggested that insurance agencies take back the bonds sold by wealth management. It is just a flow of money from the left hand to the right hand. Where can the money redeemed from wealth management go? Some time ago large certificates of deposit and insurance products were snapped up, and the flow of capital is clear. Now, bank loans are not working, and the money just runs back to the financial markets department of insurance and banks. Do we have to see a certain investment type insurance being run again later? This move is undoubtedly meaningless as the root cause is not solved.

The key point is that the underlying assets of wealth management are based on credit bonds, while the main investors are wealth management, brokerage firms, public funds, and other institutional investors. Previously, by using the cost method or valuation method, the net value of the product will not retract, since the credit bond is not in default, it will always expire. Thus, the high coupon is a steady stream of happiness, so even if the interest rates rise sharply during the mid-way, it is not necessary to passively sell bonds to stop the loss and run. After the release of new rules of capital management for calculating the net value by the fair value, wealth management is getting in trouble. Also, the market is volatile, and the net value of the product will not be maintained, which will further hurt the investors, and therefore redemption is also inevitable.

What Will Be the Future of Wealth Management?

The treasury bonds raised sharply recently, credit bonds are still falling to new lows, and the money flows from wealth management redemption to the bank to buy treasury bonds. Moreover, the current credit bond interest rates are satisfying, but unfortunately, it is difficult for individual investors to enter. What's the lesson this time? There is certainly the valuation problem described above, but the problem of the investors themselves is more significant, including insufficient knowledge about net value, the product, and the risk.

Is the bank run caused by the unattractiveness of price? Obviously, since mid-November, the risk-free rate seems to have moved up sharply, but the ten-year Treasury bond yield also grew up 20bp. If investors experienced financial deleveraging at the end of 2016 and the rapid turn of the bond bear market triggered by the recovery of the pandemic in May 2020, this volatility is normal. The fragility of the market is the key factor in this run on the market! It is better to buy capital preservation and low-yield products if such volatility is unbearable. Additionally, it is estimated that domestic investors will directly choke if they see the volatility of US stock with huge bp fluctuations, which means that our investors are more fragile!

This time, of course, the madness results from the common characteristics of investors: buy when rising and sell when declining. When the net value of the fund rose, investors will increase subscriptions, bank financial investment managers will continue to buy bonds and the net value continued to rise, forming a virtuous cycle. While the net value declines, investors redeem it collectively, and investment managers must sell the product with a loss to cash out. Nevertheless, the whole market is focusing on selling and few investors will buy, leading to the low-price-selling of financial products only cut and sell, and this will form a vicious circle. Thus, it is common for the bond varieties held by the fund products to go up and down 5bps a day.

China's fund industry is very short, starting from the early 1990s, and now has accumulated tens of trillions. Unlike foreign countries with hundreds of years of history, investors are more mature, while Chinese investors are in the stage of enlightenment. Presently, many investors just know to buy the product, without really understanding the product, the stratum assets inside this product, and risk, retracement, or volatility. Probably, financial managers never mention these concepts, but hunting for profits and managing the KYC supervision from authorities. The reality is that there is a complete mismatch between customer acceptability and the product.

What about the future? Will volatility become normal in financial products? If the fair value cost method could not be changed, then the only changeable thing is the investor's ability to accept, to ensure investors know the corresponding risk level of each product, the meaning behind the level, and their acceptance of risk, rather than just cope with R1, R2, R3, R4, R5. Finally, converting from pandemic propaganda: investors should review the risk acceptance and defend the first line of financial products.

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Samantha Luan

Commodity

Gold is set to record a stable performance next year despite a mixed set of challenges, the World Gold Council has said.

The interplay between inflation and central bank intervention will be key in determining the outlook for 2023 and the yellow metal's performance, the trade body said in its Gold Outlook 2023 report.

"There is an unusually high level of uncertainty surrounding consensus expectations for 2023," the WGC said.

"For example, central banks tightening more than is necessary could result in a more severe and widespread downturn.

"Equally, central banks abruptly reversing course — halting or reversing hikes before inflation is controlled — could leave the global economy teetering close to stagflation. Gold has historically responded positively to these environments."

Geopolitical and economic uncertainty is mounting around the globe after Russia's military offensive against Ukraine, with inflation also rising due to higher commodity prices and supply chain disruptions.

The International Monetary Fund cut its global growth forecast for 2023 and warned of a cost-of-living crisis as the world's economy continues to be affected by the war in Ukraine, broadening inflation pressures and a slowdown in China.

The fund maintained its global economic estimate for this year at 3.2 per cent but downgraded next year's forecast to 2.7 per cent — 0.2 percentage points lower than the July forecast.

Gold demand in the third quarter was boosted by consumers and central banks, although there was a notable contraction in investment demand, the WGC said in a November report.

Gold Set for Stable Performance in 2023 Despite Market Headwinds_1

Economic consensus calls for weaker global growth akin to a short, possibly localised recession; falling — yet elevated — inflation; and the end of rate increases in most developed markets.

This environment carries both headwinds and tailwinds for gold, the latest WGC report said.

A scenario of severe recession or stagflation would be considerably tough for equities, with earnings hit hard, but would provide greater safe-haven demand for gold and the dollar, according to the report.

"The likelihood of recession in major markets threatens to extend the poor performance of equities and corporate bonds seen in 2022," the WGC said.

"Gold, on the other hand, could provide protection as it typically fares well during recessions, delivering positive returns in five out of the last seven recessions."

However, a recession is not a prerequisite for gold to perform, the trade body said.

A sharp retrenchment in growth is sufficient for gold to do well, particularly if inflation is also high or rising, it said.

On the flipside, a less likely "soft landing" scenario, where business confidence is restored and spending rebounds, could be detrimental to gold and benefit risk assets, according to the report.

Next year could result in a reversal of the dynamics at play in 2022, which were high retail investment demand but weak institutional demand.

"The retail investor segment appears to care more about inflation than institutional investors, given a lower level of access to inflation hedges. They also care about the level of prices," the report said.

"Even with zero inflation in 2023, prices will remain high and are likely to impact decision-making at the household level."

On the other hand, institutional investors assess their level of inflation protection through the lens of real yields. These rose over the course of 2022, creating headwinds for gold.

Further weakening of the US dollar as inflation recedes could provide support for gold next year, while geopolitical flare-ups will continue to make bullion a valuable risk hedge, the WGC said.

Chinese economic growth should also improve next year, boosting consumer gold demand, it said.

However, pressure on commodities, due to a slowing economy, could provide headwinds to the yellow metal in the first half of next year.

Source: The National News

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Cohen

Economic

With world markets in thrall to the final big three central bank meetings of a tumultuous year next week, the parallel world of fiscal policy takes a back seat. And yet it may be just as crucial to next year's economic and financial outlook.

In one of the starkest economic lessons of a year bamboozled by war in Ukraine and an energy shock, Britain discovered that reining decades-high inflation with interest rates alone is much harder if fiscal policy is rowing in the opposite direction.

The UK's disastrously botched giveaway budget in September set out for many the limits of what's possible in a world of double-digit inflation. Loosen the public purse strings any further and the commensurate level of interest rates needed to then get inflation back to 2% targets balloons, and risks melting the economy down in other ways.

With perhaps less vulnerability to foreign investment flows and currency shifts than Britain, the United States and euro zone have been dancing with that problem too amid serial economic rescues and recovery plans over three years of pandemic, war and energy crises that hit the trillions.

For all intents and purposes, the past three years have been the budget equivalent of a war footing for Western governments. Just as inflationary too - and in need of normalising.

But the room for and extent of the fiscal clawback in 2023 and 2024 may well determine how much harder central banks have to squeeze credit from here.

Less in need of same level of new energy price supports Europe was forced into, U.S. government spending was already checked this year by Democrats' razor thin Senate majority and the objections of Democratic Senator Joe Manchin.

That majority increased by one after last month's mid-term elections and this week's Georgia runoff. But Democrats lost the House of Representatives by a narrow margin too and that likely enforces rather than loosens spending gridlock.

Britain's bond blowup in September, meantime, forced a swift change of prime minister and finance minister and a dramatic fiscal U-turn that now ushers in austerity more than stimulus.

A hazier picture prevails in the European Union, where support for Ukraine, higher military spending and EU attempts to wean itself off Russian natural gas and oil leaves less room for retrenchment.

In its latest economic outlook late last month, the Organisation for Economic Cooperation and Development reckoned energy uncertainty clouded the picture but "moderate" fiscal consolidation was indeed still likely over the next two years.

The median OECD economy was forecast to see an improvement of underlying primary budget balances, which exclude interest payments on outstanding debt, by some 0.4% of potential GDP next year and 0.6% in 2024.

And the United States stands out in that regard. The OECD sees a full 2% of potential GDP improvement in its primary balance over the two years combined.

And yet while inflation lifts nominal GDP and public revenues, the hit from a real GDP recession, higher debt servicing costs and lingering or poorly-targetted energy supports sees total debt burdens continue to climb.

Only Sweden, Portugal, Ireland are set to have lower debt/GDP ratios in 2024 than in 2019, according the 38-member OECD.

Describing the debt service outlook as having "deteriorated substantially", it said long-term borrowing costs of 10 years or more had risen significantly above so-called "implicit interest rates on public debt" - the interest paid as a share of the nominal debt stock. And this simply pointed to "more costly debt finance in the future".

'Brute force'

All of which begs the question of whether central banks will have to conduct the inflation fight on their own.

Some try to see it terms of the "monetary policy space" a government's spending and debt accumulation - and that of companies and households - affords its central bank.

Societe Generale strategist Solomon Tadesse this week modelled it over time, looking at whether a greater fiscal burden and higher debts over recent decades - supported by low interest rates or outright central bank bond buying - had in fact lowered the point at which higher interest rates bowl the economy over.

Tadesse pointed out that the Federal Reserve of former chair Paul Volcker was able to raise interest rates as high as 19% in the 1980s without causing a recession - but recession now looms again with Fed rates approaching a quarter of that.

He blames "fiscal indiscipline" over the intervening period and fears the limit that imposes on the use of interest rates to control inflation just risks baking in bloated central bank balance sheets in a "vicious circle".

And likely severe recessions from historically modest interest rates just force central banks to quickly return to so-called quantitative easing, undermining their own longer-term inflation battle.

"For markets, brute force monetary tightening without concomitant fiscal discipline that significantly slashes budget deficits and debt financing may only provide a temporary reprieve - if any at all," Tadesse said. "Sustainable normalisation out of the current crisis would call for meaningfully addressing deficit financing."

Using the Fed's overall U.S. government debt holdings as a proxy for fiscal discipline, Tadesse estimated that a reduction from current levels of about 25% of GDP to pre-pandemic levels of 10% could create greater monetary policy space - allowing a peak policy rate of 9.85% without triggering a hard landing.

It would also allow the Fed to shrink its balance sheet by about $4.36 trillion, reversing almost all of its pandemic QE.

Debates rage about the real causes and durability of this inflation surge, the connection between public debt and economic activity and the extent to which deficits matter at all.

At the very least, a test of these ideas is coming. If the Fed and other central banks pause tightening to cope with rising unemployment next year, it's not yet clear they'll have succeeded in putting inflation back in its box by then. Fiscal Cavalry Trots to Inflation Battle_2

Fiscal Cavalry Trots to Inflation Battle_2

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Thomas

Bond

India and Asean are seen to lead the global economic recovery in the second half of 2023 (2H2023), said Nomura, but Malaysia could face hiccups due to weak external demand and fiscal reform challenges amid the current political landscape.

Nomura Asean chief economist Euben Paracuelles said the research house is cautious on Singapore and Malaysia, with the boost from economic reopening seen fading and taken over by weaker external demand in early 2023.

Paracuelles anticipated Malaysia's upcoming Budget 2023 to reflect a fiscal deficit of 5.8% to gross domestic product (GDP), unchanged from 2022, as opposed to the initial official estimate of 5.5%.

"The main risk that we're seeing here is actually an increase in fiscal risk after the recent election," he said at the Nomura 2023 Asia Economic, Currencies & Equities Outlook.

"In the environment where the economy is already slowing down, we think the slowdown from the external backdrop will get exacerbated, because in Malaysia what happens to the export sector tends to get translated into domestic demand very quickly," he said, citing the close correlation between exports growth and wage growth.

The weak exports seen in 1H are on the back of recession forecast in the Group of Seven economies, including in the US (-0.8% GDP growth forecast in 2023), eurozone (-1.4%) and the UK (-1.5%).

"Weak wage growth due to the weak export sector would lead to issues in consumption spending.

"Plus the fact that the recent election showed a more fragmented political landscape, we think it will be very difficult for the government to implement very quickly some fiscal reform measures including subsidy rationalisations and even the more difficult ones to broaden the tax base," he said.

However, Paracuelles does not see Malaysia being able to postpone the fiscal reforms much longer, as credit ratings pressure could resume otherwise.

"Given the global downturn next year, there might be an understandable rationale to delay, but by 2024, if economic conditions improve, implementing a credible fiscal consolidation medium-term agenda needs to begin," he opined.

On the wider Asean, Nomura head of global macro research Rob Subbaraman said the region, alongside India, is seen as the rising star of Asia in 2023.

"We think they've got everything to play with to lift their potential growth rates compared to other EM (emerging-market) regions — relatively healthy fundamentals, young population, rapid digitalisation is happening in these economies. And China-plus-one investment flow could unlock a little bit of growth potential as well," he said.

Malaysian equities downgraded to underweight

The fading pandemic recovery boost also has the research house downgrading Malaysian equities to underweight from neutral in its 2023 outlook anchor report for Asia, ex-Japan.

While Asian stocks have valuation support and light investor positioning, Nomura sees a rotation of funds into North Asia such as China unlikely to help Malaysia's foreign fund flow picture.

That said, it sees some value in the commodities sector. Another bright spot is tech stocks, amid record net balances and improved valuations following the recent sell-off — although the first quarter of 2023 remains volatile due to US slowdown concerns, the report said.

Nomura's core Asia ex-Japan long only barbell strategy includes Press Metal Aluminium Holdings Bhd as a potential beneficiary of China's reopening, and reviving demand in infrastructure-related activities.

It also includes Inari Amertron Bhd, in anticipation of the bottoming out of the smartphone industry down cycle, coupled with its ongoing strategic initiatives in China, Malaysia and the Philippines.

Source: The Edge Markets

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Owen Li

Forex

Rates rally puts in a breather, but the Fed's patience is likely tested already

Just as we were starting to wonder whether the rally was ever going to stop, Treasuries put in a breather yesterday. The extent of the move and its contrast to the messaging from the Fed would have been reason enough already earlier on. But now the actual FOMC meeting next week is within grasp, including another crucial inflation report just ahead with Treasury supply to top it off.

Already today will see data that could give reason for pause. While the PPI data is seen to confirm easing pipeline inflation pressure, the University of Michigan consumer survey could be a bit more of a wildcard. One is tempted not to place too much weight on the reading given the relatively small sample size, but we recall the FOMC having had an eye on that measure when they decided to hike 75bp in June, despite earlier guidance of a 50bp hike. Currently, market consensus looks for unchanged consumer inflation expectations.

The June meeting set a recent precedent about the Fed swerving way from prior guidance. We do not know what it would take to tip the Fed towards placing another sounding with the press in order to steer market expectations ahead of a meeting. But the way current money market and yield curves are plotting for the path of key rates, at least beyond the upcoming meeting, is not aligned with the narrative that the Fed is trying to instil in markets.

A TLTRO piece to the ECB's balance sheet puzzle

Today at 12.05 CET the ECB will announce the amount that banks will repay of their currently outstanding TLTROs ahead of year end. That amount will come on top of the €52bn TLTRO.III tranche that matures this month. We are looking for an early repayment of around €200bn, but admittedly it is not a high conviction call. Already ahead of November's repayment, polling pointed to a wide range of forecasts from €200bn to €1.5 trillion for total repayments this year. The close to €296bn that materialised last month was clearly at the lower end of expectations, and likely also a disappointment for the ECB itself.

From the October ECB accounts we gathered that the TLTRO repayments were seen as an important first step in the balance sheet reduction process. The amounts repaid could also inform the decision on the reduction of the asset portfolios. According to the minutes the Council deemed the TLTRO recalibration "more efficient" than trying to achieve the same objective through an earlier start of (quantitative tightening) QT or more aggressive interest rate hikes. Taken at face value, that would imply another disappointing repayment could prompt a more hawkish reaction from the Council to achieve the desired pace of policy tightening – be it via rates or faster QT. However, one should also be aware that year-end considerations can influence repayment decisions and one should not move to rash conclusions. In any case it could spice up the Governing Council deliberations, where our economists have been seeing the risk of another 75bp rate hike on the rise again.

Our main take remains that there is an overarching desire by the ECB to withdraw the exceptional accommodation provided via its balance sheet. And we have repeatedly said that we think the ones that have benefitted the most now also most at risk for an adverse market reaction. Yet, especially sovereign bond spreads of the eurozone periphery have proven remarkably resilient so far. While there was some widening in the 10Y Italian-German spread of around 5bp, it still remains at a relatively tight 186bp overall.

Source: ING

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Devin

Economic

Britain set out 30 measures to overhaul the financial sector on Friday, including a repeal of 'burdensome' EU rules the government says will unlock investment and maintain the City of London as one of the most competitive financial hubs in the world.

The planned reforms also include a review of rules put in place following the financial crisis over a decade ago to make bankers accountable for their decisions and easing capital requirements for smaller lenders, after much lobbying by banks.

The City has been largely cut off from the European Union by Brexit, putting pressure on the government to ease rules as Amsterdam overtook London to become Europe's top share trading centre, adding to competition from New York and Singapore.

Leaving the European Union allows Britain to write its own rules, but as it hosts scores of international banks, it has little room to diverge radically from international norms.

"The government's approach to reforming the financial services regulatory landscape recognises and protects the foundations on which the UK's success as a financial services hub is built: agility, consistently high regulatory standards, and openness," the finance ministry said in a statement.

UK finance minister Jeremy Hunt will formally set out the plans at a meeting with financial sector officials in Edinburgh.

Now dubbed the "Edinburgh Reforms", the proposed reset had been trailed as "Big Bang 2.0", a reference to the 1980s share trading overhaul, raising expectations of a big deregulatory push which left banks fearing costly systems changes.

But the emphasis has shifted to reviewing and tweaking rules while remaining aligned with global standards, rather than any wholesale dismantling of regulations.

The batch of planned reforms include a review of securitisation and short-selling rules, overhauling prospectuses issued by companies when they list, and a plan for repealing and reforming rules that were introduced when Britain was in the EU.

Other plans include a consultation in coming weeks on a central bank digital currency, a project that Prime Minister Rishi Sunak was keen on as finance minister.

There will also be a consultation on regulating compilers of ratings on company's environmental, social and governance (ESG) impacts.

"It is important for people not to overplay this - there is no sense of any move back to a pre-financial crisis world," said Jonathan Herbst, a lawyer at Norton Rose Fulbright.

The EU is updating its own financial rules to reduce remaining reliance on London, and is ahead in areas like cryptoassets.

Accountability

The reforms target two sets of rules introduced by Britain in the aftermath of the financial crisis over a decade ago when the government had to bail out undercapitalised banks while few individual bankers were punished.

The first set, known as the senior managers' and certification regime (SMCR), requires banks and insurers to name individuals responsible for specific activities, making it easier for regulators to punish them when things go wrong.

Bankers have complained that regulators take too long to vet these senior appointments.

The second set of rules requires banks to "ring fence" their retail arms with a cushion of capital to insulate deposits from a blow up in riskier activities, such as trading derivatives.

The ring-fencing regime will be reformed to free retail focused banks and ease "unnecessary regulatory burdens on firms while maintaining protections for depositors".

Banks have lobbied to either scrap the rule or significantly raise the deposits threshold which triggers the requirement. The changes are likely to ease burdens on smaller banks to help Britain's longstanding attempts to increase competition in a sector dominated by HSBC, Barclays, Lloyds and NatWest.

Bank of England Deputy Governor Sam Woods said in 2020 that he would defend the ring-fencing rules to his "last drop of blood". The BoE said on Friday it would work with the ministry to ensure a safe and competitive financial system.

The ministry will also review EU-era stock and bond trading requirements known as MiFID II, in particular a rule requiring brokers to itemise or "unbundle" their customer charges for research on stock picks and for executing stock orders.

Britain had already set out initial reforms in its financial services and markets bill being approved in parliament. It includes giving regulators an extra objective of paying heed to the City's global competitiveness when writing rules.

Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown, said London's financial centre has been severely held back since Brexit. "Sadly, the allure simply isn't there, with many of the UK's brightest companies being snapped up by overseas investors, and London losing its top share-dealing status," she said.

Other reforms already announced include scrapping a cap on banker bonuses and easing capital rules for insurers. A public consultation on regulating crypto assets has also been flagged.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Samantha Luan

Forex

USD: Still fighting seasonal trends

Global risk sentiment recovered yesterday after a few grim sessions for global equities, and the dollar faced some broad-based depreciation. As highlighted in our recent FX commentaries, the dollar tends to be seasonally weak in December, so this is a month of damage limitation for dollar bulls like ourselves.

Price action in G10 currencies has been quite mixed, with the best performers being AUD, CHF and CAD yesterday. Among the pro-cyclical currencies, we continue to think that CAD has a better chance of outperforming next year thanks to limited exposure to China and Europe's economic woes while being positively correlated to a rise in energy prices, which is our commodity team's baseline scenario.

The U.S. calendar includes PPI and University of Michigan survey numbers today. With markets being focused on various gauges of inflation, expect dollar sensitivity to these data releases.

The dollar could stabilise around current levels as markets gear up for the last week of action (Fed, ECB and BoE meetings) of 2022. DXY may stay around 104.50/105.00 today.

EUR: Rally above 1.06 would be premature

Markets are pricing in around 55bp of tightening ahead of the ECB meeting next week, and with no more speakers before the rate announcement and no key data releases except for the ZEW surveys on Tuesday, we doubt that rate expectations will move much in the coming days.

Our base case is still that EUR/USD will struggle to trade sustainably above 1.0600, and is mostly facing downside risks into year-end as the dollar could regain some ground on global risk uncertainty and rebounding energy prices.

GBP: Keeping an eye on key technical levels

The only release to highlight in the UK calendar today is the Bank of England's inflation attitude survey. Still, markets appear to have cemented their expectations around a 50bp rate hike by the BoE next week, and this may not change drastically before the policy announcement.

GBP/USD could hover around 1.22 today, but risks are tilted to the 1.2126 200-day Moving Average being tested soon, in our view. EUR/GBP is trading around the 0.8630 100-day MA, and while we have less of a clear directional call on this pair in the short term, we see upside risks in the longer run.

CEE: European commission may issue new assessment on Hungary

Another tough week in the CEE region is behind us, but Friday has a lot to offer. Apart from the global story, we will be watching the market reaction to yesterday's National Bank of Poland press conference, which was not as dovish as expected. Governor Glapinsky said that the end of the hiking cycle has not yet been decided. On the other hand, he also mentioned falling inflation and a return to single digits numbers. That said, we believe the cycle has been closed and we do expect higher inflation than the central bank.

Today the economic calendar is thin in the region, but we may hear more headlines from the European Commission regarding Hungary. An updated European Commission assessment could be released today, which should take into account the newly passed laws on the Hungarian side and thus be more in line with EU requirements. This follows the Commission's follow-up to Tuesday's Ecofin meeting and the member countries that made the request. The outcome of the assessment should be positive for Hungary and for the markets, but there've been plenty of surprises so far in this story.