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Zhong Xing Securities Li Xunlei: How to deal with the potential risks brought by passive deleveraging

November 08, 2018 08:19
Author: Lee Thunder
source: Zhongtai Securities
edit:Eastern Fortune Network

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Summary
From the cases of de-leverage in the past developed or developing countries, almost all of them have experienced the process of passive de-leveraging, and many countries have also triggered the economic crisis. So, will we face the crisis caused by passive deleveraging? From the many problems caused by this round of stock market decline, we should attach great importance to the potential risks brought about by passive de-leverage.

   The supply-side structural reforms that began in late 2015 opened the process of active deleveraging, with the aim of preventing problems before they happen. However, from the past experience of deleveraging in various countries, it seems that it is ultimately done in a passive de-leverage manner. So, will China be able to avoid the passive deleveraging process because of the initiative to leverage? From the current point of view, passive de-leverage has begun. Macroeconomics is a big system. When you try to fix a few indicators, what impact will it have on many other indicators? This is probably more complicated than "pressing the gourd to float the scoop".

  The active deleveraging process has reached the end

I remember that at the end of 2014, at the Central Economic Work Conference, the term "high leverage, bubble" was used for the first time to describe the problems of the economy at the time. At the same time, it was pointed out that deleveraging cannot be done overnight and it takes time to resolve. However, after 2015, the leverage ratio of the whole society has accelerated, because the investment stimulus and the relaxation of the currency have been increased in order to stabilize growth.

Although the supply-side structural reforms began to be vigorously promoted in 2016, the deleveraging effect will not be reflected until 2017, mainly because the leverage ratio of the corporate sector has declined, but the leverage ratio of the residential sector is still rising. Strengthening financial supervision, controlling local government's PPP and debt expansion, and further tightening social credit, the financial industry's leverage ratio has dropped significantly, but at the same time it has brought about a decline in new social financing growth and capital market valuation. The level drops.

Source: Zhongtai Securities Research Institute

Source: Zhongtai Securities Research Institute

The shrinking of the scale of off-balance sheet finance has led to a liquidity crisis in private finance such as P2P. A large number of private wealth management products have defaulted. At the same time, the frequency of corporate bond default events has also risen significantly. The issue of equity pledge financing has fallen with the stock price of the secondary market. Further highlighted. That is,The purpose of active de-leverage is to prevent financial risks, but the actual operation process is difficult to grasp the good position, a little careless, but it is easy to induce financial risks.

Therefore, for the first time in the first meeting of the Central Committee of Finance and Economics in March this year, a new formulation of structural de-leverage was introduced, which was also intended to avoid the risk of detonation. Since this period of time, the intensity of de-leveraging has been significantly reduced. Not only has the six stable targets of “stable employment, stable finance, stable foreign trade, stable foreign investment, stable investment and stable expectations”, but also has begun to “solve” to resolve equity pledge. Financing problems, local governments and financial institutions have also taken actions to solve the problem of equity pledge financing risks and private enterprise financing difficulties.

  Falling asset prices are the main cause of passive de-leveraging

In the past, the de-leverage of the financial sector was to make the economy deviate. However, in the past six months, the stock market has experienced a sharp decline, which has affected the operating liquidity and even survival of private listed companies. For example, when the equity pledge financing mortgage price fell to After closing the line, it will face the pressure to be forced to close the position, which leads to passive de-leveraging.

According to estimates, the market value of the pledged equity reached 4.5 trillion yuan. As of October 19, the two cities had a total of 637.251 billion shares, accounting for 9.94% of the total share capital, both of which are at historically high levels. In addition, A shares have 1197 shares. The majority shareholder pledges more than 50% of the shares, the majority shareholder of 853 stocks pledges more than 70%, the majority shareholder of 484 stocks pledges more than 90% of the shares, and the majority shareholder of 140 stocks pledges 100%.

This is why local governments want to rush to local listed companies. If the stock market continues to fall, it will not only affect the cash flow of many listed companies, but also the financial intermediaries.

And the problem is not limited to this. According to the statistics of the China Securities Industry Association, as of the end of May,The private equity (PE) and venture capital fund (VC) registered in the association reached 7.89 trillion yuan.However, the scale of private equity investment funds is only 2.55 trillion yuan.That is to say, the scale of private investment in the primary market is more than three times that of the secondary market, which brings difficulties to the exit of the primary market fund in the future.

The more serious problem facing the reality is that the valuation of many PE investment companies has been inverted with the valuation of similar enterprises in the secondary market. If the valuation of the secondary market is difficult to improve in the future, or the transaction remains in a downturn, Then,It is difficult to realize the realization and exit of PE and VC, which is now nearly 8 trillion in size and will be larger in the future.In the long run, the “value” of PE and VC funds will be greatly reduced. Since many of the private equity funds are “real-name bonds”, there is still a risk of payment due. Therefore, the PE and VC fields will also face the pressure of passive de-leverage.

For the domestic residential sector, most of the liabilities are on consumer loans, of which the proportion of mortgages is very high. Therefore, the leverage of residents is mainly reflected in the real estate investment field, because the property allocation structure of the households is about It takes about 70%. In the first half of this year, the balance of residential mortgages was about 23 trillion yuan, plus other liabilities, the balance of household debts accounted forGDPThe proportion has reached 57%.

After 2008, with the development of the real estate market, the debt ratio of residents has also risen sharply, from 20% all the way up to the current close to 60%. Although it is lower than the level of major developed countries, it is already the highest among emerging economies.Considering the final distribution of domestic income in China, the disposable income of the resident sector only accounts for 60%, and the major developed economies are more than 90%. Therefore, the proportion of China's resident debt to disposable income of residents has reached 93%, which is obviously high.

Full social leverage in major global economies (%)

Source: Zhongtai Securities Research Institute

Since the beginning of this year, the overall increase in house prices nationwide has been greatly narrowed, and many places have even fallen. The bull market of real estate in China has been going on for nearly 20 years, accumulating a large bubble and there is a big risk. Once house prices fall, the passive de-leveraging process of residents is difficult to avoid.

  How to deal with the potential risks of passive deleveraging

  From the cases of de-leverage in the past developed or developing countries, almost all of them have experienced the process of passive de-leveraging, and many countries have also triggered the economic crisis.So, will we face the crisis caused by passive deleveraging? From the many problems caused by this round of stock market decline, we should attach great importance to the potential risks brought about by passive de-leverage.

  First, the leverage structure must be optimized to control and reduce the leverage of residents and businesses.From a general perspective, the central government needs to add leverage. The corporate sector and local governments need to maintain leverage, and the resident sector must be leveraged.

As mentioned above, the leverage ratio of non-financial companies has declined this year, but the leverage ratio of the residential sector is still rising rapidly. According to the China Financial Stability Report just released, at the end of 2017, the debt balance of the household sector in China has increased. 21.4%, some buyers use the short-term consumer loans and other channels to buy houses and leverage illegally. Therefore, the actual leverage ratio of housing is higher than the announced.

As first- and second-tier cities generally demand “restricted purchases and restricted loans”, the demand for large-scale investment or speculative purchases has shifted to third- and fourth-tier cities, resulting in rising house prices and expanding investment scale in third- and fourth-tier cities. However, from the perspective of population flow, most of the third- and fourth-tier cities have a net outflow of migrants, which indicates that in the long run, most third- and fourth-tier cities have high housing prices.

In this regard, it is imperative to strictly limit the continued increase in leverage between the residential sector and real estate development companies. Of course, this is based on total control and structural optimization. From the ratio of mortgage balance to the total market value of residential real estate, it is significantly lower than the developed economies such as the United States, but the proportion of mortgage balance in the disposable income of residents also exceeds the US level. In addition, the leverage ratio of listed companies in domestic real estate enterprises is around 80%, and the cash flow situation this year is not as good as in previous years.

Therefore, to prevent the crisis caused by passive deleveraging, it is necessary to prevent problems before. For example, when the current residential mortgage is still a quality loan, it is necessary to strictly limit the scale of the mortgage to prevent it from continuing to expand. From the lessons of the US subprime mortgage crisis, it is impossible for a mortgage to become a quality loan for a long time. As long as house prices continue to fall, the bad debt rate of mortgages will rise sharply.

For local governments, the actual debt level must be higher than the announced debt level, so it is necessary to increase debt transparency and limit its blind investment impulse. For the corporate sector, if the profit growth rate declines after 2019, the leverage ratio may rise again, so stable leverage is the target. In this context, it is incumbent on the central government to maintain economic stability by adding leverage, not to mention the current level of leverage is not high.

  Second, take a variety of measures to make a good plan to prevent asset prices from falling rapidly or fluctuating.

An economic crisis or financial crisis is usually triggered by a fall in asset prices. Because both the asset side and the debt side will require the relative stability of the asset price to maintain stability, once the asset price appears large and continues to fall, the liquidity crisis will occur.

However, asset prices are usually priced by the market, and there are fluctuations in the market. Fluctuations are often difficult to control. Therefore, in order to prevent exchange rates,interest rateAnd the risks arising from large fluctuations in equity assets or real estate prices require the management to make advance plans to avoid runaway situations.

For example, with the fall in housing prices in some cities, social events such as the agglomeration of homebuyers have been triggered. In the future, if house prices continue to fall, the cash flow of housing enterprises will further deteriorate. The local government’s land sales revenue will drop sharply. How to save real estate enterprises and how to make local governments over-reliant on land finances alleviate the deficit, must have Plan.

In the past year, the land premium rate has declined rapidly. The price increase of first-hand houses in 70 large and medium-sized cities nationwide has slowed down, and the number of cities with second-hand housing prices has increased, reflecting that the real estate industry has entered the autumn. I believe that the winter of real estate will surely come. If you can prepare for winter and the cold-resistant measures for residents, housing enterprises, banks, and local governments before entering the winter, you can avoid the development of developed countries to a certain extent. The collapse of the asset bubble.

  Third, insisting on promoting reform is the most effective means of dealing with "passive de-leverage."Three years ago, the supply-side structural reform was launched. Its main purpose was to adjust the economic structure and prevent economic risks. If it is not pushed at the time, the consequences must be very serious. Nowadays, the reform has entered the deep water area, and the direction of reform is becoming more and more clear. I believe that administrative reform, fiscal and tax reform, and state-owned enterprise reform should be the focus of future reforms.

This year, the two sessions proposed a streamlined reform of the administrative organization, which has already been implemented to the localities. It is hoped that the promotion will be further strengthened, unnecessary departments will be withdrawn, unnecessary personnel will be reduced, and corresponding administrative expenditures will be reduced, thus allowing for more tax cuts. big space. At present, there are too many administrative levels from the central to the local level, and the issue of the upward adjustment of the department is expected to improve.

There is more room for fiscal and tax reform, and there has been consensus on tax reduction and fee reduction, and it is also steadily advancing. This is a very important part of preventing economic risks. After all, it can reduce the cost of enterprises. In addition, the optimization of the fiscal expenditure structure is particularly important. For example, the shortcomings proposed by the supply-side structural reforms are mostly short-lived, but the expenditure is limited, so the money should be used in the cutting edge.

In my opinion,The shortcomings in the people's livelihood sector are worth more than the shortcomings of infrastructure investment.Take a look at the picture below:

The final consumption of China and the United States as a share of GDP

Source: Zhongtai Securities Research Institute

Over the years, the contribution rate of China’s consumption to GDP has risen markedly, but overall,Investment (capital formation) contributes nearly twice as much to GDP as the global average.Although the contribution of final consumption to GDP in 2017 rose to 53.6%, the United States was 83.3%, a difference of 30 percentage points. Our shortcomings in primary and secondary education, health care, and old-age care are very obvious. However, in terms of infrastructure investment such as high-speed rail and expressway, there is no short-board on the overall scale, and it is still a global leader.

If we can increase the financial investment in primary and secondary education, medical care, and old-age care, it will be beneficial to promote consumption in the medium and long term.Because many residents regard buying a house as a means of providing for the future, increasing their savings and not spending it is mainly due to the consideration of future expected investment in children's education, medical care and pension.If investment in this area can be intensified, there will be no worries about residents' education, medical care and old-age care in the future. At least the ordinary people's willingness to buy a house will decline, and the willingness to consume will increase. As a result, the balance of mortgage loans will fall and the proportion of consumption will rise.

As for the reform of state-owned enterprises, I would like to ask the question that under the circumstances that the economic growth rate is slowing down and the leading characteristics of the stock economy are becoming more and more obvious, the oversupply of the whole society is difficult to avoid. Under the homogenization competition pattern, the head effect is more and more obvious; if the state-owned enterprises and private enterprises in the same industry are to be stronger and bigger, can this be achieved at the same time?If state-owned enterprises and private enterprises can compete in different industries or differentiate their competition, is it more reasonable to compete with the same industry?

(Article source: Zhongtai Securities)

                (Editor: DF078)

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