Many experts do not trust the current rally on the global stock markets after the unprecedented crash of the stock markets. There are many reasons for that. .
“The insiders live out their countercyclical character,” says Olaf Stotz, professor at the Frankfurt School of Finance & Management. That means: The executives who know their companies better than anyone else go bargain hunting if they consider the shares of their own companies on the stock exchange to be undervalued.
According to Stotz, this is no longer so clearly the case. “The insiders’ belief that the stock market recovery would continue in the short term appears to be limited, otherwise they would have continued to buy at the same pace,” says the university lecturer.
From the second week of March to early April, German listed companies reported almost 400 executives’ share purchases to the financial regulator Bafin. Since then, the number of purchases has almost halved with the sharply rising share prices. Purchases over several hundred thousand euros are also largely passé.
Accordingly, the insider barometer, which Stotz regularly calculates from transactions reported to Bafin exclusively for the Handelsblatt, has dropped somewhat from its nine-month high of over 145 points in early April. Most recently, it was just under 139 points.
At this level, the barometer theoretically signals that stocks should outperform other asset classes over a three-month period. However, Stotz would not currently over-interpret this – precisely because the insider barometer has already moved away from the recent intermediate high.
Dax cheap at 8500 points?
The university professor would only support a new, larger rush of purchase by the board members and supervisory boards for the shares of their own companies Dax-Stands around 8,500 points expected. In mid-March, the Dax even hit below 8,300 points.
He had thus lost 40 percent since his all-time high of 13,795 points in February: “At this level, the stock market seems to be favorably valued for many managers,” says Stotz. According to the professor of asset management, private investors should only get back into the market if there are new setbacks.
In the meantime, the Dax, with almost 10,600 points, is again almost 30 percent above its March low and has been “only” 20 percent lower since the beginning of the year. Not only insiders, but investors don’t trust the rally yet. David Lafferty, chief strategist at Natixis Investment Managers: “There is too much optimism priced in the markets”. In his opinion, the negative effects of the corona crisis should occupy the markets for several quarters.
Rolf Schäffer, one of the leading macro strategists at Landesbank Baden-Württemberg, sees it similarly: “The markets have currently opted for a rather positive interpretation and consider the glass to be half full.” This half full glass has “but clear” Jumps and could prove to be fragile in the event of further vibrations ”.
The largest insider purchases in the past four weeks show that board members and supervisory boards were more selective than in the first week and a half in March. Purchases were mainly made from companies that underperformed the Dax.
The biggest purchase was – as on March 10th – at Heidelberg Cement. From March 17, the Merckle family of entrepreneurs in particular once again accessed via Spohn Beteiligungs GmbH. The Merckle family is a major shareholder in Heidelberg Cement and often buys millions of shares.
The purchases of more than 70 million euros throughout March are very high even for the Merckle family represented on the Heidelberg Cement supervisory board. The building materials group’s stock fell more sharply than many other stocks and has also recovered less.
Purchases from Krones and Fresenius
At KronesIt is similar, the world’s largest bottling plant manufacturer for beverages and food, which is listed in the small value segment SDax. Here supervisory board member Petra Schadeberg-Herrmann bought shares through Schawei GmbH for a good five million euros. Schadeberg-Herrmann and board member Norbert Broger had already invested millions in the shares at the end of February and beginning of March.
The third largest share purchase in the past four weeks was also made by a company that insiders had accessed in early March. At the Healthcare company Fresenius This time, four board members and four supervisory board members bought shares. The Dax value of Fresenius shares had also suffered more than the leading index, but has since made up half of the loss.
It is not only the largest share purchases by insiders that are countercyclical, but also sales. For example, supervisory boards parted from shares in the real estate companies Patrizia and LEG, both of which have recovered well from short slumps.
Even more striking is the sale of the Hellofresh cookbox mail order company from the MDax of medium-sized values. Co-founder Thomas Griesel sold through TWG Ventures GmbH for shares valued at 14 million euros. Co-founder Dominik Richter also bought shares via DSR Venture GmbH, and board member Christian Gärtner also accessed them – but both on a comparatively small scale.
The Hellofresh share had also lost almost 30 percent between early and mid-March. However, it fell only slightly below the level at the beginning of the year and has soared to almost 70 percent since then. No other stock outperformed a German selection index.
The sender of recipes with suitable ingredients benefits enormously from the corona restrictions and closings of the restaurants. The company itself cannot foresee whether this will remain the case. In any case, management is reluctant to make a forecast for the current year.
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Dusseldorf The leading German index starts with significant price gains into the new trading week and can briefly overcome the 10,000 meter mark. Listed in the afternoon trade the Dax 4.8 percent increase at 9980 points. The daily high is exactly 10,000 points, more than 450 points higher than on Friday.
The winners list is led by industrial stocks: The MTU-Shares rise after an interim plus of more than twelve Percent still seven percent, VW– Papers gain almost 9.5 percent, Daimler gain more than eight percent.
All 30 Dax values are in the plus. Bank stocks are also among the winners. The European banking index rose 6.4 percent, led by the last shaken Natixis-Share from France with an increase in value of 14 percent.
Last Friday, the leading German index closed 0.5 percent lower at 9526 points. However, there were signs of easing after the index failed to respond to the miserable US job market data.
The stock exchanges in Asia closed clearly in positive territory, but is not traded in China due to public holidays. After the losses last Friday, the futures contracts for the New York stock exchanges showed strong gains: According to this, the stock market index should S&P 500 3.6 percent higher on Monday open.
The reason for the significant increase in the German stock market: Falling numbers in some European countries give rise to hope that the worst in the corona crisis could be over. They are in Germany alone New infections for the fourth day in a row declining. The Robert Koch Institute (RKI) reported another 3677 confirmed cases this Monday. The number rose to a total of 95,391. The increase was less than the 5936 new infections announced on Sunday.
But such numbers are already a thing Exit scenario in terms of quarantine measures conceivable? Chancellor Angela Merkel named the only benchmark for answering this question. In her video message from the previous weekend, she indicated that with a growth rate of seven percent per day (“doubling within ten days”) the restrictions could be relaxed.
“We should already be there,” says CommerzbankForeign exchange analyst Ulrich Leuchtmann. In his view, there is growing concern that there is no end in sight in this country. His calculation: With 6,000 new infections per day, it would take between 18 and 24 years in Germany until sufficient herd immunization was achieved. “Hopefully you made yourself comfortable in your home office,” is his humorous comment.
The upward movement on the Frankfurt Stock Exchange should therefore only be a relief rally for the time being be within the medium term downtrend. In order to achieve a real turnaround, a Covid-19 drug would probably have to be brought onto the market or at least an approximate end to the economic restrictions can be foreseen. Before that, the equity markets are unlikely to rise sustainably.
This view also confirms investor sentiment. After evaluating the current Handelsblatt survey Dax-Sentiment, Stephan Heibel advises: “If you have positions in your portfolio with which you would probably not get through another sell-off wave nervously, then you should part with it today.”
German industry is doing better than expected, even though new business declined before the corona crisis began. The companies collected 1.4 percent fewer orders in February than in the previous month, but economists had expected a decrease of 2.4 percent, after a strong order increase of 4.8 percent in January.
Given the global economic shock from the corona pandemic, however, is one Incoming orders slump in March and April as well as overall strong production losses in the first and second quarters.
Look at individual values
Commerzbank: The corona crisis gives the bank one large influx of private customers. The bank and her daughter have had since the beginning of the year Comdirect 130,000 new private customers won, mainly online, said private customer board member Michael Mandel. In the last week of March alone, 10,000 customers were added. “Obviously, a lot of people currently have time to deal with their banking business.” The share price rises by 7.1 percent.
Evotec: The biotech company is building a new mainstay in promising gene therapy business on. In the Austrian town of Orth an der Donau, a team of more than 20 scientists is to advance the research and development of gene therapy-based projects. It has already secured a first order: The Japanese pharmaceutical company Takeda has entered into a long-term research alliance Evotec a. The share rises by around three percent.
The stock is interesting because several hedge funds have bet on falling Evotec prices. As of last Friday, this so-called short sale rate was 7.3 percent, an unusually high figure.
Thyssen-Krupp: With a plus of more than twelve percent, the shares of the former industrial icon were among the big winners in the MDax small cap index. On the one hand, industrial papers were in demand as losers in the crash phase on Monday. The automotive supplier Hella and aircraft manufacturer Airbus also benefit from this. But at Thyssen-Krupp, too, hedge funds play a crucial role in their betting on falling prices to ensure that trading is volatile.
Betting on falling prices, known in the technical sense as short sales, works according to the following principle: Investors borrow shares from companies where they expect price losses. They sell these papers afterwards and hope that the prices will drop. Then you can buy the shares back later and give them back to the lender. The difference between the short sale and the subsequent buyback is then the profit.
Already at the end of March, Thyssen-Krupp papers peaked by almost 50 percent on two days with a high trading volume. As at the end of March, shares are likely to have bought back on Monday. The result will be available on Wednesday at the latest when the funds have to publish their short selling rates.
Rolls-Royce / PSA: Securing new credit lines with the British engine manufacturer ensured the individual values Rolls-Royce as well as the French car company PSA for buoyancy. Rolls-Royce stocks shot up up to 21.2 percent after the supplier left airbus and Boeing secured another £ 1.5 billion line of credit. However, the long-established company has lost more than half of its market value this year and is cutting its dividend for the first time in over 30 years.
Peugeot parent PSA also secured another three billion euros in loans to better position itself against the financial impact of the corona crisis. PSA shares rose as a result up to 12.4 percent.
Look at other asset classes
The gold price is rising again. A troy ounce now costs $ 1,630, an increase of 0.7 percent. At the beginning of March, the price was just under $ 1,500 because investors needed cash after the price slump in the stock markets.
The gold ETFs (exchange-traded index funds) recorded by the economic service Bloomberg recorded inflows of twelve tons on Friday. It was 47 tons in the entire week. The speculators, however, remain cautious.
Oil prices are falling again. A meeting scheduled for Monday of oil-producing countries that have merged into the so-called Opec plus has been postponed to Thursday.
In early Monday trading, a barrel (159 liters) of North Sea Brent cost $ 32.90 to ship in June, down 3.5 percent. The price of a barrel of American WTI with delivery in May dropped 2.7 percent to $ 27.50.
US President Donald Trump threatened tariffs on crude oil imports. “I’ll do whatever it takes,” Trump said at the White House on Saturday night. The background is the drastic drop in prices on the crude oil market. It goes back to a double crisis, consisting of a massive drop in demand due to the corona pandemic and the price war on the oil market. The US fracking industry in particular is suffering from the low prices.
Given the increasing optimism in the fight against the coronavirus pandemic, investors are withdrawing from government bonds that are considered a “safe haven”. In return, most yields on bonds in top-rated eurozone countries rose two to three basis points. Ten-year German government bonds yielded minus 0.4 percent three basis points firmer and thus significantly higher than the record low of minus 0.91 percent reached a month ago.
What the chart technique says
With the plus of the opening of trading on Monday, the downside risk for the leading German index will decrease. “Even if the picture brightens at short notice, it should be noted that all Dax values are still below both the 200 and the 50-day average”, say Helaba’s technical analysts. With 23 titles, the 50 line also runs below the 200 day line. “In the past, such pronounced constellations only allowed limited scope on the top,” is their assessment.
According to the chart technique, the range from 10,138 up to and including 10,391 points is decisive. Among other things, there is the low of December 2018 with 10,279 points, the starting signal for the rally until mid-February 2020 with the previous record high. “This is the decisive hurdle in chart technology, the skipping of which would put the German standard values on a quick recovery path,” say the technical analysts at Düsseldorfer Bank HSBC.
The small downward price gap from last Tuesday was closed, also a positive sign. Such downward price gaps arise when the daily low of the previous day is above the daily high of the subsequent trading day. The daily low on Tuesday was 9703 points, the following high of Wednesday was reached at 9686 points.
“When planning wealth, the rule is: never get out completely!”
Dusseldorf The money could be used to repay all of Europe’s public debt, and there would still be five trillion euros left: the 50,805 listed companies worldwide lost 19.4 trillion euros in just six weeks, according to Handelsblatt calculations. In such a short time, this decline is historically unique.
The courses worldwide lost 24 percent, in Germany the 755 listed companies were hit even harder with a loss of almost 30 percent. All local companies together currently cost 1.4 trillion euros. Alone Apple and Microsoft reach a total market value of 1.95 trillion euros.
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Dusseldorf The leading German index is going down again this Wednesday: The Dax loses at the close of trading 3.9 percent and closes at 9545 points – a minus of 390 points. All 30 Dax values are in the minus.
The stock market barometer is now further away from the 10,000-point mark. The previous day he had temporarily exceeded it, but then closed at only 9936 points despite a 1.2 percent increase.
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new York Under the impact of the coronavirus pandemic, the US stock markets ended one of the weakest quarters in their history in the red. The leading Dow Jones index lost 1.8 percent on Tuesday to 21,917 points. The technology-heavy Nasdaq dropped one percent to 7700 points and the broad S&P 500 lost 1.6 percent to 2585 points. The March declines were clear – 13.7 percent for the Dow, 12.5 percent for the S&P and 10.1 percent for the Nasdaq.
However, the full economic impact of the epidemic was most evident in the index figures for the full quarter. At 20 percent, the S&P suffered the largest decline in the first quarter of its history. The Dow declined 23.2 percent, the largest percentage decline in a quarter since 1987 and the largest minus in the first quarter since at least 1900. The Nasdaq, however, survived the quarter comparatively lightly with a minus of 14.2 percent. The last decline in this size was in 2018. In Europe, Dax and EuroStoxx50 had increased by about one percent each to 9936 and 2787 points on Tuesday.
“There is still uncertainty,” said portfolio manager Jack Janasiewicz from the asset manager Natixis. “It would not be surprising if we experience another phase of weakness in the coming weeks, in which the recent lows are tested or even fallen below.”
The US is currently outpacing Europe as the global epicenter of the Covid 19 pandemic. There are now more than 160,000 confirmed infections and more than 3,100 fatalities, the number of which continues to increase rapidly.
In New York City alone, 67,000 people are already infected with the virus. Maryland, Virginia, and Washington DC imposed stricter restrictions on non-essential home and business movements on Monday.
The US Federal Reserve (Fed) has created a so-called “temporary repo facility” for foreign central banks to reduce tensions in the financial markets. The program enables participating central banks to temporarily exchange US government bonds for dollars. The program will be available to central banks for at least six months from April 6.
The US Federal Reserve is thus improving the liquidity of the US currency, which is in demand in these turbulent lines as a “safe haven”. For example, due to a lack of liquidity, there were major problems in trading US government bonds in mid-March – a one-off process that could pose a risk not only to the US.
Oil companies on the upswing
Thanks to a rising oil price, oil companies were among the favorites on the stock market. The US variety WTI rose by 1.1 percent to $ 20.31 a barrel (159 liters) after US President Donald Trump and his Russian colleague Vladimir Putin agreed to consultations on the situation on the oil market.
In addition to the virus crisis, this is also suffering from the price war between Russia and Saudi Arabia. “This shows how much Trump cares about the US oil industry,” said portfolio manager Thomas Altmann from wealth consultant QC Partners.
Shale oil producers in particular are under pressure because, according to experts, they only work profitably from an oil price of around $ 50 due to the complex fracking process. Therefore, the titles of companies like Marathon, Occidental or Apache initially won above average up to eleven percent. However, in the course of trading, they gave up their profits. Occidental closed 5.1 percent up.
Focus on individual values
In view of Trump’s proposal for an infrastructure program, the shares of the construction machine manufacturer Caterpillar took the Dow top with around four percent of the individual values.
After the recent significant price losses, the cruise liners Royal Caribbean Cruises and Carnival went up again: around eight percent for Royal Caribbean and around three percent for Carnival. The latter wants to prepare itself for the crisis with the help of fresh money.
In the Caribbean, two ocean liners from the subsidiary Holland America Line with infected passengers are still looking for a port to have the ships docked. However, this is currently proving difficult.
In the US bond market, trend-setting ten-year government bonds gained 14/23 points to 107 24/32 points and returned at 0.681 percent. On the foreign exchange market, the euro regained $ 1.10 in US trade and cost $ 1.1022 at the close on Wall Street. The European Central Bank set the reference price at $ 1.0956 (Monday: 1.1034). The US dollar thus cost 0.9127 (0.9063) euros.
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Frankfurt Larry Fink began writing his letter to Blackrock shareholders in his New York office. The boss of the world’s largest asset manager ended him in his home office. Since January, the corona virus has also directed Blackrock. It represents an “unprecedented medical, economic and human challenge”, which will continue to shape the future, as Fink writes. After the crisis, the world would be different, he concludes in the eleven-page letter that is available to the Handelsblatt.
For the 67-year-old, the virus has “dramatically changed our lives and put financial security at risk”. Governments would have had to face unprecedented quarantines of the infectious disease while responding to the economic and financial failure. “In my 44 years in the financial sector, I have never experienced anything comparable,” writes Fink.
The outbreak of the disease had moved the markets at a pace and scale that was otherwise only seen in financial crises. As dramatic as it is: Fink believes that “the economy will recover, partly because some of the obstacles that characterize a typical financial crisis are missing”.
What Fink says has weight. Blackrock had $ 7.4 trillion in investment funds at the end of December, more than any other fund company. The volume is thus twice as high as Germany’s economic output. As in other regions of the world economy, Blackrock is also involved in the entire corporate elite in Germany and is often even the largest shareholder.
According to data from the financial regulator Bafin, the US fund holds 7.62 percent of the shares in the real estate group Vonovia, with the insurers alliance and Munich Re it is 6.44 and 6.68 percent. At the financial service provider Wirecard the asset manager holds 5.57 percent. The asset manager holds the largest share package at German bank with 5.15 percent and at Bayer with 7.44 percent.
Fink, an avowed supporter of the Democratic Party, was surprised by the speed with which stock indexes fell from record levels. For the first time since 1997, he writes, he took a break on trading on the New York Stock Exchange to offer brokers a break and to slow down price fluctuations. At the same time, record low liquidity in US government bonds has exacerbated the situation. These US Treasuries normally serve as the foundation for the capital market.
Long term view
Fink draws its confidence in a steady recovery of the economy from the quick reaction of the central banks to get the problems of the credit markets under control quickly. In addition, governments would “act aggressively to provide fiscal incentives”. Fink is once again campaigning for a long-term perspective. It is more important than ever. “Companies and investors with great determination and a long-term perspective have better chances of navigating through the crisis and the aftermath,” Fink hopes.
According to analysts from the Italian bank Unicredit The protective screens in industrialized countries have already triggered a bear market rally despite paralyzed economies. They refer to the $ 2 trillion rescue package in the United States and the Federal Government’s measures, which added up to more than a third of its gross domestic product.
In addition, the European Central Bank has announced a massive expansion of bond purchases through its pandemic emergency program. Defensive sectors already showed a drop in earnings estimates and price losses similar to those of the 2008/09 financial crisis. However, cyclical companies’ earnings estimates may still have a long way to go before they bottom out.
According to Esty Dwek, Head of Global Market Strategy at Natixis Investment managers, the stock markets have already largely priced in the damage from the corona pandemic. Nevertheless, the re-entry into the stock market seems premature at the current time. As long as the number of infections around the world continued to rise and the peak had not yet been reached, prices could continue to decline across the board.
According to the motto “First in – first out”, the courses in Asia are likely to recover most easily. America, on the other hand, could have been dealing with the consequences of the virus longest. At the moment there is hope that the restrictions imposed on society and the economy in most industrialized countries could be relaxed significantly by the end of June.
While the real economy will take longer to process the corona shock, the recovery in the financial and capital markets should start earlier.
Despite all the measures, Fink warns against too much optimism. The world is no longer without risks, and there is no clarity as to whether the ground has already been reached for the markets. “Knowing that is impossible,” says the financier. The world is facing major challenges in the face of heavily indebted companies and governments who have not carefully planned their aid programs.
The “economic pain of the outbreak will be disproportionately heavy”, especially on the shoulders of the economically most vulnerable.
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He wrote in a blog post that the ECB would be ready to act if the yields on euro area government bonds got out of hand. Lagarde had raised doubts about this by saying that it was not the central bank’s job to eliminate risk premiums on bond yields. These premiums make financing a government more expensive – investors demand it as an additional return for a higher risk.
The ECB decisions on Thursday include additional bond purchases of EUR 120 billion for this year that can be used flexibly. They can also be used to buy government bonds from certain countries if the risk premiums there skyrocket.
In view of the extreme fluctuations in the markets, the question arises as to whether the ECB’s extensive package on Thursday has exhausted its funds in the current crisis or could add more. Standard & Poor’s economist Sylvain Broyer believes: “We have probably not yet seen the last package. If the US Federal Reserve continues to cut interest rates and buy bonds again, which many expect, the ECB may have to react. ”
Targeted purchases in the south
When it comes to Dirk Schumacher, the economist of the French investment bank Natixis, the ECB should “significantly intervene in peripheral bond markets in the short term”. In other words, you should specifically buy additional government bonds from countries such as Italy or Spain. He also advocates a “clear statement that the ECB is ready to use its balance sheet aggressively to stabilize bond markets and the banking system”. In an emergency, she should even buy loan portfolios.
One of the biggest risks in the current situation is that banks may be too careful about lending when lending. However, Lagarde had pointed out on Thursday that the euro countries or EU institutions would have to step in with guarantees to cover risks, this was not the task of the central bank.
If the crisis worsens, one option for the ECB would be to activate the country government purchasing program (OMT), which allows for unlimited purchases. The prerequisite for this, however, would be that the country concerned, such as Italy, previously submitted an aid application to the European Stability Mechanism (ESM), which is subject to conditions. There are already demands from the European Parliament to relax these requirements.
If the economy in the euro area does not recover from the consequences of the epidemic by the middle of the year, it will hold CommerzbankChief Economist Jörg Krämer thinks it is possible for the ECB to revive an older program from 2010, which is known as SMP. However, this does not allow unlimited purchases of government bonds from individual countries, which is why it only worked to a limited extent in the euro crisis. OMT, on the other hand, had a calming effect due to its unlimited dimensions, although it was never actually used.
Krämer himself does not believe that any further measures by the ECB are necessary. She was right to ask governments to grant partial credit guarantees to companies in need so that banks could better help them with loans. Now the ball is with the economic politicians. “The ECB cannot prevent a credit crunch on its own.”
Good communication is key
The European economist at Allianz, Katharina Utermöhl, believes that in the event of a coordinated fiscal policy offensive by the euro countries, no further monetary policy steps are necessary at first. However, should the risks to financial stability increase, the ECB expects the bond purchases to deviate even more than before from the weighting according to the so-called capital key in order to provide targeted help. This key is based on the population size and economic strength of the member countries.
If that is not enough, the ECB could also expand its purchasing limits. According to these self-imposed limits, the ECB may not buy more than a third of a country’s outstanding bonds. For some countries like Germany, this border is not far away. Some economists are therefore calling for these limits to be raised now. Lagarde, however, said at her press conference that this was not necessary.
Among other things, because it can be assumed that the euro countries will become more indebted and the countries will also have to issue more bonds as a result. Critics, on the other hand, argue that an increase would have sent a clear signal that the ECB would be ready to act if the crisis worsened. Frederik Ducrozet from the Swiss wealth manager Pictet considers it a crucial communication error that Lagarde has not commented more openly on this. ECB circles, on the other hand, point out that they wanted to act proportionally to the problems.
In the current situation, an expansion is not necessary. But if you are convinced that a significant expansion of bond purchases is necessary, you are ready to act.
Ultimately, as with other problems, Broyer’s remark applies here. He says: “It is now a question of building trust. Communication can currently be more crucial than the specific monetary policy measures. “
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Beijing China’s local governments are currently launching numerous large and small support programs for domestic companies. Tax relief and reduced social security contributions are among the most common types of help. The Chinese economy has been suffering from the consequences of the coronavirus crisis for weeks. The International Monetary Fund (IMF) expects the world’s second largest economy to grow to 5.6 percent in 2020.
But the Chinese government wants to prevent a violent slump, especially to stop major job losses. The previous economic support is therefore only the beginning. “Most of the spending will be made in the second and third quarters,” said Wang Tao, chief economist for China at the major Swiss bank UBS.
The Coronas crisis highlights a well-known problem in China: the country’s high level of debt, which will now continue to increase. Wang expects local governments in particular to borrow. “There will be higher expenses and these expenses will be financed through debt,” she says.
The trend is already clearly visible: China’s local governments have raised a record amount of new debt in the first two months of the year. According to current data from the Chinese Ministry of Finance, they issued 1.2 trillion yuan in bonds in January and February, 56.4 percent more than in the same period last year.
China’s debt has been growing for years. Especially after the financial crisis, economic stimulus measures led to a massive increase in government spending, and as a result gross debt (i.e. government, household and corporate debt combined) rose from 140 percent in 2007 to 261 percent in the second quarter 2019. The rating agency DBRS Morningstar estimates that China’s government debt ratio alone will increase to 76.6 percent of its gross domestic product by 2024.
But doing nothing is not an alternative. The trade dispute with the United States had a negative impact on domestic companies last year, and now the coronavirus crisis is coming. For weeks now, consumers in China have only been buying the bare essentials; until recently, factories in large parts of the country were idle and supply chains have been interrupted. The economy is slowly returning to normal. But now there is a threat of new corona cases abroad.
The indebtedness of Chinese companies is already among the highest in the world and has caused unrest among investors in the past. According to calculations by the Bank for International Settlements (BIS), corporate debt was around 152 percent of China’s economic output in 2018. This rate was around 57 percent in Germany and 74 percent in the United States.
For some companies, the corona shock is the factor that causes them to get into trouble. For example, the state-owned conglomerate HNA had to apply for financial aid from the Chinese province of Hainan in early February due to liquidity shortages. However, the company was in a bad position even before the corona virus crisis due to excessive shopping trips.
In particular, small and medium-sized companies, which employ a large number of people in China, could suffer from the sustained loss of sales. 20 percent of the companies surveyed by the Washington Center for Global Development think tank at the end of February said that their liquidity reserves did not last longer than three months.
“The special loan renewal program and the extension of repayments for coronavirus companies can help solve the problem of tight cash flow,” said Iris Pang, China economist at Ing Bank. In the past few weeks, several reference interest rates have been lowered in China, primarily aimed at providing more liquidity in the market in the short term. The Chinese government has also instructed banks to turn a blind eye on loan maturity.
Waves of layoffs could threaten Beijing’s power
Observers anticipate that China’s central bank may relax the requirement for minimum deposits to banks, the so-called reserve requirement rate (RRR), this month. The lower the amount that banks have to hold, the more money they have to lend.
China’s government wants to prevent unemployment from rising, and waves of redundancies could threaten its power. Many Chinese people also endure the repressive system because the economy has gone uphill over the past few years. An increase in debt could help stabilize employment, which is important for growth in consumption and investment after the epidemic ends, according to engineer Pang.
The promotion of the economy through state stimulus programs has a long tradition in China. In recent years, the government has tried to stimulate slowing economic growth with stimuli.
The deficit in China’s national budget has therefore been increasing for several years and has averaged 2.9 percent of gross domestic product in the past three years. However, many experts estimate the deficit to be much higher.
Even if the corona crisis is over, the consequences will be sustainable. “It will take years for the debt to be paid,” said UBS economist Wang. In addition, China is not using its investments efficiently and effectively. “Much of the debt that arises is basically not productive,” said Alicia Garcia Herrero, Asia Pacific chief economist for the French Natixis Bank. They were not enough for the level of growth that China is operating. “That means less growth in the future,” says Garcia Herrero.
According to a recent analysis by the rating agency DBRS Morningstar, there is a large structural gap between China’s local governments and the central government. Put simply, central government finances are strong and local government finances are weak.
85 percent of the total expenditure is incurred at the local level, but only half of the income arrives there. This has led to enormous mountains of debt. At some point, there must be restructuring. “And the central government should increase its share of the burden,” said UBS analyst Wang.
Much of China’s debt is domestic
The Chinese central government promised more help in early March given the additional burdens caused by the effects of the coronavirus. China will step up financial support for local government agencies, Chinese Vice Finance Minister Xu Hongcai said at a press conference.
The Ministry of Finance will accelerate transfers, particularly in the regions severely affected by the virus, to ensure the normal operation of local government and to ensure wages, Xu said.
Most of China’s debt is domestic, according to UBS expert Wang, which makes the People’s Republic less vulnerable than other countries. “If tax revenue rises again because the corona virus is under control in China and factories resume work by the end of the first half of the year and consumers return to shopping centers and restaurants, fiscal pressure should ease in the second half of the year,” said Ing economist Pang.
The big question, however, is how the positive trend in China in the number of newly infected people will develop in the next few weeks. Experts warn that the risk of new infections will increase if the precautionary measures taken by the provincial governments are gradually relaxed. In addition, the risk of infection from travelers returning to China from affected areas from abroad is increasing.
More: The corona virus will accelerate deglobalization. The violent economic downturn caused by Corona will pass. But the long-term consequences remain.