Malt Liquidity 49
China, Chyna, Chinuh
Signalling is everything
One issue with the ZIRP market regime is that it’s simply not profitable to bet against the size, whether this is a central bank, institutional investors bidding up asset classes in a desperate search for yield due to TINA, or governments outright banning it:
China's regulators are tightening control over the inner workings of its currency market, pressuring banks to trade less and in smaller ranges, two banking sources told Reuters, as part of a sweeping push to curb speculation…
Recently, representatives of China's State Administration of Foreign Exchange (SAFE) have embedded themselves on currency trading floors from commercial banks to major state-owned lenders, said the two sources at separate market-making banks.
They said the officials stayed for months, far longer than supervisory visits previously, and urged them to price customer deals faster and in tighter ranges, or spreads.
One can’t help but be moderately awestruck at how stark a break from Western fiscal policy China seems to be taking. Unlike the US with its perpetual bond market liquidity provision inflating equity investments, China seems squarely focused on blunting the volatility realized by individuals at the expense of institutional profit-seeking. The interconnectedness of the world’s financial system and the proxy USD through the Hong Kong dollar peg allows an interesting buoying of their own fiscal interests while not outright banning short selling and dealing with the issues of explicitly allowing only single-sided speculation. Seeing the forex transactions being regulated makes me believe that this time is different regarding China’s cryptocurrency ‘ban’ as well:
Cryptocurrency exchanges have begun cutting links with customers in China after Beijing declared more activities related to digital coins “illegal” last week, in its latest broadside against the virtual currency industry. Huobi, one of the world’s biggest crypto exchanges, announced it would remove Chinese users by the end of the year, while Binance, another large platform, was no longer accepting user sign-ups with Chinese phone numbers.
While this move was met with the same skepticism of years past (because, well, of course a tightly run state is anti crypto circumvention of state monetary policy), the broader emphasis on curbing speculation across the board rather than outright ‘banning’ cryptocurrency as stated indicates that the CCP will enforce some sort of clampdown.
As I mentioned the other day, it’s all about trading volumes on assets like bitcoin which contain a high percentage of retail participation. Indeed, the continued rise of assets like bitcoin and the correlated coins to it resolutely depend on trading volumes staying constant over time - price growth necessitates a lack of interest on the short side and continued volume crossing spreads to push the price higher in low-volume periods. As long as there is no mass exodus, the price of BTC/ETH should not catastrophically collapse, but without maintenance of trading volume, the price should deflate (relatively) slowly over time. One can’t help but wonder if the CCP was communicating through internal channels to major mainland speculators and telling them to liquidate over the past couple months.
This is all a continuation of the CCP playbook of observing how things play out in the West and deciding that it doesn’t work in the mainland. The de-emphasis of individual choice on youth video game time, celebrity, and more falls in line with the ban on speculation itself. Enrichment should come through the state approved channels, not ‘getting lucky’ - a philosophy reinforced by curbing speculation and gambling, with wanton disrespect for established industries:
Bill Hornbuckle, chief executive of casino group MGM Resorts, was confident last week that China’s regulatory crackdown on tech, education and online gaming would not extend to Macau, the world’s biggest gambling centre. “We’ve gotten zero direct signal that there’s a concern at that level,” he told an investor event in Las Vegas. Even with 20-year casino licences set to expire next year, he exuded assurance, confidently predicting that MGM’s would be extended. “We are believing [our licence] gets extended: time to tell.”
But just one day later, authorities in the Chinese territory unveiled the biggest shock to the sector since the start of the pandemic: a sweeping proposal to increase oversight that could wrest control of the lucrative industry away from foreign shareholders.
The worst part of betting against the size is when you get caught too heavily on the other side… but I can’t say I have a lot of sympathy for Macau casino operators.
While gambling will never leave Chinese culture, casino profits are a lot more tied to a few high rollers than one should be comfortable with - it’s essentially leverage on a few individuals. I wouldn’t be surprised to see a further internalization of billionaire profits and a mandate on what they can do with their wealth, which certainly doesn’t include gambling it away…
The ‘long China’ philosophy was always that open markets and foreign investments would open up the country itself to new ideals. But what fun is having a country at your whim and not thinking you can do better? How long will people be skeptical that China is going on its own path?
Double Vision
Large college endowments have notched their biggest investment gains in decades, thanks to portfolios boosted by huge venture-capital returns and soaring stock markets.
The University of Minnesota’s endowment gained 49.2% for the year ending June 30, while Brown University’s endowment notched a return of more than 50%, said people familiar with their returns, which aren’t yet public.
Meanwhile, Duke University over the weekend said its endowment had gained 55.9%. Washington University in St. Louis last week reported a 65% return, the school’s biggest gain ever, swelling the size of its managed endowment pool to $15.3 billion. The University of Virginia’s endowment reported a 49% gain…
While China insists on curbing speculation, here, we encourage it. It’s particularly fitting that one of the most inflated parts of the US - college tuition and expenses - were adept enough to double dip and take advantage of the effects in other markets while consumers of the product see none of the benefit. With bond market liquidity backstopped, bets that should be highly speculative have their risk curtailed, in a sense - there’s no shorting private companies, obviously. As the money kept flowing in, the valuation of said companies continued to get bid up. Series rounds are just illiquid spread prints, after all. But the difference between any VC paper and crypto is obvious - the exit liquidity is in the public markets, and there are far more speculators willing to provide liquidity for private participants to exit in exchange for the ability to trade and profit off gyrations. Is it any surprise who the beneficiaries are revealed to be of this structure? Perhaps Xi has a point - speculation might have gone too far.
In the category of “least surprising news ever”…
China’s Belt and Road Initiative has left scores of lower- and middle-income countries saddled with “hidden debts” totaling $385bn. New research suggests that many countries’ financial liabilities linked to President Xi Jinping’s hallmark foreign policy initiative have been systematically under-reported for years. This has resulted in mounting “hidden debts”, or undisclosed liabilities that governments might be obliged to pay.
On that note…