Service Hotline: 400-826- 0806

News center

News
行情分析

[Original Research] Is “Grey Rhino” Far From Us?

Date: 2017-07-25
Views: 30

 

       Introduction

       “Grey Rhino”, a term referring to “potential crisis of high probability and high impact, and event predictable to a certain extent”, was initially mentioned in an editorial of the People’s Daily after the financial work conference wrapped up. As the editorial said, “… need to prevent both ‘black swans’ and ‘grey rhinos’. We cannot play down or ignore small signs of any types of risks.” We think that there are three big “grey rhinos” ahead of China’s economic development currently: enterprise leverage ratio, housing bubble and global liquidity inflection point. Before these “grey rhinos” rush towards us, we shall fully utilize “grey rhino hunting strategy”, consider what we can do currently and take necessary measures to build up the security wall, and then realize a favorable turn of crisis.

          On July 17th, the first working day after closing of the National Financial Work Conference, an editorial titled Guard Against Financial Risks Effectively was published on the front page of the People’s Daily, mentioning the term “grey rhino” for the first time. As it said, “To prevent and defuse financial risks, we need to increase awareness of crisis. …… need to prevent both ‘black swans’ and ‘grey rhinos’. We cannot play down or ignore small signs of any types of risks.” The phrases “black swan” and “grey rhino” were coined by Michele Wucker, an American author and the former chairman of World Policy Institute. Compared with low-probability and high-impact black swan, “grey rhino” is potential crisis of high probability and high impact, and event predictable to a certain extent.

        Image you are in the African savanna, you will not be surprised when finding a grey rhino nearby and think it is not threatening. However, when this grey rhino approaches you gradually and almost touches you, you will suddenly realize that it may cause great damages to you and it is too late to run. So “grey rhino” represents the most frequent dangers in the world today, which are ordinary and normal but of mass destruction, unlike occasional and elusive “black swan”. Financial crisis, climatic change, significant policy, destructive innovative technology and such are all “grey rhinos” which may result in serious consequences or impacts in t he end.  

        The financial crisis in 2008 was regarded by most to be a “black swan”. However, after the financial crisis, it was discovered that a series of warnings and signs showed before the crisis. If you had read the book on financial crisis written by economic historian Charles Kindleberger, you would have understood clearer that this crisis is a “grey rhino”, not a “black swan”. As Wucker said, “‘grey rhinos’ are some events with traceable signals neglected by receivers; the system allows us to give no action and to deem and accept these signals as normal phenomena.” Differing from “black swan”, “grey rhino” is not an incidental emergency, but is still neglected.

        There is an old saying in Han Fei Zi, “A solid dyke can collapse because of an ant hole in it; a high-rise building may be burnt by spark in the gap of a chimney”. In the 1st half of 2017, GDP increases by 6.9% on a year-on-year basis, many macroeconomic indicators are improved and nominal GDP rises for 5 consecutive quarters, exceeding market expectation (Fig. 1). In a better economy, there are few people believing a crisis is imminent, and this optimism keeps risk accumulating. Wucker concluded several stages of “grey rhino”: deny – muddle along – fretful (hesitant) – panic – act or breakdown. Therefore, “grey rhino” is not a result of natural disasters or force majeure, but more like a man-made disaster.  

The proportion of value added in Chinese financial industry has doubled in past 10 years, from 4% in 2015 to 8.35% in 2016, surpassing that of many developed countries like US. However, such rapid development is achieved at the cost of quick expansion of total assets in finance and downturn of real economy. As revealed in a CASS report, China’s rapid growth in finance was in a sharp contrast with decline of industrial ratio since 2012, and in 2015 especially, growth rate of finance was more than two times of that of economy. In terms of contribution rate in 2012-2016, the finance has contributed 7.5%, 8.9%, 9.5%, 16.4% and 7.1% respectively to China’s economic growth, while the industry has contributed 40.59%, 37.9%, 35.3%, 30.4% and 30.7%, decreasing significantly.

        On the contrary, total assets of banking industry increased from RMB 113.6 trillion Yuan in 2011 to RMB 230.4 trillion Yuan at the end of 2016. On profit rank of Top 500 of the Fortune 2017, China’s big four banks were listed at top 2-5 (Fig.2). Moreover, in the past 5 years, assets of insurance companies increased from RMB 6 trillion Yuan to RMB 16.2 trillion Yuan; assets of trust businesses increased from below RMB 5 trillion Yuan to RMB 20.4 trillion Yuan; assets of securities companies increased from RMB 1.72 trillion Yuan to RMB 5.79 trillion Yuan, and assets under management of securities companies increased from RMB 281.8 billion Yuan to RMB 17.82 trillion Yuan.

         Such a rapid rate of growth is rarely seen in the history of global finance, and the sharp expansion of financial assets is always accompanied by rising financial risks. US financial crisis in 2008 is generally considered as a result of financial overdevelopment. This is a turning point. Since then, more and more people doubt and criticize on the opinion that financial development is good for economic growth. For example, Krugman, Nobel Prize winner in economics, argues that “disadvantages of financial overdevelopment outweigh the advantages”, and that “finance absorbs too much wealth and talents in the society”. In fact, Bank for International Settlements (BIS) made research and data predication on 33 manufacturing industries of 15 developed economies and found that when financial sector develops faster, productivity growth of industries with lower asset tangibility or higher R&D expenditures decreases disproportionately. Facts proved that financial booms cannot promote economic growth generally. Fortunately, the Chinese government has already noticed “grey rhinos” in finance and took relevant precautions. The theme of this year’s financial work is risk prevention and it is even proposed that “preventing and defusing financial risks, especially systematic financial risks, is fundamental financial task and the forever theme of financial work” in National Financial Work Conference in July.

        We thought that there are three “grey rhinos” affecting Chinese economy currently, i.e. enterprise leverage ratio, housing bubble and global liquidity inflection point.

First “grey rhino”: enterprise leverage ratio. In response to the impact of global financial crisis in 2008 on our economy, China introduced many stimulus policies and aimed to drive domestic economic growth by infrastructure investment, thereby entering a leverage cycle with high debts. Increase of infrastructure investment drove development of steel, cement and chemical projects with most investments from the government and large state-owned enterprise, which results in increasing leverage ratio of relevant enterprises. On the whole, China’s overall macro leverage has climbed to 279% of GDP (Fig. 3) in 2016. In particular, the leverage ratio of non-financial enterprises has risen rapidly from 98% at the end of 2008 to 197% at the end of 198%, far beyond that of developed countries like the US, Japan and UK.
        Researches by BIS indicated that higher level of debts will push economic growth when credit is relatively low or employment rate of financial departments is moderate. However, there is a threshold. Once such threshold is surpassed, finance will drag economic growth. A plenty of evidences shows that productivity will be slower when a country’s government, corporate or household debts surpass 100% of GDP. After summarizing the common features of previous financial risks, Nomura put forward the famous “5-30” rule, which means if a country’s debt ratio rises by over 30% within 5 years, the possibility of a crisis will be greatly increased. Finance is supposed to be a tool for the development of the real economy, but for a variety of reasons, a large amount of capitals flows from the real economy to the financial industry, which restricts the development of China’s real economy. From this perspective, China’s “grey rhino” has begun to move.

In this National Financial Work Conference, an emphasis was given to deleverage of state-owned enterprises, governance of local debts and normalization of financial market. Moreover, such work is stressed by words like “top priority”, “strictly control”, “lifelong responsibility” and “must” to show the importance of deleverage.

The second “grey rhino”: housing bubble. According to Global Housing Watch Report issued by IMF, Shenzhen ranks first among large cities in the world with 38.36 in terms of housing-price-to-income ratio. Among top ten cities, five are from China: Hong Kong is fourth with 34.95; Beijing, fifth, 33.32; Shanghai, sixth, 30.91; Guangzhou, tenth, 25.85 (Fig. 4). In terms of the total amount, China’s housing mortgage balance reached US$ 3.5 trillion in 2016, 2.5 times of that of Japan, and exceeding the figure before collapse of bubbles in Japan in 1990s. In terms of housing mortgage solvency ratio, such ratio in US decreased from 7.2% before financial crisis in 2007 to 4.5% in 2016, and China’s solvency ratio reached 6.6% in 2016. The total value of China’s real estate market has hit RMB 300 trillion Yuan, about 6 times of that of the UK, and close to the sum of that of both US and Japan. It accounts for 411% of GDP, far beyond the international average level of 260%.

Housing bubble is caused by various factors, mainly the scarcity of land, the existence of asset shortage in household investment and the use of leverage. In addition, the emergency plan of RMB 4 trillion Yuan launched to address global financial crisis in 2008 has directly led to overuse of financial policies, excess liquidity and over-marketization of real estate. In 2016, the annual amount of social financing was RMB 17.8 trillion Yuan, growing by 15.5% on a year-on-year basis and of which RMB 12.6 trillion Yuan was newly added loan. Based on our calculation, balance of social financing reached 220% of GDP in last year. If local government bonds are considered, this ratio will be higher (Fig.5).

The high real estate price reflects that one the one hand, financial system allocates excessive monetary credit resources to real estate industry but less financial support to weak links in economic and social development, which exerts crowing out effect on real economies, especially small and medium-sized enterprises, and on the other, the rapid rise of house price damages the resource allocation and risk management functions of financial system, and the ratio of medium and long term loans to new loans of resident households roars. In 2016, 60% of new loans of big four banks are invested into real property industry, accounting for 23% of the total investments. China has never experienced a real adjustment in the real estate market, so people have the illusion that house prices will never fall. However, once the bubble bursts, the “grey rhino” will rush to you and catch you off guard.

        The third “grey rhino”: global liquidity inflection point. Since the financial crisis in 2008, the amount of balance sheet quickly increased from US$ 890 billion to US$ 4.47 trillion after several rounds of quantitative easing policies made by the FED. Moreover, a large-scale global excess liquidity was caused due to sheet expansion carried out by central banks of other countries simultaneously. After recovery of about ten years, the American economy began to rise. It is expected that the FED will control the rhythm and intensity of “sheet shrinkage” by utilizing interest rate and exchange rate so as to exit from quantitative easing policy as soon as possible. As claimed by the IMF in the latest issue of World Economic Outlook in July 23rd, if the normalization of the US monetary policies is faster than the expectations, it will tighten the global financial conditions and reserve the capital flow into newly emerging markets, together with appreciation of US dollars, putting pressure to new economies which have high leverage ratio, tie exchange rate to US dollars or mismatch balance sheet. If China cannot continue to focus on solving risks of financial sector and controlling excessive credit growth (mainly by tightening the macro-prudential policy), it will lead to sharp slowdown of economic growth, and have spillover effect on other countries through channels like trade, commodity price and confidence.

        This year, pressure on depreciation of RMB exchange rate has weakened significantly and capital outflows have eased thanks to multiple favorable factors such as restatement on capital control policy by regulatory departments and the weakening US dollars. However, if the global liquidity reduction is faster than market expectations, it will exert a new round of pressure on Chinese capital outflows and RMB depreciation. In addition, the ratio of total value of stock market to GDP of G7 countries (US, Japan, German, UK, France, Italy and Canada) is close to the peak values in 2000 and 2008 again. After reaching these two peaks, market collapsed and a huge impact was caused to the global economy (Fig.6). Therefore, we seem to see the figure of another “grey rhino”.

        Once these three “grey rhinos” mentioned above move and rush towards you, will you survive unscathed if you choose stand still? When “grey rhinos” are far across the distance, you still have enough time to react. However, when a hug “grey rhino” stares at your eyes, you will be panicked and out of your mind. What’s worse, a “grey rhino” may turn into a pack of “grey rhinos” and in zoology it represents a threat of crash. For different stages of a crisis, Michele Wucker gives the “grey rhino hunting strategy”:

       First, acknowledge the existence of a crisis. Only by acknowledging the existence of a “grey rhino”, can we avoid people’s cognitive obstacles to a crisis and grasp the life-gate of the “grey rhino”.


       Second, stand downwind and keep your eyes on the distance, through which we will not only observe the whole approaching course of a crisis, but also make correct choice and take proper actions.


  

[Original Research] Is “Grey Rhino” Far From Us?

[Original Research] Is “Grey Rhino” Far From Us?

[Original Research] Is “Grey Rhino” Far From Us?

[Original Research] Is “Grey Rhino” Far From Us?

[Original Research] Is “Grey Rhino” Far From Us?

[Original Research] Is “Grey Rhino” Far From Us?

[Original Research] Is “Grey Rhino” Far From Us?

[Original Research] Is “Grey Rhino” Far From Us?

   Third, define the nature of “grey rhino” crisis accurately. By defining the nature of crisis, determine the order of priority of crisis and then solve problems in a targeted manner.

 

Fourth, do not stand still. If possible, just make plans and stick to them. If you are unable to kill the “grey rhino” in one strike, you shall take measures to delay the ultimate outbreak of the crisis.

 

    Fifth, do not waste a crisis. We must recognize the uniqueness of the crisis and take it as an opportunity to not only avoid disaster but also benefit from it.

    Before a “grey rhino” runs towards us, it is critical to think about actions that can be done at each stage and take necessary measures to build a safety wall. As revealed by the global financial crisis triggered by the American sub-prime crisis in 2007, the correlation between financial system and real economy, stability of financial system and asset price bubble are ignored in the financial regulatory system as monetary policies always focus on inflation and macro-economy. This year, financial deleverage has become the core of the Chinese government’s efforts to maintain financial stability. On the one hand, monetary policies changed from “prudent” into “healthy neutral” to improve interest rate of money market and increase debt cost of financial institutions so as to squeeze the room for capital arbitrage by a modest tightening of liquidity; on the other hand, the intensity of macro-prudential management has been strengthened and especially in the first quarter of this year, the off-balance-sheet financing has been formerly included into the scope of broad credit monitoring to restrain the rapid expansion of off-balance-sheet activities. In this National Financial Work Conference, the General Secretary XI Jinping put forward four important rules that need to be grasped for better financial work, namely “back to the origin, optimize the structure, strengthen the supervision and market-oriented”. Moreover, it was stressed in the conference that we should give more priority to prevention and resolution of systematic financial risks, and realize scientific prevention and early recognition, warning, discovery and treatment towards risks in major fields, and improve financial security line and risk emergency response mechanism. The Financial Stability and Development Committee under the State Council is newly established to enhance financial regulation & coordination, improve regulatory drawbacks, strengthen the prevention of “grey rhino” and pay regular attention to risks.  
 

    It is worth noting that Chinese financial regulatory departments shall carry out financial deleverage prudently in an intensity and rhythm that the stability of financial market will not be affected by rapid deleverage on the one hand, and the room for empty operation of funds in the financial system is squeezed and such funds are forced to flow into real sectors to push industrial transformation and upgrading on the other. Experience in many countries has shown that under the background of high asset price in economic expansion period, the current asset-liability ratio underestimates the real leverage ratio. If the economic downturn meets collapse of capital bubble, there will be a spiral cycle of “deleverage – output shrinkage – price fall”, i.e. financial accelerator effect in economic downturn period. Then, the economic recession will be more serious under the effect of “deleverage” after “debt – deflation”, and market liquidity will be likely to go from one extreme to the other, from excess to scarcity.

    Under the context that Chinese economy is still favorable, we shall guard against these risks around us but neglected. You can see this “bulky and logy” “grey rhino” far away from you, but once you put your eyes elsewhere, this “grey rhino” may catch you off guard with straightforward path and fulminic attack force, and then directly push you down!

 

News / Related news More
2017 - 12 - 04
Yongquan Forum and Baishaquan · ZUFE Strategic Cooperation Signing Ceremony were held on the afternoon of 3rd December at Baishaquan M&A Block. Yongquan Forum is a major communication and project paring brand created by Baishaquan M&A Block. By hold sharing session and salon or giving speech each month, the forum serves as a communication platform for industry leaders with certai...
2017 - 11 - 30
CAI Gangqing, president and deputy secretary of the Party Committee of Anji Industrial Investment Development Group (IIDG) paid a visit to TTGG with 5 colleagues on the afternoon of 30th November. ZOU Jin, general manager and deputy secretary of the Party Committee of IIDG, FANG Jun, vice-general manager, and other department heads of IIDG attended the discussion. Our managing partner ZHANG Y...
2017 - 11 - 28
Zvi Heifetz, Israeli Ambassador to China, paid a visit to TTGG along with his wife on the evening of 28th November 2017. They were greeted by TTGG’s president YU Baohong. ZHANG Yu and GUO Feng, managing partners of TTGG, LI Xiang, general-manager of Investment Management Department, and other department heads also took part in the meeting.After greeting, YU briefly introduced TTGG’s hist...
2017 - 08 - 14
With the accelerating rhythm of the society, more and more white-collars are feeling stressed under modern work environments. In fact, such stress primarily results from the target-oriented time management. The key factors facilitating their abilities to improve time management efficiency and effectiveness are: how to find the causes of inefficiency, how to distinguish between the important things...
Copyright © 2016 - 2019 Zhejiang Paradise Silicon Valley Asset Management Group Co., Ltd
犀牛云提供企业云服务
X
1

QQ设置

3

SKYPE 设置

4

阿里旺旺设置

等待加载动态数据...

等待加载动态数据...

5

电话号码管理

  • 400-826-0806
6

二维码管理

等待加载动态数据...

等待加载动态数据...

展开