August 08, 2013

August 08, 2013

Beijing Begins Promoting Private Investment to Ease Strains on Local Government Financing

Two weeks ago, in commenting on the fragile state of China’s local governments’ finances, we noted that the central government might lever up while the local governments gradually lever down.  Over the course of time, there could be a “recapitalization by attrition” as local government borrowing declines and steady economic growth reduces the proportion of bad debts.

At last Wednesday’s Politburo meeting, however, Chinese Premier Li Keqiang laid out a different plan that may not have an immediate, short-term impact, but may be more significant moving forward.

What did Chinese Premier lay out and propose?  Is this a positive development for China? 

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U.K. and European Regulators Show Some Teeth: Proposed Leverage Rules Challenge Big Banks

At the end of June, big European banks lost a battle in the ongoing war regulators are waging as they try to rein in over-leveraged institutions and defend against the risk of future crises.  The Basel Committee on Banking Supervision proposed new rules that would evaluate banks on the basis of “gross leverage,” and set a 3 percent requirement.

Gross Leverage Requirements Take Center Stage

One primary difference with present capital requirements — and one much disliked by banks — is that the new leverage rules wouldn’t distinguish between the levels of risk associated with banks’ assets.  Note that a bank’s “assets” includes debt owed to it — whether that’s government bonds, cash deposited in the central bank, or a complex derivative security.  Regulators are concerned that in the past, banks gamed the evaluation of risk to make themselves appear healthier than they really were, especially in the run-up to the financial crisis and its ongoing European aftermath.  So they’re imposing gross leverage requirements as a simpler, less easily manipulated measure...

First to Respond

Barclays and Deutsche Bank have been the first to respond, and they’ve chosen very different strategies…

The Two AJs – Barclays’ Antony Jenkins and DB’s Anshu Jain — Presiding Over Different Strategic Responses to New Regulations

Barclays and DB.jpg
Source: Financial Times

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Recovery Progressing: The Developed Economies Pick Up the Baton from the Emerging Markets

Global aggregate PMI — the purchasing managers’ index, a measure of expansion in manufacturing — increased in July to 51.2 from June’s 50.3 — a measure above 50 indicates expansion.  However, the aggregate masks a divergence — the developed economies are getting stronger, while emerging markets are getting softer.  It seems that in the aftermath of recovery, as China moderates and restructures, the growth baton is passing to Japan, the U.S., and Europe.

Another measure of manufacturing expansion, the Institute for Supply Management’s index, came in very positive in the U.S. in July, reaching a two-year high at 55.4.  It’s possible that this leading uptrend in production will soon lead to better manufacturing payroll numbers…

A piece we read in Bloomberg reinforced the message we delivered in this letter last week: that China’s highly-leveraged corporate sector and local governments may eventually produce a bumper crop of nonperforming loans, but that this does not foreshadow a 2008-style financial collapse in China…

China: Less Important Than You Think?


Guild Basic Needs IndexTM

According to the GBNI data for June, the cost of food, clothing, shelter and energy components are up about 6.1% over the past 12 months.

GBNI June 2013.jpg

Track our analysis in these letters and at

In this week’s Premium Global Market Commentary available to Gold Subscribers, we feature:

  • Executive Summary 


  • Reform of China’s One Child Policy

    The Chinese government has been moderating the country’s “one-child” policy for at least 15 years, especially in rural areas; and many in China’s growing middle class have had the financial wherewithal to flout the rule for some time.  Nonetheless, the policy has been effective at lowering China’s fertility rate…
  • Good News for Baby Food and Clothing Suppliers – and Eventually for Education CompaniesWhatever the long-term effects of the policy change — and it will likely just be a moderation of the same kind of demographic trends that every nation experiences as it develops and its fertility rate declines — the short-term effects are more interesting from the standpoint of an investor…
  • Fed Chiefs: The Good, the Bad, and the UglyFor months, trading volatility has seemed to hang on every word of the chairman of the Federal Reserve, and with media scrutiny of the prospects for his successor has remained at a constant fever pitch.  Markets may have digested the likely prospect of an approach to the tapering of QE later this year, but the post-crisis superstar role of the Fed’s chairman is still something new…


  • Guild’s Premium Global Market Summary

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