(Jason Lee/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: Wall Street and China, Chinese debt and “Lake Woebegone” ratings, Europe’s banks, lawyers seeing green, and Poland flunks an Estonian tax lesson.

Wall Street, Woke Capitalism, and China

Whether it’s from the investment world, big business, Davos, or, these days, no small portion of business-oriented media, we are currently hearing a great deal from prominent figures in the private sector about the need to subordinate shareholder rights to various policy objectives, ranging from climate change to greater boardroom diversity and much more besides.

But when it comes to doing business with China, which, last time I looked, was a corrupt, corporatist oligarchy with communist characteristics, characteristics that have long included concentration camps, slave labor, and, more recently, a revived genocide, with the main target now being Uyghurs, rather than Tibetans, the voices from the business pulpit go quiet.

From today’s Wall Street Journal:

In February 2018, Beijing’s chief trade negotiator was in Washington to try to avert a trade war. Before meeting his U.S. counterparts, he turned to a select group of American business executives—mostly from Wall Street.

“We need your help,” Vice Premier Liu He told guests gathered in a hotel near the White House, according to people with knowledge of the matter. They included BlackRock Chief Executive Larry Fink, David Solomon, then Goldman Sachs Group’s second-in-command, and JPMorgan Chase & Co.’s Jamie Dimon, there as chairman of the Business Roundtable lobbying group.

Yes, that’s the same Larry Fink who has been pressing so hard for more “socially responsible” investing and the same Jamie Dimon who has been calling for more inclusive capitalism, the CEO of a bank which is (too slowly, according to activists) disengaging from businesses of which, on climate grounds, it disapproves. And, yes, that’s the same Goldman Sachs that did this:

As Goldman Sachs Group Inc. moves to increase diversity on corporate boards, the investment bank isn’t extending the initiative to a particularly challenged region: Asia.

Chief Executive Officer David Solomon revealed last week that starting in July the bank won’t handle initial public offerings for companies that lack either a female or diverse director.

But the rule applies only to IPOs in the U.S. and Europe. Asia’s exclusion is striking, given how common all-male boards are in the region. Other bastions of male dominance, including Latin America and the Middle East, also went unmentioned.

Back to the WSJ:

Looking for allies in trade talks with the Trump administration, Mr. Liu dangled a prize, the people say: Beijing offered to give U.S. financial firms a new opportunity to expand in China.

Shortly after the gathering, Mr. Liu presented China’s position to the U.S. side, including the financial opening. Most other U.S. industries were disappointed. The Trump administration rejected the offer as too narrow and sent the Chinese packing.

But Mr. Liu didn’t go home empty-handed. The get-together helped turn Wall Street into one of the biggest cheerleaders for a deal. In the trade agreement that was eventually signed in January, China’s financial opening stood out as a prominent concession.

America’s money men have long held a special place in Beijing’s corridors of power, but until now their firms have had little to show for it. The Trump administration has tried to “decouple” parts of the two economies—a direction that President-elect Joe Biden would have a hard time reversing and may embrace. The broader U.S. business world also has soured on engagement with China.

Wall Street, however, is going all in. Since the signing of the trade deal, JPMorgan will get full control of a futures venture in which it had a minority stake. Goldman Sachs and Morgan Stanley became controlling owners of their Chinese securities ventures. Citigroup Inc., meanwhile, won a custodian license to act as a safe keeper of securities held by funds operating in the country.

Meanwhile the New York Times recently reported that:

Nike and Coca-Cola are among the major companies and business groups lobbying Congress to weaken a bill that would ban imported goods made with forced labor in China’s Xinjiang region, according to congressional staff members and other people familiar with the matter, as well as lobbying records that show vast spending on the legislation . . .

Read the full report and judge for yourself, but one or two of the larger woke corporations do make an appearance.

It’s almost as if double standards were being applied.

But there’s rather more positive news from the Journal:

New legislation that is likely to force some Chinese companies off U.S. exchanges will accelerate a migration under way since last year.

On Wednesday, the U.S. House of Representatives unanimously approved a bill that would ban trading in shares of foreign companies whose audit papers aren’t inspected by U.S. regulators for three consecutive years. The measure passed the Senate in May and is expected to be signed into law by President Trump.

China’s government and financial regulators have long resisted U.S. demands to see the audit papers of Chinese companies whose shares are traded on the New York Stock Exchange or the Nasdaq Stock Market . . .

(We discussed this issue in a Capital Note back in August.)

While “bipartisan” is not always synonymous with good (indeed it can be the opposite), a unanimous vote would indicate that the Biden administration will have difficulty in reversing course, even should it want to. It’s also worth noting that the bill that would prohibit the import of certain goods made by forced Muslim labor in China passed the House in September by a margin of 406 to 3.

Around the Web

Nominal negative interest rates are, in my view, an invitation to disaster, even more so when the borrower is located within a profoundly dysfunctional system, and yes, China is profoundly dysfunctional, at least for those who are not embedded within the system.

Outside lenders and investors, therefore, should only get involved in that market if (1) they are prepared to overlook the concentration camps (and all the rest) and (2) if the returns look exceptionally good.

I’m not convinced that this counts as exceptionally good.

Almost Daily Grant’s:

[O]n Nov. 19, China sold €4 billion in euro-pay sovereign debt including a five-year tranche priced-to-yield minus 0.152%.  That’s the Middle Kingdom’s first foray into the negative-rate club, according to Dealogic. The deal was covered four-and-a-half times over, according to Deutsche Bank head of China capital markets Samuel Fischer, who helped oversee the sale.


However, Grant’s reports that some lenders are losing their taste for Chinese debt:

Bloomberg reports today that corporate dollar-pay bond issuance sank to $9.9 billion in November, down 52% on a sequential basis and the lowest monthly total since April.  That slump comes at a potentially inopportune time. According to data from Debtwire, Chinese state-owned enterprises face more than $3 billion in high-yield dollar bond maturities in the first quarter of next year, by far the busiest quarterly maturity schedule through at least 2023.

One potential explanation for the financing slowdown: A string of recent defaults from those state-owned enterprises across various geographical regions and sectors… Those defaults helped trigger a selloff dealing creditor losses equivalent to RMB 60 billion ($9 billion), a local broker estimated to Caixin on Nov. 24.  Some 10 SoE’s have defaulted so far this year, representing 40% of total such defaults over the past five years.

Suddenly skittish investors have tightened their wallets in response, forcing cash-hungry outfits to pay up, with an unnamed Shanxi-based coal miner reportedly paying 5% coupon for ultra-short-term financing. “This might be a historic credit crisis,” one anonymous investor, who held bonds issued by both Yongcheng and Brilliance, told Caixin.  One senior regulator showed limited sympathy regarding those fears, rhetorically asking in response: “When creditors lent so much money to [now-stricken SoEs], did they conduct their risk control properly?”

I think we know the answer to that.


A key feature of the recent credit scare: A Lake Woebegone-type ratings regime, in which virtually all comers are well above average. More than 98% of outstanding bond issuance in China comes from those rated double-A and above according to Wind Data Services, while some 57% of all onshore corporate debt garnered a triple-A-rating as of mid-October per asset manager Invesco Ltd, up from 38% five years earlier.  Indeed, both Brilliance and Yongcheng had enjoyed pristine triple-A ratings from China’s onshore credit rating agencies.  The recent spate of trouble has done little to change that. According to Wind Data Service, only five Chinese companies out of more than 5,000 have been downgraded below the double-A threshold since the Yongcheng and Brilliance defaults.

“China’s rating agencies are even worse than [those] in the U.S.” Andrew Collier, managing director of Orient Capital Management, groused to the Financial Times. “They’re not only beholden to the customer but also [to] the government.”

Like a home-plate umpire, the Chinese Communist Party is always right.

What could possibly go wrong?

Another reason for thinking that the European Central Bank will be keeping rates low for as long as it can, via the Financial Times:

Europe’s top banking supervisor is writing to the region’s biggest lenders to warn that many of them are failing to do enough to prepare for a likely…

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