Trying to deleverage China without blowing up the system

By Ambrose Evans-Pritchard

Last updated: January 22nd, 2014

Photo: Rex Features

China is walking a tightrope without a net. There is an acute cash crunch. Credit at a viable cost is being fiercely rationed. Foreign buyers with money in hand can – and arebuying up nearly completed buildings from distressed developers for a song.

The shadow banking system has risen to 30pc of all lending from 20pc in barely more than a year. The growth generated by each extra yuan of credit has fallen by three quarters from 1.0 to 0.25 in five years, evidence of credit exhaustion.

That was the gist of a fascinating gathering on China at the World Economic Forum in Davos, including CITIC Chairman Zhang Yichen, the president of the Chinese Academy of Social Sciences Wang Weiguang, and Blackstone chairman Stephen Schwarzman, among others.

It was Chatham House rules so they cannot be quoted by name (except for one), but I pass on a few general thoughts to readers.

"They are trying to deleverage without blowing the whole thing up," said CITIC's Zhang Yichen.
"The M2 money supply is 120 trillion RMB but that is still not enough cash because velocity of money is very slow, and interest rates are going up."

"My guess is that they will manage it. The US couldn't contain Lehman contagion but in China all contracts can be renegotiated, so it is very hard to have a domino effect. We'll see a slow deflating of the bubble," he said.

"The stock market is not a true market. It is wholly controlled by the government. Even under the new reforms some of the rules are mind-boggling. They are trying so hard to contain speculation that they ended up causing more speculation. They are trying to control price of IPOs, to discourage the price going up. It is a perfect example why markets should be left alone."

There was general agreement that there will be "no more stimulus" for now. President Xi Jinping is determined to tough it out.

The moment the Chinese authorities open up the capital account and make the RMB convertible there will be a rush of money abroad. That will unleash captive funds in property that have nowhere else to go, and could trigger a disorderly fall in real estate prices, and much else besides. So the government will not do it yet.

An ex-global regulator sitting next to me disputed the 30pc figure for the shadow banking sector, muttering out loud that it was really 50pc. Others agreed.

The authorities are alarmed at the mushrooming difficulties of the trust fund, especially the looming default of the China Credit Trust Co on $500m of debt. However, they will let some trusts go bust to teach a lesson in moral hazard. There will be haircuts, but not wipeouts.

US-China rivalry could become ugly. The West is in deep structural crisis, and will not face up to its own failures. It will blame China. Both Xi Jinping and Barack Obama are worried about this in the long-run. (To which I would say, why did China then impose an air identification control zone over a big chunk of the East China Sea, including the Senkaku Islands?)

Nothing said changes my mind that China is riding a $24 trillion credit tiger that it cannot really control. Loans have jumped from 120pc of GDP to around 220pc since the post-Lehman blitz (George Magnus from UBS says it may be 250pc by now).

As Fitch says, this is an unprecedented rise in the credit-GDP matrix in any large state in modern times. It will not end with a Western style banking crash because the financial system is an arm of the state. It will end in an entirely different way. Since Chinese credit now matches the entire US and Japanese banking systems combined in dollar worth, this is no longer a local Chinese story. It is part of our lives too now.

Now off to hear Shinzo Abe talk about Abenomics live and in person.

Markets Insight

January 23, 2014 6:45 am

Money markets sound alarm for ECB

Rapid withdrawal of liquidity has pushed up overnight lending rate

Sudden rises in very short-term market interest rates – the cost of borrowing overnight, for instance usually spell trouble. Soaring Chinese interbank borrowing costs at the end of last year highlighted the central bank’s difficulties in curbing the most egregious financing practices of the country’s banks.

Less noticed beyond a few specialist circles, the European Central Bank has this year also seen market interest rates risingnot as acutely as in China, but possibly sufficiently to force a change in strategy.

As in China the rises reflect shifts in the banking landscapesomething the ECB is keen to encourage. But the risk is of rising market rates feeding through into higher borrowing costs for businesses and consumers when economic growth remains weak. An unwanted, premature monetary policy tightening – via higher market interest rates – could tip the eurozone into a dangerous deflationary slump.


The ECB’s problem is largely self-inflicted. When the eurozone debt crisis was at its most intense in late 2011, Mario Draghi, the new ECB president, decided to flood banks with a “wall of money”.

Eurozone banks were urged to take advantage of cheap three-year ECB loans, or “longer-term refinancing operations”, but to ensure sufficient take-up the ECB sweetened its offer with an early repayment clause. Rather than being locked into holding ECB funds on their books for the full three years, banks could repay after a year.

The sweetener helped ensure the LTROs were successful in averting disaster: banks borrowed more than €1tn and the eurozone crisis eased, at least temporarily.

By the time the early repayment clause could be exercised in January 2013, the situation had changed. With the eurozone clearly on the mend and financial tensions eased, repayments quickly flowed.

At the end of last week €450bn had been repaid. And the ECB’s balance sheet has shrunk significantly: relative to gross domestic product, it will soon be smaller than the US Federal Reserve’s.

Withdrawing all that liquidity has pushed up market interest rates. As a result of cuts in the ECB’s main policy rate, the euro overnight index average (Eonia) – an interest rate benchmark – had crashed almost to zero (excluding spikes caused by technical factors). This week it was back above 35 basis points.

You can argue that the sharp rise is good news. Banks are repaying ECB money because their finances are healthier and they can borrow again in markets.

Strikingly, a quarter of LTRO repayments have been by banks in Spain, on the eurozone’s crisis hitperiphery”, according to Barclays. “A higher Eonia is a small price to pay for a return of investors to the periphery,” says Laurent Fransolet, the bank’s head of fixed income research.

The rises so far in Eonia are also modest compared with the peaks seen during the crisis years. What is more, repayment of the LTROs – which were the eurozone’s answer to “quantitative easing – are making easier an eventual exit from the ECB’s exceptionally loose monetary policies.

While the Fed has struggled to calibrate manually the tapering, or scaling back, of its asset purchase programme without creating turmoil in global financial markets, the pace of the ECB’s exit is driven by the market; banks repay ECB funds as their finances improve.

Wrong kind of exit

In the long run that might arguably produce better economic outcomes. The snag is that this seems precisely the wrong time for an ECB exit.

While the LTROs were designed to avert a looming bank crisis, the ECB’s task in coming months is to prevent sharp falls in eurozone inflation from turning into a deflationary shock. The low pace at which the Fed is unwinding its crisis policies has kept the euro high against the dollar, adding to downward pressure on eurozone prices.

Mr Draghi could try to override the automatic tightening effects of LTRO payments, but that may not be easy. Given that banks are repaying LTROs, take-up of any fresh offers of long-term ECB loans might be embarrassingly weak.

The ECB could cut its main policy rate again already at just 0.25 per cent. Beyond that, the only alternative may be full-blown US-style quantitative easing, an option it has resisted so far.

We are not at that point yet. Mr Draghi points out rightly that there is no clear relationship between measures of “excess liquidity” and EoniaLTRO repayments are only part of the story. But the ECB is braced for an acceleration in repayments. From this month the maturity of outstanding loans has fallen below a year, making them less useful to banks needing to impress regulators.

The warning lights are flashing in money markets.

Copyright The Financial Times Limited 2014.

Health & Wellness

Custom-Fit Treatments for Prostate Cancer

Disease fight takes a page out of the breast-cancer approach

By Ron Winslow

Jan. 13, 2014 7:12 p.m. ET

In a bid to improve treatment for men with high-risk prostate cancer, some researchers want to take a page from the playbook for breast cancer.

Medical scientists are working to develop strategies for treating prostate tumors that are tailored to individual patients, as is currently done for many women with breast cancer. Fresh advances in the understanding of prostate cancer suggest that some men with a high-risk form of the disease might benefit from more aggressive treatment.


The average age of prostate cancer diagnosis. The chance of having it rises rapidly after age 50.

1 in 36

Men will die of prostate cancer, the second leading cause of cancer death in American men, behind lung cancer.

Inside a Prostate-Cancer Cell


Other men may benefit from less treatment. For instance, radiation plus hormone therapy, also called androgen-deprivation therapy, is a common strategy to kill prostate tumors. But a recent study from researchers at Memorial Sloan-Kettering Cancer Center suggests that analyzing a tumor's DNA may identify patients who would do just as well with radiation alone. If borne out in further research, some men may be able to skip hormone therapy, avoiding side effects that include loss of libido and heart disease.

The developments come amid changes in the way many types of cancer are identified and treated. The changes are being driven in part by the use of genomic information that defines tumors by their underlying biology and provides clues about drivers of the disease not available by conventional exams.

Researchers say, for instance, that several new genomic prostate-cancer tests can help separate high-risk tumors from those at low or intermediate risk, offering information to doctors and patients to guide treatment choices.
About 240,000 men in the U.S. are diagnosed with prostate cancer each year. Most cases are low-risk forms of the disease that will have little effect on their lives or longevity. In these cases, a big concern is that overtreating the cancer puts these men at unnecessary risk for impotence, incontinence and other complications.

About 20% of diagnosed men are considered at high risk for having their cancers spread beyond the prostate gland based on a measure called the Gleason score and other factors. For some men with an aggressive form of the disease, the 10-year-survival rate is well below 50%. "We may not be treating them aggressively enough," says William Polkinghorn, a radiation oncologist at Memorial Sloan-Kettering, in New York.

Some 95% of men who die of the disease are initially diagnosed with cancer that is confined to the prostate region, says Philip Kantoff, director of the Lank Center for genitourinary oncology at the Harvard-affiliated Dana-Farber Cancer Institute, in Boston. Finding ways to "cure" such patients is "mission central," he says. Once cancer spreads beyond the prostatetypically to the bone—it is considered incurable.

The current standard of care for high-risk prostate cancer is either surgery to remove the cancerous gland or radiation plus hormone therapy to kill the tumor. Some men get radiation after surgery, but generally the two approaches aren't given together.

By comparison, women with high-risk breast cancer, which like prostate cancer is also typically fueled by sex hormones, typically get a combination of surgery, radiation and drugs. Medicines are tailored to patients based on whether the hormones estrogen and progesterone or a gene called HER2 is fueling the tumor.

Aggressive treatment of these women has resulted in improved survival and relapse rates, says Charles Sawyers, head of the human oncology and pathogenesis program at Memorial Sloan-Kettering. Whether a similar approach would improve survival for high-risk prostate cancer isn't certain but it is "a conversation that needs to be had in a more vigorous way," he says.

There is some evidence it could work. Research from clinical trials, for instance, suggests that giving radiation soon after surgery increases the time a patient lives without the disease coming back, says Adam Dicker, head of radiation oncology at Jefferson Medical College of Jefferson University, in Philadelphia.

But there have been few studies looking at the effect of combining treatments. It can take 10 to 15 years to complete a trial testing a multipronged strategy versus a single-treatment approach.

Genetic tests have recently become available that examine tumors for molecular signatures that predict whether a tumor is high- or low-risk and can help doctors make treatment decisions.

A test marketed by San Diego company GenomeDx Biosciences Inc. yields a molecular profile that can indicate, for instance, whether a man who undergoes prostate surgery to remove the tumor would also benefit from radiation treatment, says Doug Golginow, the company's chief executive.

It "doesn't tell you if a specific chemotherapy" will work against the tumor, but "it sorts out a lot of confusion by telling you whether you have the kind of disease that's going to kill you or not kill you," he says.
Genomic Health Inc., in Redwood City, Calif., and Myriad Genetics Inc., of Salt Lake City, sell tests that, for instance, can help distinguish between high- and low-risk prostate cancers, possibly enabling men to delay or forgo aggressive treatment.

Dr. Polkinghorn's research at Sloan-Kettering yielded another genetic signature that could tell men when they need less therapy. He led a recent study that showed androgen's role in prostate cancer goes beyond providing fuel for the tumor's growth; the male sex hormone also activates androgen receptors that turn on genes which repair damaged DNA. The finding is important because radiation kills tumor cells by breaking DNA. It also explains a two-decade-old mystery over why combining radiation with anti-androgen drugs is significantly more effective against high-risk cancer than radiation alone.

Depriving the tumor of androgen "takes the sunscreen off the prostate cancer cell and makes it more sensitive to radiation," Dr. Polkinghorn says. The report was published in November in the journal Cancer Discovery.

The analysis revealed that levels of androgen-receptor activity vary widely between patients. This suggests that patients with high androgen activity may benefit from hormone therapy while those with low activity levels may gain little from it and could forgo the treatment.

The researchers plan to validate the result by testing it on a database of prostate-tumor specimens gathered from a variety of clinical trials where the outcomes of the patients are known.

Dr. Polkinghorn now runs a clinic for high-risk prostate-cancer patients. He and his colleagues are developing a protocol to test how well such patients respond to more aggressive therapy.

Howard Bellin, a 77-year-old recently retired plastic surgeon who had surgery to remove his cancerous prostate in October, is being treated with the approach. The conventional strategy, Dr. Bellin says, is for doctors to wait after surgery to see if the tumor comes back and then "go after it with bigger guns" or hormone therapy. He says he is being treated now with two hormone drugs and radiation, hoping that a cure lies in "treating it with your big guns right away."

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