Daily Agenda: How Big, How Manageable Is Chinese Debt?

U.S. acknowledges size of Saudi Treasury holdings; CPI cools in U.K.; Office Depot to explore options; Buffett buys stake in Apple.


Qilai Shen

A primary risk narrative among investors so far in 2016 has been rising debt levels in China and the underlying quality of many of those loans. With so much uncertainty about the real size of total debt within the Chinese economy — estimates range from 200 to more than 300 percent gross domestic product — and opaque reporting on nonperforming loans, the full scale of the problem remains unknown. Many have pinned hopes on China’s nascent corporate bond market to alleviate concerns as more private-sector lending emerges from the shadows, but results have been mixed. So far in 2016 there have been ten corporate-bond defaults, prompting China’s Securities Regulatory Commission to introduce stiffer underwriting oversight. With as many voices from the asset management industry calling the Chinese economy a bubble that resembles the mid-2000s U.S., as there are managers insisting that Beijing’s stimulus measures will work, the debate remains likely to remain in the spotlight.

Inflation moderates in U.K. The U.K. Office for National Statistics today released consumer price-inflation data for April that was somewhat weaker than expected, with the headline index expanding by an annualized 0.3 percent versus consensus forecasts for 0.5 percent, the same level recorded in March. Separately, producer prices were slightly stronger for the month with the core index level at 0.5 percent year-over-year. The pound slid versus the dollar in morning trading following the news.

U.S. discloses Saudi treasury holdings. Yesterday the U.S. Treasury Department released Treasury international capital data on foreign holdings of U.S. sovereign debt for March. For the first time, this report included holdings by the Kingdom of Saudi Arabia, disclosing its possession of $116.8 billion in U.S.-issued bonds. The lack of disclosure had dated back to accords between the U.S. government and the Saudi royal family in the 1970s. The figures released fall short of prior disclosures by the Saudi government and central bank, suggesting that a large portion of Saudi reserves are held abroad.

Office Depot seeks strategic options. In a statement issued yesterday, executives of Office Depot announced that the company had engaged Bain & Co. to help the retailer explore options to maximize its value after its proposed merger with Staples was scuttled by regulators over antitrust concerns. The office-supply chain received $250 million in breakup fees when the merger was cancelled.

Fitch withdraws ratings for tobacco munis. Within 30 days, Fitch Ratings will withdraw coverage of municipal bonds tied to tobacco legal settlements, according to a statement issued yesterday. Fitch analysts say payments by cigarette producers have become impossible to predict for the roughly $34 billion in municipal bonds tied to health claims brought by the states. The claims led to a massive settlement in 1998. The move came after officials in New York and California modified existing agreements with cigarette companies.

Berkshire’s Apple stake revealed. In a regulatory filing disclosed yesterday, Warren Buffett’s Berkshire Hathaway listed a 9.8 million share position in Apple as of the end of the first quarter of the year. The disclosure came as Apple shares are trading at multi-year lows after the company announced a year-over-year decline in revenues for the first time in 13 years. Buffett has long eschewed investments in cutting-edge technology companies.