Asia Tea Time - Cup 40 ☕

This week I talk shadow banking in China, position sizing, and the launch of Bitcoin ETFs.

Macro in Asia

Property crisis flares up as China’s shadow bank Zhongzhi files for bankruptcy

Zhongzhi Enterprise Group, a shadow banking conglomerate in China, filed for bankruptcy liquidation late last week as it was unable to repay its debt. 

Chinese stocks duly fell on Monday and ended the week down.

Why it’s happening

• The property debt crisis in China has been one of the biggest concerns of investors but mainly over property developers who are hugely indebted – leaving a lot of property buyers in China without the homes they paid for. 

• Zhongzhi is related in that being a shadow bank means it sold trust products to retail investors, and some of these products were created by developers’ wealth management arms. Juicy yields were offered, sometimes as high as 8%.

Why it matters

• With China’s economy slowing and the Chinese consumer starting to tighten their purse strings, any other wobbles for the financial system will likely impact both sentiment and growth.

• China’s stock markets were the worst-performing major ones in the whole of 2023 so news like this isn’t going to help them.

What’s next?

• Keep watching for whether the Chinese government steps in with a “bazooka” stimulus package in the near future, as many investors and economists are urging it to do. 

Tim’s Take 

Zhongzhi is a typical shadow bank – multiple shareholders, unclear related entities and a web of secrecy. 

These shadow banks spawned to meet financing needs and in response to the fact that China’s financial system couldn’t keep up with the rapid development of the economy.

Unfortunately, the products sold by these shadow banks hasn’t turned out so well for many of the investors who bought into the trust products. There is some consolation in that the majority of investors were ultra-high net worth individuals. 

💡

As a result, there’ll likely be less public sympathy and the individuals involved also aren’t likely to end up protesting – something middle class individuals who were invested in wealth management products have done in the past. 

The problem with a lot of these trust products is that a lot are sold through “off balance sheet” channels. The upshot? It means that a lot of the funds invested might not ever be recovered in a winding up process.

While Zhongzhi is by no means a systemic collapse (i.e. it’s not going to blow up the Chinese economy), the bankruptcy is just one more reason why investors are staying away from China for now. 

The opaque nature of the collapse and the secrecy surrounding it is an apt microcosm of the broader transparency issues that the Chinese economy has. 

Until there’s a deal-breaking U-turn from Chinese authorities (by easing up big time on fiscal and monetary policy), the malaise in the Chinese economy and stock market are likely to continue.

Tim's Money Tip of the Week

When you’re investing and building a portfolio of stocks, funds, bonds, exchange-traded funds (ETFs) – whatever it is – the first thing we naturally gravitate towards is exactly what we’re buying.

Yes, that’s clearly important because that decides your returns over time. But beyond that, we should also take note of one important factor which tends to get overlooked – position sizing.

What does that mean? It basically means how much money (or percentage of your overall liquid net worth) is in one fund, stock, ETF etc.

Clearly, you’re going to have less concentration risk if you own an ETF that holds 500 or 1,000 stocks versus holding, say, two or three stocks.

But even if you have a portfolio of ETFs, you should be looking at organising it according to the stock market’s/bond market’s size (relative to its share of the value of that market worldwide).

That could mean getting more exposure to Europe or Asia – given the US is by far the largest – or even specific countries like Japan or India.

On the flip side, if you have stocks and you want to build a diversified portfolio, you should be looking to accumulate around 20-25 stocks over time across different sectors.

That way, your net wealth will be spread out and not too concentrated in one single company. 

Knowing when to trim your positions and let your winners run will be important, of course, but understanding the risk of position sizing is crucial.

At the end of the day, responsible position sizing when investing will let you sleep easy at night.  

Story of the Week

The wild world of cryptocurrencies got a boost earlier this week as the key US regulator – the Securities and Exchange Commission (SEC) – finally approved spot Bitcoin ETFs.

A lot of the world’s biggest asset managers (think BlackRock’s iShares and Fidelity) have jumped on the bandwagon and launched their own Bitcoin ETFs.

Bitcoin’s price has surged in the past six months, on expectations that this approval was forthcoming, and went “to the moon” in 2023 by notching up a 150% gain.

However, where it goes from here is anyone’s guess. What’s not in doubt is the fact that the launch of these ETFs will give the industry a much-needed boost in both transparency and credibility.