ASH BENNINGTON: It's Tuesday, May 26th, 2020, just after market close here in New York. This is the Real Vision Daily Briefing. I'm going to be joined shortly by Managing Editor Ed Harrison, but first, Jack Farley with the latest market news.
JACK FARLEY: Thanks, Ash. I know you and Ed have a lot of thoughts about China, the relationship between China and the United States, and the possibility of a new Cold War. I want to zoom in on China by looking at a historic event within a niche asset class there, convertible bonds. There's a lot of action going on. A hybrid fixed income security that gives investors the option to turn debt into shares if they reach a certain level, convertible bonds have been on an unprecedented boom in China. Chinese companies have rushed into secure the cheap financing.
In 2019, Chinese borrowers raised $55 billion in convertible bonds, the same amount that was raised in 2017 and 2018 combined. Investors zeal for Chinese converts only heightened as COVID-19 spread in Wuhan and throughout China. The bull market accelerated, and issuance has showed no sign of slowing. On May 13th, issuance for the month had already swelled to $1.68 billion, the first time that monthly issuance for Chinese converts had passed $1 billion since September of last year.
Now, there are many possible reasons for this. One is that investors move to de risk their holding, so they sold their stocks off in January and move to what seemed like safer ground. In addition, convertible bonds become especially attractive in times of volatility, because as a hybrid asset class, they seem to give investors the best of both worlds offering the safety of fixed income as well as a taste of the equity capital if the stock hits a certain level or a premium above par. Then on the supply side, companies had lowered that conversion premia to artificially low levels. That conversion premium normally stands at 20 or 30% but in China, it had got as low as 8% so that borrowers could entice investors to come to the table.
As a result, Chinese CBs converted at a remarkable frequency. What is quite rare in the US occurred with up to 90% frequency, according to [?] Securities. There's a reason that investors have been flocking to CBs. They've done very well for investors. If you look at this chart, about 75% of all Chinese convertible bonds that reached maturity were liquidated at 130% of the principal amount, so quite good for investors, but the party may soon be over. A note issued by JiangSu HuiFeng Bio Agriculture is set to default, marking the first condition bond default in the history of Chinese markets. This convertible bond was suspended from trading in late April, and it won't resume trading unless HuiFeng post a profit for 2020, which it hasn't managed to do in 2018 or 2019.
To make matters worse, a repurchase clause could force HuiFeng to buy back the convertible bond if the underlying equity remains below 5.4 yuan until June 5th, which it has for over a year and a half. HuiFeng has repeatedly warned that it doesn't have enough money to do this, substantially increasing the risk of default. Interestingly, the instrument was rated AA by Chinese credit rating agency Pengyuan, despite getting a D from China Knowledge, it should be noted that D is the lowest rating.
We're looking at a historic event within the Chinese convertible bond market. HuiFeng has until June 5th to allay fears of insolvency. The world is watching, analysts are already warning that low rated convertible bond issuers will experience similar credit risks to HuiFeng. Meanwhile, Chinese CBs have hit choppy waters over the past few weeks. With that, let's go back to Ash and Ed.
ASH BENNINGTON: Welcome, Ed. How are you doing?
ED HARRISON: I'm doing well actually. Actually, let me be honest, I'm a little fatigued from doing a lot of cycling over the weekend but other than that, I'm doing really well.
ASH BENNINGTON: I'm a little fatigued from eating carbs. Ed, let's jump right to it. What are you looking at?
ED HARRISON: Well, I'm looking at the market to be honest with you, first and foremost, because it was up. I saw the Dow is up 500%, markets were up generally speaking. At the S&P, we closed above the 3000 level so that's well above this Fibonacci retracement that we're talking about, at 61.8. We've met the resistance at those levels and now, we're headed higher. Really what this is all due to is what I was talking about a few weeks ago is the reopening. I said the reopening would be positive for Europe.
I really hadn't expected the US to open as quickly as it had done but it has reopened almost as quickly as Europe so you're going to generalize bounce in terms of shares at this particular juncture. We haven't yet discounted of what the future holds but there's the bounce that we should have expected as a result of the reopening, and then we'll see what happens later. The thing that's on my mind as the bounce happens is also what's going on with China because that was what was feeding some of the negativity at the end of last week. For me, that's more of a longer term issue than the reopening is at this point.
ASH BENNINGTON: Dow up, I think you meant to say over 500 points, not 500%, up over 2% on the day, S&P briefly crossed above the 3000 level, to close at the 2991 level. That's up about 1% on the day. Some interesting points you mentioned on the retracement level, we're up about six 36% now from that March 23 intraday low of 2191.
ED HARRISON: Right. I think that that's great in terms of the markets over the near term but really, we've got to be looking over the medium to long term. There are a lot of headwinds there. Certainly, in terms of the economy, the market's discounting some of those at this particular juncture, but as I was saying earlier, I'm more concerned about other things on the horizon, and that includes China. I think that the China story is a lot bigger than the markets are making them out to be. It only discounted them for a little bit for one day.
For instance, today we heard news that China was going to improve more American imports. That's what the US Trade Office says, that's positive but when you really peel back the onion, you see a lot of headwinds which would suggest to me a new Cold War's brewing. We're in the middle of a new Cold War, China versus the United States.
ASH BENNINGTON: Precisely to that point, Ed, you did a true deep dive today in Credit Writedowns, where you did some really terrific analysis and also cited some really great articles, some from the South China Morning Post that people here in the US might not otherwise have seen.
ED HARRISON: South China Morning Post does a great job of looking at this. Right before we came on camera, we were talking about this. It's a Hong Kong based newspaper. It's interesting because a lot of the-- just from a political perspective, a lot of what people are thinking about as Hong Kong in particular, will the South China Morning Post be as open, able to be as open in terms of talking about the issues as it has been when we get a new regime in Hong Kong as a result of China cracking down. That will be very interesting, but I looked at my feed from South China Morning Post, I saw something that was very interesting.
Let's look at this one, China in 2017, that just came out, the World Bank says that from the data using 2017, China overtook the US as the number one in buying power in the world. It's still clinging at the same time to its developing market status. The National Statistics Agency insists that China should not be measured alongside developed countries like the US so they're trying to have it both ways. The US doesn't want to let China have it both ways and it sees China as a an emerging threat as a result of that. For example, just today, one of the headlines that the South China Morning Post was talking about was from Friday where the US Senate passed a bill to boost oversight and delist Chinese companies from exchanges because they are looking at these companies as potentially fraudulent, that they are a threat to national security, things of that nature.
This is where we're headed going forward. Another article in the South China Morning Post talked about TSMC, which is a Taiwanese chip maker. They're stopping new Huawei orders because of US restrictions, the US has said, you cannot use US components in Huawei parts. If that's the case, and you use Huawei parts in your 5G network, or wherever it might be, then you're violating US law, because those are US parts that are part of that and therefore, we can sanction you. These are the things that are coming going forward.
ASH BENNINGTON: I'm struck by a couple of things listening to that analysis. The first is just how complicated this issue is and how many moving parts there are. As reporters, we're not experts in any one given area. We do a lot of reading. We do a lot of research. The amazing thing that I find when I peel the onion back and with the China story is I'm just reminded of how much I don't know. For example, you sent me a-- sent out rather this morning with Credit Writedowns a terrific Reuters article that did a deep dive into this and thinking about the Cold War analogy or metaphor or framework. There were references to the George Kennan telegram and the [?] telegram and all of this deep statecraft type of stuff.
Then there's the technology issue, which as you point out, is very much a supply chain issue. It's very much about 5G. It's about the future of who is going to control networks. It's about who's going to run things like the next generation SWIFT system, payment systems, all of these very elaborate technical issues. Then of course, there's an incredibly complicated military story there as well, especially in the South China Sea, in and around the Strait of Malacca. These are incredibly, incredibly complicated issues.
The second thing I was thinking was when you pointed out the story about how China overtook the US in aggregate buying power, I was thinking over the weekend, one of the things that I did was I sat on the sofa, fired up my Roku and watched or re-watched, I should say, Raoul's interview with Kyle Bass. Kyle's point is that the Chinese currency is overvalued, perhaps as much as 50%, and that when we look at those aggregate economic figures, that we should perhaps take them with a grain of salt. Now, Kyle definitely has an opinion about the region and about the leadership but he's so compelling in the framework of the case that he lays out in that piece, in the way that he looks at a series of hard data points that may be subject to different interpretations but he surfaces the actual facts in, I think, a way that is extremely interesting.
ED HARRISON: Yeah, it's good for you to look back at some of the content here in Real Vision about China because there's a lot. Leland Miller from China Beige Book comes to mind. Another piece that would be interesting if people want to get a deeper dive into China. I would say that the World Bank is using purchasing power parity so that takes away a little bit of the exchange rate value that Kyle was talking about. When you peel back the onion, let me-- there were four articles that I was looking at in particular that I was thinking about, as I put together the piece on Credit Writedowns. The first was, from early May, there was an article in Reuters about the Chinese, what they were doing, because they felt that they faced a global backlash.
There was a Chinese report that came out and it was warning that because of the coronavirus, people were starting to look at China differently. China was not forthcoming with regard to their case count, they still have probably under counted, they didn't tell the rest of the world what was going on, and so people look at China as having caused this to a degree in terms of catching other countries out, making them flat footed in their response and the result has been a drastic change in the way that people are starting to look at China, not just in terms of the health care side of things, but also in terms of the economic side of things.
A second article was from the Globe and Mail. This was from this past Friday, it was saying that in Canada, the tide of opinion is turning against China, that they're looking at China in the exact same way that the United States is looking at China. Then finally China, in a Bloomberg article, was warning US politicians about this cold war. What I found the most interesting however, was the South China Morning Post saying that the Chinese, they recognize all this stuff. They recognize that the US, Canada, other countries are looking at China in a different way.
As a result of that, they're doing their new five-year plan to decouple. The new 2025 Chinese five-year plan is not going to be something that has these growth targets that are based upon exports. They're really going to go towards a domestic driven economy. They're going to decouple themselves from the West. This is what's going to drive their geopolitical ambitions, no longer dependent upon the West. I think it's a very interesting story, and I think that it's significant in terms of what blowback we could get from sanctions, from any weapons that the United States could use against China in the coming days.
ASH BENNINGTON: I read all of those pieces and they were all, I thought, extremely interesting in the analysis. I was struck by the Bloomberg piece, especially by the lead on that piece, it's very clear that China is a rising world superpower and they are very much aware of that and flexing their muscle in the diplomatic posture that they're taking in the statements that they're making publicly. When I read the five-year plan piece that you sent to Credit Writedowns, I always have the same reaction to five-year plans, which is my instinctive desire to say, gosh, I wish the United States had a five-year plan on things like infrastructure, technology, broadband, energy, not necessarily-- I'm not a big fan of central coordination, but just to provide some strategic guidance for how the free market can best find solutions to line up with what is in the long term interest of the United States as a nation state.
That's always my first reaction, but yeah, look, China has been playing the long game now for-- well, it's their fifth-- there's their 14 five-year plan. There's the number and it's a very long time and it's been slow progress in a way that we generally don't think in the United States. I think that the dynamism of markets definitely is something that I know, you and I both believe in incredibly deeply, but it would be great to have some level of planning and thought behind some of our policies as well.
ED HARRISON: Well, we rely on the markets and the Chinese yet they're a more centrally planned economy and so they can use that as a weapon, as a tool to boost their economy over the long term in the places that they want to boost it. The Trump administration has said, actually, the Trump administration came out today saying it's willing to pay for US companies to uproot their supply chains and bring them home to China. This is what Fox News sources are saying. Actually, the United States, it does have a plan, that is if we're going to have a recession, and we need to spend money, well, let's spend it on actually bringing supply chains back to the United States. That's what the Trump administration is saying.
Let's think about how this works from a Chinese perspective as well using Huawei because I thought it was very interesting. The Sydney Morning Herald about a year and a half ago, did a piece about how this whole Five Eyes thing happened in terms of Huawei being the enemy of the state for the United States and for other Anglo American companies, it was so--
ASH BENNINGTON: [?] familiar, Ed, with the Five Eyes Intelligence Sharing Agreement, could you just give a little bit of a primer on that?
ED HARRISON: Yeah, it's New Zealand, Australia, the UK, Canada and the US and the intelligence agencies within those countries, they communicate with one another, and they're called the Five Eyes because they're looking globally at national security interests, national security threats, in a collective way. They're exchanging information back and forth and what they ascertain, at some point, got to the point where Malcolm Turnbull, who was the PM in Australia back in February 2018. He was so alarmed at Huawei that he was actually lobbying to strip Huawei out of 5G networks in Australia.
Eventually, that led in November to New Zealand, doing the same thing. It led directly to the imprisonment, if you remember in Canada of a Huawei executive. Six days later, the UK said that they were going to review Huawei in their 5G networks as well. This whole thing escalated. Eventually, it was on the back burner of COVID took over but now the UK is re-investigating Huawei and likely what's going to happen, I believe is that they're going to block Huawei from their supply chains.
You have that on the Chinese side. This is what's happening to the Chinese. On the other side, you have Trump saying, yes, we are going to actually pay the US government to strip out Huawei and other companies like that out of the supply chains of US companies.
ASH BENNINGTON: Yeah, that's exactly right. What you said about how incredibly important a story this was that got pushed on the back burner and is very likely to come back because it touches on all of those points. It's intelligence, it's national security, it's technology, and it's economics. It's really one of those stories that did just a perfect storm of all of these issues with China converging. I should say, of course, on balance, I'm a fan of our system first and foremost, but it is interesting to see the Trump administration beginning to-- I wouldn't use the word central planning but think about a strategic vision.
Look, I'm all for globalization. I love free trade, I love open borders. I love the exchange of ideas and capital and labor, but the reality is that these are some very sensitive technologies. If one country is going to be setting the standards, as an American, it makes a lot of sense that it would be US companies who exhibit leadership of course, in engineering and have for decades in the telecom space, so there's no reason that we can't do it. It seems to me at least like a step in the right direction. What are your thoughts on that, Ed?
ED HARRISON: Well, I think that it goes back to what I was saying at the beginning with regard to the World Bank designating that, on a purchasing power parity basis, China was number one. Now, it's clear that there's a rivalry