The collapse of Silicon Valley Bank (SVB) at the speed of light caused a global uproar.
Against the background that the Fed may raise interest rates longer and higher, whether the Silicon Valley Bank incident will induce a wider range of liquidity risks, and even spread to the global financial system, has aroused strong concern. At the same time, whether the event will affect the Chinese market is also the focus of investors’ attention.
In this regard, a number of leading brokerage firms analyzed that from the perspective of liquidity and leverage, the predicament of Silicon Valley Bank is far from enough to cause financial turmoil, and the current overall situation may not be as tense as the market worries. At the same time, since China’s local venture capital industry’s dependence on US dollar funds has been greatly reduced, the event’s impact on the Chinese market is also limited.
‘Longer, more’ Fed rate hikes fuel market concerns
Regarding the reason why the market reacted more to the Silicon Valley Bank incident, CICC said that it was mainly concerned about whether the incident would induce more interest rate hikes under the circumstances that the Fed may raise interest rates for longer and higher, and financing costs and bond interest rates are further pushed up. Large-scale liquidity risks even affect the entire financial system.
CITIC Securities pointed out that the potential damage to the economy and finance caused by the continued high interest rates of the Federal Reserve is also an objective fact, and the risk outbreak of Silicon Valley Bank also stems from the rapidly rising interest rate environment. Since February this year, overseas markets have rapidly and substantially revised up their expectations on the rate and frequency of the Fed’s interest rate hikes.
A few days ago, Federal Reserve Chairman Jerome Powell testified at the hearing of the US Senate Banking Committee (Senior Banking Committee) on the theme of “semi-annual monetary policy report”, warning that the Fed’s policy rate level and inflation pressure may be higher than policymakers had previously expected.
“If the headline data indicates a need for faster tightening, we will be prepared to accelerate the pace of rate hikes.” Powell said in a prepared speech that current trends suggest the Fed’s work to fight inflation is not over.
Chen Guo, managing director and chief strategy officer of China Securities, analyzed in a report published on the official account of “Chen Guo A-Share Strategy” on the evening of March 12 that tail risks emerged after the Fed raised interest rates sharply, and interest rate-sensitive assets more fragile. On the asset side, a large amount of U.S. debt was allocated at a high price and MBS was short-lived, etc., which are important factors that caused the liquidity risk of Silicon Valley Bank.
It is worth noting that under the high interest rate environment, the market is worried about liquidity risks in the US banking industry as a whole.
“Although Silicon Valley Bank is committed to releasing positive signals, the capital market is more focused on seeing Silicon Valley Bank’s investment losses and refinancing needs, so the stock price has fallen sharply. At the same time, the market is worried that in an environment of rising interest rates, other banks will also face and Silicon Valley Bank Similar pressures, such as bond selling pressure, investment losses, intensive financing needs, etc., have thus led to a significant decline in the Bank of America Index.” CICC pointed out.
In addition, CICC stated that since historical experience, liquidity shocks are often sudden and unpredictable, which often lead to market concerns and linear extrapolation, specifically manifested as “sell first and then look”.
not enough to cause financial turmoil
Although the Silicon Valley Bank incident triggered an uproar in the global market, leading brokerages generally believe that the overall situation may not Not as nervous as the market feared.
Specifically, in terms of liquidity, CITIC Securities believes that even if U.S. inflation remains sticky, it will be difficult for the Fed to raise interest rates at the pace and magnitude of last year. The latest non-agricultural data in the United States showed that the tension in the job market has eased marginally, with wage growth and unemployment rate both lower than market expectations. Therefore, the current round of rebound in US dollar and US bond interest rates is basically over.
“From the perspective of liquidity, the tightening of onshore and offshore liquidity in the United States is not so significant. Under extreme assumptions, if the subsequent tightening of liquidity triggers a greater level and degree of liquidity shock, the Fed may also have sufficient resources means to provide liquidity support.” CICC also pointed out.
In terms of leverage, CICC stated that after the financial crisis, the overall leverage of the U.S. financial sector under strong regulation was relatively low, and the capital adequacy ratio was relatively healthy. Therefore, the possibility of a large-scale debt crisis does not seem to be high. The Silicon Valley Bank incident May not be representative of the entire U.S. banking system.
According to data from the CITIC Securities report, the current reserve balance of U.S. depository institutions is 3.0 trillion U.S. dollars, which is 1.6 trillion U.S. dollars higher than the low point in 2020, and is still in a relatively healthy position. At the same time, the Tier 1 capital adequacy ratios of the four major U.S. banks have continued to rebound in the past three quarters.
“Currently, the probability of this event triggering systemic financial risks is limited, and the probability of large U.S. financial institutions being affected may be relatively low,” Chen Guo believes.
CITIC Securities even made it clear that the current liquidity dilemma of Silicon Valley Bank is not enough to trigger risks and financial turmoil in large financial institutions.
Very limited impact on the domestic market
In terms of domestic impact, CITIC Securities clearly pointed out that the domestic contagion of the Silicon Valley Bank incident is extremely limited.
“Currently, Silicon Valley Bank has not been involved in the debt default of the residential sector and the corporate sector, and the risks are more concentrated in US dollar PE/VC and some start-up companies, which may have a relatively large impact on the US technology field and venture capital ecology.” CITIC Securities pointed out .
CITIC Securities further pointed out that in the past two years, China’s domestic venture capital industry has greatly reduced its dependence on US dollar funds. According to Zero2IPO’s statistics, in 2022, the newly-raised RMB fund LP in China’s equity investment market will account for 73.2% of the capital contribution of state-owned holdings and state-owned participation entities, showing the obvious characteristics of state-owned assets guiding industrial upgrading and transformation.
“Therefore, Silicon Valley Bank’s liquidity dilemma is not enough to trigger risks and financial turmoil in large financial institutions, and its impact on the PE/VC industry and start-up companies has extremely limited domestic contagion.” CITIC Securities said.
CICC also judged that the impact of external risk events on the A-share market may be relatively limited.
“In the context of the recent strengthening of the Fed’s tightening expectations, the ten-year U.S. bond rate once rose to close to 4.1%, and the U.S. dollar index was close to the 106 mark. In the high interest rate environment, the market has intensified concerns about the risks of the U.S. financial system and technology companies.” CICC The company further pointed out that “the impact of external risk events on the A-share market may be relatively limited, and A-shares are expected to show certain resilience in the global market fluctuations.”
The possibility of further adjustments in US stocks cannot be ruled out
Although the Silicon Valley Bank incident is not enough to cause financial turmoil, under the background of the gradual increase in the internationalization of A-shares, the disturbance of the US stock market by the incident still deserves investors’ attention.
Chen Guo reminded investors that because investors are worried that the Silicon Valley Bank incident may not be an exception, the concerns of the Silicon Valley Bank incident may spread to some small banks and more vulnerable emerging economies, and the impact on technology stocks may be more worthy of attention.
“Silicon Valley Bank’s target customers are concentrated in technology and start-up companies. The U.S. technology industry has been significantly negatively impacted by the high interest rate environment, with financing difficulties and tight cash flow. R&D investment relies on bank cash deposits, and there are few physical collateral assets, and the Silicon Valley Bank incident may have an impact on the business activities of a large number of technology companies.” Chen Guo predicted.
Chen Guo said that there are still twists and turns in the decline of US inflation data, and the duration of high interest rates may be longer than expected. The combination of incidents such as Silicon Valley Bank suppresses risk appetite, and the possibility of further adjustments in US stocks cannot be ruled out.
The Minsheng Securities Research Report pointed out that with the further advancement of the Fed’s interest rate hike cycle, the vulnerability of interest rate-sensitive sectors in the United States has begun to become prominent, and the downward pressure on the technology sector is also further spilling over.
“In recent years, with the gradual increase in the internationalization of A-shares, the linkage between China and the US stock market has increased significantly, and the spillover effect of overseas monetary policy adjustments on A-shares has become more significant. Therefore, investors need to pay close attention to the Fed’s monetary policy trends.” Chen If so.
