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Oil: Part of the Ongoing Adaptive Economy

By Charles H. Green

According to economist Robert Dye, America is in a “transitional economy” with considerable crosscurrents and volatility, which is leading us through an ongoing, rapid evolution, highlighted with the requirement of several complex adaptations by its participants. While he related his outlook to the global economy with many of these disruptive elements, such as technology, labor, housing and financial, I’ll focus on only one of the most dominant elements discussed: oil.

Dye is Senior Vice President and Chief Economist at ComericA Bank, and he spoke before U.S. Oil Production & Consumption, Monthly Dataan audience gathered for the third quarter economic forecast presented by the Robinson College of Business at Georgia State University recently.

Click here for a full-size copy of the nearly image, courtesy of ComericA Bank.

Why would a bank economist know anything about oil? Maybe it’s because this Dallas TX-based economist works for a bank that makes its footprint primarily in five states: Texas, California, Florida, Michigan and Arizona, which represents 31% of the U.S. GDP. And these five states include two of the top four oil producing states (TX #1, CA #4), the top three oil consuming states (TX, CA & FL), and the top auto manufacturing state (MI). Needless to say, they better understand oil.

Dye described the fast changing oil horizon predicated off of recent technological advances (extracting oil from shale), to the geopolitical theater (our old friend, Saudi Arabia). He described the rush of oil production in the U.S. as this new technology emerged as the ‘shale-gale,’ which had most economists predicting the return of a booming manufacturing sector in the U.S., such as we described one such viewpoint last September. That month, the average price of West Texas Intermediate crude oil sold for $92.58/barrel. This week that same oil is selling for less than one-half the price.

Who would have imagined just ten years ago that the ‘shale gale is contributing to the global oil glut? And if the U.S. and other five leading nations enter into an agreement with Iran regarding their nuclear power development, count on another 1 million barrels of oil headed to the market each day.

It’s notable that Saudi Arabia has responded to both the rise in U.S. oil production and falling prices with their spigot wide open. They’re charging hard to maintain global market share at any costs and replace the lost American exports with buyers in new markets. If history provides any guidance, they can manage that just fine, based on the decades they sold oil well south of $50/barrel.

Dye predicts that the days of $90-$100 oil may be over, which may greatly affect how much capital is deployed to exploring new wells in the U.S. While pricing bouncing between $50 to $60/barrel is workable, $40/barrel is different. Banking regulators have already set their sights on lending to this industry, cautioning lenders about the industry’s substandard condition that’s in the near term.

Long term depressed pricing will render U.S. oil producers as essentially the ‘swing market producers,’ meaning that they’ll kick in when shortages arise, but will fade away as production expands elsewhere. Our industry here likely will be required to adapt to switching online/ offline quickly in response to changes in the global supply, with a new goal changing from stabilizing prices to stabilizing revenues.

Oh yea, and all the talk about re-shoring our manufacturing base due to lower energy costs? Those rosy predictions are starting to abate as falling U.S. oil production will dent that potential, and the remainder of opportunity may be sapped up with the rising dollar on global currency markets.

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Global Growth is Moving Sideways

By Charles H. Green

According to economist Gregory Daco, the global growth outlook over the next five years seems to be moving sideways, “stuck in second gear,” as he put it. With contrasting results predicted for China, the Eurozone, and the other emerging markets, along with the effects of major structural changes occurring in China and Japan, there should be growth ahead, but he predicts it will be at a muted pace.

Daco is Head of U.S. Macroeconomics at the Oxford Economics, and spoke before an China Investment in Fixed Assetsaudience gathered for the third quarter economic forecast presented by the Robinson College of Business at Georgia State University recently. He summarized the cloudy growth forecast in terms of the combination of mixed results from several of the world’s major economies:

China–GDP results in China have been lower than expected, and as such, most economists have lowered forecasts, reckoning to a ‘new normal.’ Much of globe came to expect a continuation of the meteoric growth levels in the 10 to 12 percent range experienced in recent years, but that level has tapered off quickly without explanation. And given China’s tendency to obfuscate their intentions, there is global recognition that the economy is slowing down faster than the official numbers are described by the government.

Complicating matters is the fact that there are political transitions in play, with President Hu Jintao in the midst of purging the vast government of hundreds of senior and mid-level bureaucrats in an effort to root out corruption, all the while struggling with a slowing economy, which is not known as his strongest suit. There are emerging changes in upper mobility of Chinese consumers, who were encouraged to borrow for investments, only to watch the Shanghai composite index drop off precipitously in recent months.

After five years worth of building inventory and in the middle of a huge infrastructure building program, suddenly China’s commodity purchases has dramatically dropped off, leading to falling prices and activity. The question of not whether growth will slow, but how fast and how far?

So how are the other BRIC nations faring, in light of China’s stumble? There again, results are mixed, with two of the three suffering the hangover effects from Chinese gyrations.

Brazil-This emerging economy, darling of the late 2000s, hit the end of their super- growth rather abruptly. When China started buying up commodities in the 2000s, Brazil aimed an outsized portion of their output in response, and today is feeling the pain of those purchases going away. The commodity spikes are over, so production has slowed in response, unemployment has climbed back to high levels and there’s less capital available to support growth for anything else. Brazil is stuck with high debt levels, but their monetary policy is tough to effect any relief with a softening currency. A recession is forecast in 2016.

Russia –Despite a strong economy in recent years driven by the strong global demand for its oil and gas, Russia is not faring so well as oil prices have plummeted and the international economic sanctions over its invasion into Ukraine have begun to take a toll. Russia’s dependence on oil revenues has left it high and dry, as its currency has fallen off badly over the last year.

India-Of the BRIC countries, India is the bright spot at this time. Their emphasis on  education development and investments are admirable for the long term potential for growth. Their more pro-business government is making key investments in transportation and food production, which have both brought prices down and given consumers more income. Prospects for this economy are looking positive.

Japan-Elsewhere, the world’s third largest economy is not projected to fare much better than recent years, but if there is a glimmer of positive news, they’re not projected to be heading into a recession, based on second quarter growth. Japan has an aging population, and although consumer confidence remains “ok,” wage growth has been flat or falling over the last several years, as workers have little bargaining power.

Industrial production growing is growing, but household spending is volatile. A 2014 planned tax hike cooled spending considerably last year, and after it went into effect, buying plunged. Inflation is hovering on deflation.

Europe-The big question for Europe is whether growth there, driven by considerable reductions in oil prices, is sustainable? Leading indicators suggests there is better growth ahead, and momentum is leaning toward solid gains in consumer growth and employment growth. Even consumer confidence is looking upward.

Will this be followed by corporate investments and profits? The Euro’s weakness tends to add inflationary pressure, meaning some consumers may postpone spending, and certainly lower spending on imports. Greece remains a risk, but is currently a much lower risk since the crisis has been deferred to work out down the road.

And where does the U.S. fit into this equation. Although we had a slow start to 2015, there was a stronger than expected 2nd quarter, particular in western states. Growth expectations remain strong for the balance of the year along with employment gains. The only question is when–not whether–the Federal Reserve will begin to normalize interest rates.

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Consumer Demand + Investment Trumps Market Turbulence

By Charles H. Green

With China’s economy stalled as Europe growth is limping, U.S. GDP growth in coming months ahead will be predicated on the return of healthy domestic consumer demand and more capital investment, despite recent stock market turmoil, says Rajeev Dhawan of the Economic Forecasting Center (EFC) at Georgia State University’s J. Mack Robinson College of Business.

Dhawan’s assertions were delivered in his quarterly “Forecast of the Nation,” released Rajeev DhawanThursday, against the backdrop of China’s currency devaluation in mid-August. Even though initial reactions were negative, he characterizes the devaluation as “positive news for the economy overall,” which will boost domestic profit margins on imported goods.

Between low gas prices and wealth gains from reflated home prices and stock portfolios, post-recession consumers are in the mood to spend, albeit judiciously, on utility items. For the first seven months of the year, vehicle sales averaged 17.0 million units – up 4.5% over the previous year’s strong sales numbers, led by light trucks that drove the increase, rising by 10.7% over the previous year. By contrast, consumers hit the brakes when it came to passenger car purchases, which declined 1.9%.

As for oil, Dhawan anticipates prices will stay below $60/barrel until late 2016 due to a drop in global demand and an increase in drilling efficiency by U.S. producers. “People can safely expect low gas prices to continue for the next year.”

But when will the Federal Reserve determine that the economy is strong enough to hike interest rates and by how much? “The expected rebound in investment spending (forecast to rise 6.2% in the second half of 2015), will be strong enough for the Fed to start normalizing interest rates,” Dhawan said. “The issue is whether it will do so at the September or December meeting.” At present, remarks by key officials strongly telegraph a September move provided the ongoing market correction doesn’t deepen further.

Highlights from EFC’s National Report:

  • After stumbling in the first quarter of 2015, real GDP grew strongly at 2.3% in the second quarter. Growth of 2.2% is expected for the second half of the year, which will lead to an overall annual rate of 2.2%.
  • Business investment growth will hit 3.0% in 2015, rebound to 5.4% in 2016 and 5.2% in 2017. Jobs will follow by a monthly rate of 219,000 in 2015, 226,000 in 2016 and 214,000 in 2017.
  • Housing starts will average 1.105 million units in 2015, rise to 1.202 in 2016 and 1.275 in 2017. Expect auto sales of 17.0 million units in 2015, 16.5 in 2016 and 16.4 in 2017.
  • The 10-year bond rate will rise to 2.7% in 2015 and should rise to 3.3% before the end of 2017.

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Stock Market Plummets, SME Lenders Indirectly Impacted

By Amaresh Gautam

The U.S. stock market started falling last week dragging the global markets with them and presently (at post deadline), many leading global stock markets have experienced something of a meltdown. The source of this meltdown? Most analysts are blaming investors being concerned about recent news of the Chinese economy and disappointments in other emerging markets.

Data shows that Chinese factory activity has reached a low level last seen in 2009. Beijing Correctionreleased manufacturing figures showing fresh evidence of problems at the heart of their economy. The preliminary Caixin China Manufacturing Purchasing Managers’ Index for August fell to a 77-month low. After Monday’s closing, the Shanghai Composite Index had lost all of their gains since the beginning of the year.

Low U.S. oil prices also add to the worries and have fallen to less than $40 per barrel, a level not seen since before the financial crisis. The dollar fell to a two-month low against the euro and added to speculation that the Federal Reserve may now postpone a broadly expected increase in interest rates next month.

Through last Friday, the Dow Jones index had lost about 10% from its record closing high on May 19, appearing to be entering a correction (a fall of at least 10% from a recent peak), and a rocky start Monday morning saw the DJIA fall over 1,000 points until investors started buying up bargains. Still the day finished down four percent.

Stock market swings are not the bellwether of all things in the economy, since the immediate impact only directly hurts those holding securities. If you’re personally invested in a broad basket of balanced securities, chances are the effects of this moment are only taking away inflated gains, not eating anything near your principal. If you’re buying on margin, you may have more reason to be concerned.

Amid this mayhem, small business lenders would do well to remember that markets often have its reasons that only the market can understand, and to be sure, some economic fundamentals are still strong (e.g. rising small business lending volume this year). But as written through several articles in these pages, it pays to pay attention to the world beyond your book of business.

The price of oil and devalued Chinese currency may not hit your pocketbook this week, but there are causes and effects that eventually are felt by most everyone. If one of those is that the Fed postpones rate hikes due to the uncertainty, that will hurt lenders more than borrowers, and that’s getting closer to home.

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Average Consumer Credit Scores Are Rising

By Charles H. Green

American consumers are managing their obligations better these days, as the NYTimes reports that average scores have reached new highs and delinquent credit payments have dropped. The national average FICO® score is now 695 — the highest it has been in at least a decade, according to the latest analysis from Fair Isaac Corporation, the score’s creator. Nearly 20 percent of consumers now have scores above 800.

While the national FICO® score distribution continues to improve, Fair Isaac reports that FICO-April-2015-Average-FICO-Scorethey see evidence—both in terms of average scores and with delinquency measures—of a leveling off in credit quality. And that leveling could represent either a pause in the continued US financial recovery or possible cracks starting to show at the edges of several years of a relatively low-risk underwriting environment.

The higher scores are led by tangible reductions in delinquent real estate loans, however, there has been little change in the level of delinquent credit cards, and actually an increase in delinquent auto loans.

FICO® scores are determined by using loan and other vital information information reported through the three major credit reporting agencies. The score is widely used by commercial banks and non-bank lenders to assess credit risk in lending that ranges from credit cards, auto loans, and home mortgages to small business loans and equipment leases. The FICO® score, which ranges from 300 to 850, directly affects access to credit for millions of people as well as determining the credit terms offered.

There are plenty of reasons that the average credit score could be rising, not all of which are pointed out by FICO’s rosy news release. Obviously, as lenders worked through the financial crisis/housing bust, the volume of seriously delinquent loans impacted millions of borrowers. But through a combination of eventual repayment,  borrower deleveraging, or write-offs, virtually all lenders still standing have experienced a drop in these delinquent accounts, as average portfolios have improved.

So, the passage of time is also an important factor and older accounts help increase scores. Bad credit performance discourages most lenders to avoid granting credit to certain applicants, but as the years go by, that negative information starts dropping off credit reports. So it’s natural that the impact of all those delinquencies that weighed on credit scores during the recession (2007-2009) are most likely starting to erode.

Other contributors to these statistics may not be such a positive. Since the Great Recession, we’ve seen a rise in the fintech credit marketplace, many of whom offer consumer as well as business credit. Many borrowers have dropped out of the traditional credit market, and no longer get graded by FICO, since the consumer lenders in that channel (payday lenders) usually do not report credit results.

Another impact related to this average score improvement, particularly on the lowest score ranges, may have been the adoption of FICO 9 last year, which was a change in their algorithm where FICO finally deleted medical bills and other non-credit items from their analytics. These factors dragged down scores on many consumers who were unaware of unpaid obligations or were in a legitimate dispute with a creditor.

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Invoice Marketplace C2FO Attracts $40 Million Funding

By Ravinder Kapur

In a recent development, Temasek Holdings, Singapore’s sovereign investment fund, has led a $40 million investment round into C2FO, an online marketplace, which allows firms to get discounts from their vendors for upfront payments. C2FO, a company founded in 2008 with its head office in Fairway, Kansas, hopes to leverage Temasek’s emerging markets expertise to increase its business volumes.

DEALSTREETASIA has reported that C2FO, a fintech startup, has recorded exponential Accounts Receivable (2)growth in the three months ended June 30, 2015, in which period the capital flowing through its platform stood at $5.4 billion compared to $1.2 billion in the comparable three months a year ago.

John Kill, senior vice president and chief financial officer at C2FO said, “Our record growth in the past quarter for existing and new global customers generated a 334 percent increase in working capital flows. Our market operates globally across 15 countries and multiple languages. As we consistently outpace our year-over-year performance, we continue to attract the attention of world-class partners.”

C2FO’s business model is based on the use of an electronic trading platform through which suppliers can negotiate for early payment of invoices with buyers. The demand for its services hinges on the fact that while suppliers generally pay high rates of interest for borrowing working capital, the buyers, who may have surplus cash, do not have access to suitable investment opportunities for their short-term funds.

In a bid to boost its business volumes, C2FO has partnered with Tradeshift, which helps buyers and suppliers convert from paper invoices to electronic records. Kansas City Business Journal reported that the two companies have a natural synergy, as Tradeshift speeds up the record keeping, while C2FO hastens the payment process. Tradeshift has extensive operations, with 500,000 companies in 190 countries using its platform.

Temasek is Singapore’s $266 billion wealth fund. While, the investment in C2FO would form an extremely minor portion of its portfolio, it is significant that a sovereign fund is showing interest in an American fintech company.

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Court Ruling Raises Threat to Fintech Lenders

By Charles H. Green

As reported by the American Banker, a recent court ruling rejecting an appeal by a Bank of America subsidiary could have negative consequenses for some fintech lenders who issue loans through banks in an effort to not be bound by state usery laws.

The decision involved the sale of charged-off credit-card debt by the BOA subsidiary, and Oops!was issued  by a three-judge appeals panel in New York who found that the bank’s legal authority to charge an interest rate that exceeds state usury caps did not transfer to the debt buyer.

The defendants in the lawsuit petitioned the full appeals court to reconsider the ruling, and were joined by industry trade groups including the American Bankers Association, the Consumer Bankers Association, and the Financial Services Roundtable. In late June, the Second Circuit Court of Appeals denied the petition. It remains to be seen whether ruling will be appealed to the Supreme Court.

The broad ruling raises questions whether or not fintech lenders can issue loans through banks like WebBank, a $236 million bank based in Utah, which has no caps on interest rates, which are extended to borrowers in other states that may apply usury laws apply. WebBank can do so freely, since their standing as a chartered bank allows them to provide financing anywhere so long as it is consistent with it’s own state laws.

But fintech companies, such as Lending Club, Prosper and PayPal and others have relied on this capacity to fund loans in dozens of states with restrictions, with the full intention of repurchasing the loans afterwards for their own portfolio. This workaround meant that the fintech did not have to register to lend in many states nor comply with many restrictions implied by individual state laws.

According to the American Banker, during an August 4 earnings call, Lending Club’s CEO Renaud Laplanche disclosed that approximately 12.5% of Lending Club’s consumer loan volume would exceed state interest rate limits if the company were forced to obtain state licenses.

Lending Club, a peer-to-peer marketplace lender, serves to connect borrowers seeking to lower borrowing costs to lenders that generally buy into small portions of multiple loans. Their loans are facilitated with the borrower’s opt-in after acknowledging the effective cost of the loan ahead of agreeing to accept it.

The impact on these lenders will possibly be the requirement to register as a lender in the many states they currently lend in for future business, which is expensive and carries the burden of applying individual local limitations for all applicants that originate in the individual states.

This decision could also affect the sale of charged-off debt by banks, the private-label credit card industry and other nonbank lenders such as PayPal, which partners with Comenity Capital Bank on its PayPal Credit product.

Read more at AmericanBanker.com.

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Hacked News Release + Early Trading = $100M Illegal Profit

By Charles H. Green

The Securities and Exchange Commission (SEC) recently announced fraud charges against 32 defendants for taking part in a scheme to profit from stolen nonpublic information about corporate earnings announcements.  Those charged include two Ukrainian men who allegedly hacked into U.S. newswire services to obtain the information and 30 other defendants in and outside the U.S. who allegedly traded on it, generating more than $100 million in illegal profits.

The SEC’s complaint was unsealed in U.S. District Court in Newark, N.J., and the court Fingerprintentered an asset freeze and other preliminary relief that day. This international scheme is unprecedented in terms of the scope of the hacking, the number of traders, the number of securities traded and profits generated,” said SEC Chair Mary Jo White.

The SEC alleges that over a five-year period, Ivan Turchynov and Oleksandr Ieremenko spearheaded the scheme, using advanced techniques to hack into two or more newswire services and steal hundreds of corporate earnings announcements before the newswires released them publicly.  The SEC further charges that the pair created a secret web-based location to transmit the stolen data to traders in Russia, Ukraine, Malta, Cyprus, France, and three U.S. states (Georgia, New York, and Pennsylvania).

The nonpublic information was use during a short window of opportunity to place illicit trades in stocks, options, and other securities, sometimes purportedly funneling a portion of their illegal profits to the hackers.

Law enforcement officials said the companies — Business Wire, PR Newswire and Marketwired — often detected the overseas hackers and kicked them out, but the hackers returned time and time again.

The NYTimes offers minute details of how the scheme operated with one company, Panera Bread, from information gleaned from court documents.

While crime may not pay–at least for those we know who get caught–what we don’t know is what we don’t know. Accordingly, remember our feature story a few days ago about cybersecurity and commercial lenders (“Is it Safe? Cybersecurity Threat to Lending is Real”)? Might be a good idea to read it again and give some proactive thinking about how to make sure your company–and clients–aren’t the next victim to some seemingly preventable theft of information that’s harmful to someone.

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混乱-How Chinese Currency Affects Main Street Lenders

By Charles H. Green

Chaos, or said on the other side of the planet, 混乱, is defined as a state of utter confusion or disorder; a total lack of organization or order. Between the withering summer heat, anticipation of a pending Federal Reserve rate hike and the rumbling of the Fall football season, hearing about China’s devaluation of its currency may, in fact, have American bankers, wondering whether we‘re turning back to chaos again, just as expectations for ramping back up to economic normalcy were at hand. It’s a fair question.

What does this news from China mean and how does it affect Main Street lenders?

China’s decision to devalue its currency this week is part of a long effort to be seen as a Chaosmajor player in financial markets. But the move carries some risk for the world’s economy. Even as the second-biggest economy in the world, China is a powerhouse of trade and manufacturing that yearns to be more. They want prestige in the global financial markets like the United States, Japan and England. That is believed to partially have been behind their efforts earlier this year to establish the Asian Development Bank, which will lend money for regional infrastructure projects.

Likewise, their decision earlier this week to let the Renminbi (commonly call the ‘yuan’)  to fluctuate more freely is another part of China’s effort to become a financial player on the world stage. Their ultimate ambition is to have China’s currency to be a globally accepted reserve currency, meaning that the yuan would become one of the small, elite group of currencies used by the International Monetary Fund (IMF) to determine exchange rates.

But the IMF won’t do that as long as the yuan’s value is tightly controlled by the government. So China’s central bank has been pushing the government to let the yuan fluctuate a bit.

And part of the government does think that by allowing interest rates and currency values to move more freely will help iron out some of the structural problems that now threaten the Chinese economy, and which have led to slower growth than targeted. And as such, the high levels of debt that have accumulated domestically cloud the intermediate horizon.

China has eased the value of the yuan about four percent against the dollar, which is very good for the Chinese economy, but not so good for the U.S. or the rest of the world’s economy. When the yuan loses value, Chinese goods become less expensive to import, which makes it harder for companies in other countries to compete to sell goods–their imports become more expensive and Chinese goods are more competitive.

To be sure, a lot of China’s trading partners may be tempted to devalue their own currencies, which theoretically could end up causing countries to compete with each other to see who can drive their exchange rates down the most. That would bring more  instability to the world’s economy at a time when most regions are still struggling to recover.

Moving China toward an open market economy

According to coverage by the NYTimes, the timetable set by the Peoples Bank of China (PBOC), China’s central bank, is year-end to open up the country’s markets, and as the year passes, questions are emerging about whether their creaking financial system, and the people who run it, are up to the task. Allowing market forces to assert more influence over the exchange rate, as demonstrated this week, is only one step on the road to tearing down the barriers that keep money from flowing across China’s borders.

While President Xi Jinping has promoted the idea of market forces playing a decisive role in China’s economic priorities, the PBOC has led the push to liberalize capital markets.

But China’s stock market meltdown exposed significant holes in the country’s financial regulations that regulators are now trying to plug. That leaves political leaders and the technocrats who run the government with little capacity or appetite to oversee a system where investors worldwide have the ability to easily move money in and out of China.

According to economist and NYTimes columnist Paul Krugman, “China is ruled by a party that calls itself Communist, but its economic reality is one of rapacious crony capitalism. Yet their zigzagging policies over the past few months have been worrying. Is it possible that after all these years Beijing still doesn’t get how this “markets” thing works?”

China’s economy is “wildly unbalanced,” with a very low share of GDP devoted to consumption and a very high share devoted to investment. This imbalance was sustainable so long as the country was able to maintain extremely rapid growth; but that growth has inevitably slowed, as China’s labor surplus dwindled. As a result, returns on investment are dropping fast.

Continued Krugman, “The solution is to invest less and consume more. But getting there will take reforms that distribute the fruits of growth more widely and provide families with greater security. And while China has taken some steps in that direction, there’s still a long way to go.”

Ripple effects that may be felt on Main Street

To travel to Beijing from the American midland is about a thirteen hour flight. Given that the average airspeed on those flights are around 500 mph, you can figure out that it’s another world away, right? So why does a currency devaluation there have anything to do with a small business in Southern Illinois, Florida or New Mexico? That would be because we are all connected–at least through the global economy.

China is one of the world’s largest buyers of petroleum and many other commodities. A massive infrastructure building program and serving the biggest population on the globe requires lots of materials, as it does to churn out a broad assortment of manufactured goods for the planet.

It’s no coincidence that U. S. oil prices slid to a more-than six-year low Friday on escalating concerns about the mismatch between global supply and demand. The WSJ reported that oil futures on the New York Mercantile Exchange hit a low of $41.35 a barrel, a level seen last on March 4, 2009, when the U.S. economy was still mired in a deep recession. Oil was recently trading at $41.88 a barrel, down 0.7% from Thursday’s settlement.

This problem is not solely due to China’s devaluation of the yuan, but is mainly caused by the rapid growth of U.S. domestic oil production, thanks to fracking technology, and the OPEC cartel’s decision to maintain full production in the face of lowering global demand. And now investors are worried about China’s oil demand following its surprise currency devaluation. A weaker yuan makes imports of dollar-priced commodities, such as crude, more expensive.

For America’s Main Street businesses and their lenders, the immediate impact will be felt depending exactly on what their business they’re in (or who they lend to). For companies dependent on importing Chinese manufactured goods, or who can substitute these goods for what they purchase today, the lower currency is an improvement. But if companies are competing against Chinese goods, this move is bad.

Likewise for anyone whose business relies on petroleum or other raw commodities, or similarly concerned about our low inflation rate and the risk of slipping back toward deflation, this move is a concern. The rising tension scenario that turns into anything resembling a competition among global currencies toward steep devaluations turned into a full scale currency war should keep everyone awake at night.

Moving on

China’s currency stabilized on Friday, ending a three-day plunge that shook markets globally amid the Renminbi’s steepest devaluation in decades, as the PBOC set the official exchange rate higher — though only slightly — against the dollar, for the first time since Tuesday.

As reported by the NYTimes, the Renminbi responded by strengthening 0.1 percent, ending the week at 6.392 per dollar. Still, that meant the Chinese central bank had effectively devalued the currency by 4.4 percent over the course of the week, the steepest drop since the country’s modern exchange rate system was set up in 1994.

The sudden decline added fuel to a global debate about currency wars. It also raised new concerns about whether Chinese leaders could manage the country’s huge, but the slowing economy as they pursue a market-driven overhaul to their financial system, which remains broadly under state control.

For years, China looked like the principled non-combatant. As other countries sought to secure an economic advantage by letting the value of their currencies slide on international markets, China held firm on the value of its money. But by sharply devaluing its currency this week, China jumped into the fray.

The abrupt move opens a new phase in what some analysts see as a long-raging global currency war, a development that could leave the United States exposed and undermine efforts to pull the world economy out of the doldrums.

The yen, the euro and several other major currencies have fallen in recent years against the dollar as the Federal Reserve has cut back its stimulus and policy makers elsewhere have sought to obtain gains for their sluggish national economies.

China’s stock markets are still struggling after a sell-off that started in mid-June. The government took extraordinary measures to support share prices, including barring major shareholders from selling stocks and ordering state agencies to buy, with backing from state banks. But they had little lasting effect.

There’s a couple informative charts offered by the NYTimes that track China’s corresponding currency and equity market, which illuminate the effects of their latest policy moves here.

Geopolitical considerations

All of this comes with the backdrop of rising regional tensions in East Asia, largely stoked by a more intentional Chinese assertion of aggressive behavior. The Economist reports that in early in September, President Xi Jinping will take the salute at a military parade in Beijing, his first public appearance at such a display of missiles, tanks and goose-stepping troops.

Officially the event will be about commemorating the end of WWII in 1945 and remembering the 15 million Chinese who died in the Japanese invasion and occupation of China of from 1937-45, suffering more lost people than any other country except the Soviet Union.

But next month’s parade is not just about remembrance; it’s about the future, too. It will be the first time that China is commemorating the war with a military show, rather than with solemn ceremony. The symbolism will not be lost on its neighbors and will unsettle them, because China,  today’s rising, disruptive, undemocratic power is no longer a string of islands presided over by a god-emperor.

Instead it’s the world’s most populous nation, led by a man whose vision for the future (a richer country with a stronger military arm) sounds a bit like one of Japan’s early imperial slogans.

And now what?

It remains to be seen what will happen in the next few days and weeks, but just about as universal consensus agreed that the Federal Reserve was likely to announce an interest rate hike at the September meeting of the Federal Open Market Committee (FOMC), there is pause to consider the possibility of another delay. No one, probably including the voting members of the FOMC know how the Fed will respond.

China has been on their watch list for some time due to concerns about the slowing of their GDP and recent stock market fluctuations, which have given U.S. policy makers a substantial reason to hesitate. Given other concerning trends, like lagging U.S. consumer spending in the face of significant reductions in gasoline prices, might cause the FOMC to once again leave 0% interest rates in place.

What should commercial lenders do to respond to these changes or possible threats that these events represent? Think about how the economic horizon might affect the particular industry of companies in your portfolio, and carefully monitor those who may be vulnerable. Screen new loan applications that are exposed to more competitive imports from China, or involved in the manufacture or distribution of the commodities that are suddenly falling in price.

Most of all, keep your eyes on more news ahead to stay ahead of changes that impact your existing book of business and the loan volume in your budget.

Did you know SBFI offers commercial lender training–learn more here.

Read more stories of interest to commercial lenders here.

What do you think about this story? Comment below or write me at Director@SBFI.org.

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More Lenders Sign on to Borrower’s Bill of Rights

By Charles H. Green

Last week this page reported about the Aspen Institute assembling a group of online, ‘fintech’ lenders and leaders in Washington, labeled as the ‘Responsible Business Lending Coalition,’ to announce the creation of the ‘Small Business Borrowers’ Bill of Rights.’ These rights are principals of fair play that these participating parties agreed to adopt for clients.

Originally, five fintech lenders (ACCION, Fundera, Funding Circle, Lending Club and the Got EthicsOpportunity Fund) and one business loan broker (Multifunding) signed onto the pledge, along with the endorsement of two advocacy organizations (Aspen Institute and the Small Business Majority). At the time of the announcement, they collectively challenged other peer competitors to recognize these rights as well, and publicly sign on to adopt and adhere to the rights as industry standards for dealing with small business borrowers.

As of the publication time of this article, the number of lenders signing on has tripled to 15, with ten additional lenders having signed on to the pledge in the past seven days. Other organizations are endorsing the idea (including Small Business Finance Institute) as a means of adding visible support around the ideals and common goals of creating a more competitive and beneficial financial environment for all participants.

If you haven’t already read them, the Small Business Borrowers’ Bill of Rights outlines six key rights that the coalition believes all small business borrowers deserve as a matter of both best practices of the financial service industry, and fair play so far as dealing with people that do not regularly engage in financial matters day-to-day. These rights are:

  1. The Right to Transparent Pricing and Terms, including a right to see an annualized interest rate and all fees
  2. The Right to Non-Abusive Products, so that borrowers don’t get trapped in a vicious cycle of expensive re-borrowing.
  3. The Right to Responsible Underwriting, so that borrowers are not placed in loans they are unable to repay.
  4. The Right to Fair Treatment from Brokers, so that borrowers are not steered into the most expensive loans.
  5. The Right to Inclusive Credit Access, without discrimination.
  6. The Right to Fair Collection Practices, to prevent harassment and unfair treatment.

Read more about the bill of rights and the coalition here.

The new lenders signing on include Dealstruck, The Intersect Fund, Streetshares, 1 Main Street Capital, Borrowize, Justine Petersen, Credibility Capital, Business Center for New Americans, Akouba Credit, and Market Street Funders.

Just to be clear, there’s no requirement that the lender be in the fintech channel, nor that loan brokers only refer loans in that sector. So why not take a closer look and step up to making the pledge on behalf of your lending company?

Did you know SBFI offers commercial lender training–learn more here.

Read more stories of interest to commercial lenders here.

What do you think about this story? Comment below or write me at Director@SBFI.org.

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