Primary Vision Insights – July 28th, 2021

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By Mark Rossano

SUMMARY

US Completion Activity OPEC+ Agreement Europe Slowdown Geopolitical Update- Iran Focus China Floods and Global Shifts to Weather Patterns Quick China Debt Update

US Completion Activity

U.S. activity saw another increase as we see an additional 2-4 spreads being added per week as we progress through the remainder of the summer. We should be by about 255 spreads by the time we get into the end of August, and in a position to see one last push in Sept/Oct getting us to our target of 275 spreads. It is important to consider some of the underlying issues with labor vs equipment. Labor issues will remain pervasive, but many companies were preparing for them as far back as April when negotiations started for 2H’21 drilling and completion programs. The other side is equipment because at what point will an E&P accept a “lower” quality spread to achieve a “simpler” frac. Not every job has to be the most complex, high powered, and efficient horsepower on the market. For a discount, will an E&P accept something a little less efficient spread?

Texas will remain a key driver of activity- especially the Permian- with steady activations in the Western Gulf, TX-LA-SALT, and Williston. DUCs have been increasing in the Haynesville and will see a pickup in activity as we progress through the summer/ early fall. Appalachia remains well off normal pace, and given where natural gas and NGL prices sit- we will start to see some interest and see spreads move closer to 30. The Anadarko will also start to see some activity pick-up and get closer to 17-20 over the next few months supported by the current NGL basket price. Current activity remains skewed towards crude, but we will see this balance out a bit with some additional activity in gas spreads. The natural gas strip has moved higher in favor of renewed activity- nothing like what we have seen in previous years- but at an acceleration point given supporting prices.

We exited 2019 with 302 active spreads and averaged about 388 reaching a high of 463 in 2019. In 2020, we averaged 154 starting off the year with 358 at the peak to exit at 136 spreads in 2020. Just using rough numbers, that puts about 166 spreads sitting on the sidelines. We are now sitting at 242 spreads, which means from the peak activations in 2020 (358)- there are 116 spreads sitting in sidelines. It is unlikely there are 116 perfect spreads sitting on the sidelines: some have been scrapped, others ripped apart for parts, but some can be repaired or pieced together to close the gap. With a target of 275 spreads, we only need 33 spreads to come out of the “potential” 116 sitting in some form in the yard. While it won’t be as easy as an E&P calling on a Monday and the spread moving into position by Friday, there will be enough spare equipment and parts on order to bring 33 spreads back to life.

I bring this up because we have faced questions regarding activations and the speed in which we can get more crews back in the field. We are coming into peak months for activity and given recent comments from companies- it is likely we see 275 spreads working with a trend closer to 300 in 2022. There will be some seasonal slowdown in Nov/Dec, but it won’t be at the same rate we have seen in previous years due to the slow start to the year. The comments from corporations and what we are seeing on the ground confirms our view of a US crude production rate of 11.5-11.7M barrels a day. Rig additions are catching up as we see the pace of frac spreads slowing, but rigs being deployed at a rising pace throughout the remainder of the year. At peak levels, the spread between spreads and rigs was .48, but we currently sit at an all time high of .5021. We expect to see the spread drift lower to a .45 ratio and it won’t be because spreads are dropping- but rather rigs are catching up with activity. The pace of spread additions was robust off the lows with a near 45-degree angle as companies worked through DUC inventory in order to stem decline curves and setup for growth (recovery) in 2021. The goal going forward is NOT to reach 13.2-13.5M barrels a day, but rather fit within the confines of what the market can tolerate: 11.7-12M barrels a day. Depending on the pace of the global recovery, there is a chance the market can support 12.3M barrels a day- but that would be the peak in the next few years. OPEC+ countries and non-OPEC nations (Latin America) will be increasing their output and baseline production levels. This will provide a “steady” flow of baseline capacity at a higher rate- requiring a “lower” call on the U.S. which has already been factored in with our adjusted production numbers.

OPEC+Agreement

We have been calling out the renewed OPEC+ investments to grow production from Greenfields and add wells to current brownfields to help arrest decline curves. The most recent OPEC+ agreement drives home the rising production levels as baselines for several key members were taken higher. Investments have been happening over the last three years (away from the public eye) to increase production capacity while addressing decline curves. The below numbers don’t include the Neutral Zone, which isn’t included in the current OPEC+ agreement. [1]

KSA 11,500 MMBPD- up 500k Russia 11,500 MMBPD- up 500 UAE 3,500 MMBPD- up 332 Iraq 4,803 MMBPD- up 150 Kuwait 2,959 MMBPD- up 150

In order to phase out the remaining 5.76mn b/d of the original 9.7mn b/d production cut implemented last year, Opec+ has agreed to increase production by 400k b/d a month from August and extend the current two-year pact beyond its April 2022 expiry until the end of next year. While the group aims to fully unwind its original cut by the end of September 2022, the extension would allow for a three-month window to pause quota increases in the case of abrupt changes to market dynamics. Essentially- OPEC+ is leaving wiggle room to adjust for an increase in COVID19 type restrictions impacting demand and/or Iranian supply returning if US sanctions against Tehran are lifted.

To get the UAE on board with this extension, the group agreed that the baselines from which output adjustments are calculated will be raised from May 2022 for five of the deal's participants — the UAE, Saudi Arabia, Russia, Iraq and Kuwait. The baseline increases amount to a cumulative 1.63mn b/d.

Opec+ will add 3.6mn b/d of production to the market between August this year and April 2022 if it eases the cuts by 400,000 b/d each month. This will leave 2.16mn b/d of the original cut to phase out, which would equate to a 432,000 b/d monthly quota increase in May-September 2022 if the three-month pause is not used. The adjustment to the five producers' reference production does not affect this monthly rise, delegates say, adding that the new baselines will only be used to determine individual members' share of this quota increase within the wider group. And these monthly increments could be lower if countries reach their maximum production capacity and are unable to produce their share of the quota rise, Saudi oil minister Prince Abdulaziz bin Salman says. But there remains a level of uncertainty among some other member countries, with two delegates expecting the 1.6mn b/d baseline adjustment to push a portion of this volume into the market from May, in addition to the 432,000 b/d quota increase. This outcome seems less likely, as it could lead to more than the remaining 5.76mn b/d of the original cut returning to the market. The UAE agreed to the deal, but they are still taking an “unfair” share of the cuts when we look at the percentages of actual production. The UAE has increased its baseline production to 4.1M barrels a day, and rumors put KSA at 13-15M barrels a day. I would say it is probably closer to 13M barrels given investment, but there are comments from local people it is closer to 15M. I am unclear at the moment if that includes Neutral Zone expansion, but regardless- KSA has been hesitant to announce increases for fear of “spooking” the market with more production. Iraq has been very steady in their investments along the shared fields and general areas bordering Iran. Iraq completed their expansion of the Basrah port to handle about 960k barrels a day, which would handle the increase flow from the regions receiving investments. The agreement was signed in order to show unite and move the process forward, but I don’t think this is the last time we hear from the UAE. The shift in the way they trade their crude will keep and drive to acquire market share will shift their underlying cooperation. The UAE is still exporting well above their “allocation”, which is something that Iraq has been doing for some time and now KSA is joining the party.

Saudi Arabia and Kuwait have increased their ability to run natural gas for power generation both locally sourced and imported. Kuwait recently completed their LNG importing facility opening up a new chapter of local oil consumption vs natural gas. These countries will be able to reduce local oil consumption and slate more for the export market. This allows them to live within their OPEC thresholds while increasing the amount of crude available to customers. Exports will be the important one to watch as we have the region increasing flows with floating storage creeping higher. It has also helped keep the spreads cheap in the region (Dubai/Murban) vs Brent- WTI- West Africa. We have already seen a steady rise of Saudi exports, which has put pressure on others in the region.

Saudi direct crude use in mbpd (JODI)

Middle East Crude Oil Floating Storage

The knock-on effect bleeds over into other areas with places like West Africa struggling to clear cargoes and more deferrals taking place (again). Brent and WTI have also come under pressure with slowing exports and widening differentials to incentivize movement. The market is already trading out into September (especially in WAF), which are priced off of November and not front month. The cost of WAF vs Dubai is keeping movements very slow from Angola, Nigeria, and Congo. The loading schedule for September provides an opening for more deferrals so far as Libya is expected to hit 1.3M in production, which should push exports to 1.2M in Aug. This will put additional pressure on Urals flowing into the region and keep spreads closer to $2.50 below dated brent.

The market was making a big deal on some Nigerian OSP increases- but we also like to look at seasonality and historics. It is also important to look at what is happening behind the scenes with reduced shipping rates and deals to move cargoes. The OSP is the starting point for negotiations and depending on underlying demand- the final price can trade above or below. In this case, we continue to see trades happening below OSPs- especially as ESPO premiums continue to weaken.

Fresh demand for Mideast Gulf crude emerged as Chinese private sector refiner Rongsheng issued its regular spot purchase tender. Rongsheng's tender sought crude loading in September or delivered to Zhoushan in October, with offers to be submitted by 22 July. Rongsheng had purchased around 8mn bl of Abu Dhabi crudes in its spot tender last month. Offers for September-delivery Johan Sverdrup were in the range of $1.20-1.60/bl premium to November Ice Brent while cargoes to be delivered in October were offered just below a $2/bl premium to December Ice Brent. Djeno for September-delivery Djeno fell to a 90¢/bl premium to November Ice Brent, with offered heard marginally below a $1/bl premium. August-delivery Djeno was offered at around a 50¢/bl premium to October Ice Brent. Dalia for delivery in August was offered at around $1.30/bl premium to October Ice Brent. Gindungo to be delivered in August was offered a little below a $2/bl premium to October Ice Brent, while cargoes to be delivered in September were offered around a $1.20/bl premium to November Ice Brent. September-delivery Pazflor was offered at slightly above a $1.50/bl premium to November Ice Brent, while offers for October-delivery cargoes were marginally above a $2.70/bl premium to December Ice Brent. Mondo to be delivered in September was offered at marginally below a $1.80/bl premium to November Ice Brent. Saturno for delivery in late October or early November was offered at slightly above a $1.50/bl premium to December Ice Brent. Tupi for delivery in September eased to a $1.30/bl premium to November Ice Brent, with offers heard around $1.70/bl premium. October-delivery Tupi, Sapinhoa and Bauna were offered slightly below a $2.50/bl premium to December Ice Brent, while Iracema for delivery in the same period was offered at a little above $2.50/bl premium. September-delivery ESPO Blend edged down to a $1.30/bl premium to November Ice Brent. Offers for August-delivery cargoes were stable at slightly below a $2/bl premium to October Ice Brent. September delivery Oman was valued at 90¢/bl premium to November Ice Brent. Offers for October-delivery Cold Lake dipped to around a $2.50/bl discount to December Ice Brent. ESPO Blend premiums continued to slide on weak demand from China's independent refiners. September-loading ESPO Blend traded at premiums of around $2.50/bl to front-month Dubai assessments on a fob Kozmino basis. September-loading ESPO Blend cargoes had earlier traded at premiums of $2.80-3/bl to Dubai. Russian producer Surgutneftegaz issued a new tender to sell another three ESPO Blend cargoes loading on 19-26, 23-30 and 26-30 September. Bids must be submitted by 2pm Moscow time on 21 July. One company sold one September-loading ESPO cargo on 21 July.

Vitol offered 100k tons of Urals for July 31-Aug. 4 delivery at Dated -$2.40/bbl: trader monitoring Platts windowGrade last bid at -$2.45 for Aug. 2-6 delivery on Monday

Litasco sold 100k tons of Urals to Totsa for Aug. 7-11 delivery at Dated -$2.35/bbl: trader monitoring Platts window Unipec offered 100k tons of Urals for July 31-Aug. 4 at -$2.40/bb BP sold Ekofisk for Aug. 12-14 to Litasco at Dated +$1.05/bbl, FOB: trader monitoring Platts window Grade traded yesterday at +$1.25 for Aug. 3-5 loading Vitol sold Oseberg for Aug. 14-16 to Gunvor at +$1.05, FOB Glencore bid the following grades: Brent at +$1.80 for Aug. 15-19, CIF Brent at +80c for Aug. 1-13, FOB Ekofisk at +$1.15 for Aug. 9-11, FOB Litasco bid Forties at +$1.05 for Aug. 15-17, and Ekofisk at +$1.25 for Aug. 3-8, FOB Vitol offered Brent at +$1.35 for Aug. 2-6, CIF

The premiums of Brent/Dubai and WTI/Dubai keeping exports relatively capped. Prices will have to be reduced (or Dubai prices rise) in order to see additional flows out of both regions. The North Sea and WAF are playing a game of chicken with both sides avoiding a steep decline in pricing. Instead, the move has been measured as reductions slowly expand to try to find buyers. We have seen some additional Chinese buyers, which has put more crude into transit- but also meets demand into and even beyond Oct. The problem is- Asia is already buying Fall/Winter cargoes that become product in Dec-Jan-Feb so the “surge” in demand that was expected never materialized.

Europe Slowdown

Now the market is faced with additional slow downs in travel and driving with a rise in COVID cases and floods. Europe travel started to roll over ahead of the rise in COVID19 cases and the world struggles to get its footing.

While Europe sees a slow down in driving, German data is rolling over a bit with some activity paring back from recent highs. We highlighted that production and general manufacturing activity was slowing in Germany as assembly lines slowed due to shortages.

As activity slows, Europe is seeing a spike in prices with Unilever the latest to increase their products. “Companies across Europe are stepping up price hikes to cope with mounting cost pressures, supply-chain disruption and delivery delays. On Friday, a survey from IHS Markit showed manufacturers’ costs surged in July at the fastest pace since at least 1997, while selling prices also jumped. That followed warnings earlier in the week from companies including ABB Ltd. and Unilever that added to alarm bells about inflation. Among those hiking prices is Unilever, which said expensive crude and palm oil, as well as freight costs, were behind its decision to charge more for everything from bouillon cubes to hand sanitizer. Dutch paint-maker Akzo Nobel NV, which supplies Apple Inc. and BMW AG, said it’s already hiked product prices 4.5% and is planning further increases this year.”

The rise in prices is still behind the U.S. but closing quickly:

As wages are unable to keep pace:

These are some of the key headwinds to future oil/product demand- rising prices and low wages.

Geopolitical Update- Iran Focus

The geopolitical landscape remains a quagmire with issues arising from inflation, water or food shortages, or just general economic problems. Iran has seen their issues grow across the country with renewed protests regarding water shortages and economic stress. We spoke about the protests earlier this year in the Sistan and Baluchestan province along the Pakistan border. Pressure has been building as inflation levels spike in Iran and economic strife builds. The black market has expanded as residents struggle to find the most basic needs- now expanding to water.

Water shortage protests have broken out in Lorestan and Khuzestan following broad water problems. Some people the water is being exported to Iraq, but the shift in weather patterns has resulted in broad swaths of areas experiencing droughts while other regions massive flooding. The protests have broadened out and have now reached Tehran where protesters show support of the people in Khuzestan and a broader hatred for the current Regime. The protests were kicked off by the Ahwaz (Arab minority) bringing attention not only the water shortage, but also the vast economic problems their people face within Iran. They live on some of the most resource rich regions in the world but live-in absolute poverty as the money and resources are funneled through the Regime. “They live in two strategically important locations: Khuzestan province (home to Iran’s primary oil and natural gas production and major ports), and the Persian Gulf region between Busher and Bandar Abbas, which sees significant maritime traffic. Ahwazis are among the least assimilated of Iran’s ethnic minorities.”

The IRGC (Iran Revolutionary Guard Corps) claimed they intercepted weapons that were being smuggled into the province, which is likely and points to additional pressure in the region. Problems have been growing with Iran’s influence within Iraq- specifically in Basrah which is a key oil export hub and sees a large amount of Iranian crude flow through it. While under sanctions, Iran is able to push crude sales through the area by having them claimed as Iraq’s through shared fields.

The shared fields are broken down below with some of those key areas settled by the Ahwaz. The IRGC has begun cracking down on the protests with live fire resulting in several deaths to disperse the crowds. “Video shows police force of #Iran's Islamic Regime throwing stones & firing their assault rifles at the protesters in the city of Izeh, North of Khuzestan province. People were protesting water shortages & also in support of people of Susangerd & Ahvaz.” Assets were being deployed over the last 24 hours moving troops and equipment into the region, and the locals are pointing out- “Why are you sending in the military instead of potable water?” This has created more anger and sparked additional protests: “IRGC Ground Force (Land Forces) deployed T-72M1 main battle tanks & BMP-2 Infantry fighting vehicles to Lorestan & Khuzestan provinces in southwest of Iran to use against people who are protesting water shortages.” We have been highlighting for some time the pressure is mounting on the Iranian regime as locals are fed up with their policies and support of proxies.

The Iranian military and proxies faced another barrage of attacks in Syria from the Israeli military. Several targets were destroyed at the Aleppo airport and at Al-Safira SSRC belonging to the IRGC Quds Force and Syria Arab Army. We have pointed out how Israel and allies have been able to hit targets at will throughout Syria/Iraq creating more pressure on Iran that supports many of these proxies. It is a drain on scarce resources, and a growing point of contention with the local Iranian populace. This is all exacerbating the underlying negotiations with the U.S. and Europe regarding the JCOPA.

Both sides have reached a stand still with more commentary coming from Iran "Today, Iran informed the Agency that UO2 (uranium oxide) enriched up to 20% U–235 would be shipped to the R&D laboratory at the Fuel Fabrication Plant in Esfahan, where it would be converted to UF4 (uranium tetrafluoride) and then to uranium metal enriched to 20% U–235, before using it to manufacture the fuel," an IAEA statement said.” Iran has completed stopped complying with the IAEA and has let their deal/ oversight lapse creating a widening divide between Iran and the US/Europe. We never believed a deal was likely (at least not before Iran’s election) in 2021 given the U.S. and Iran have new administrations and each side wants to feel each other out. This is a broader dance, but the stress on the Iranian economy is growing.

China Floods and Global Shifts to Weather Patterns

The broader issue (with Iran an example) is the rising inflation around the world as food and necessities increase in price and shortages persist. We have seen wide ranging shifts in weather patterns creating floods in some areas and persistent droughts in others. China is facing another round of floods in key growing regions resulting in thousands of acres destroyed. Heilongjiang, Jilin, and Inner Mongolia have all been experiencing intense flooding with many thousands of hectares of crops wiped out. Two dams in Northern China collapsed sending a surge of water into villages and surrounding farmlands resulting in what is being described as “catastrophic.” It will result in weak yields and keep China reliant on the international market even more and well into 2022.

China has been trying to increase yield in order to cut down on some reliance on the international markets, but the extreme weather will impact those abilities significantly.

In Zhengzhou, the provincial capital and a major iPhone production center, 617 millimeters of rain fell from late Saturday to late Tuesday.

That almost equals the city's average annual rainfall of 641 millimeters in just three days. Authorities said that the extreme weather event broke records across the board.

The above is just an example of some water levels that have hit areas across China. China has canceled some corn shipments but given the fallout from the storms- we should see they purchased again. At times, China cancels shipments to push prices around and try to get a more favorable clearing price (I know shocking!)

Flooding has hit key regions throughout China: “Heilongjiang, Jilin, and Inner Mongolia have all been experiencing intense flooding with many thousands of hectares of crops wiped out. These are #1, 2, 3, and 7 respectively for PRC's corn output. Heilongjiang and Inner Mongolia hold >40% of PRC's soybean production as well.” Questions are starting to rise again about the integrity of the Three Gorges Dam, and its ability to withstand another surge of water like last year. The reservoir is reduced down to 145 meters in order to allow flood waters to accumulate behind it and slowly allowed to shift downstream.

So far- the dam is well within its limits, but the upstream and downstream pressure is rising again. The upstream side just refers to flood waters coming up behind the dam, and the downstream issues limit (in theory) the amount of water the 3 gorges dam can release without exacerbating the problem. The reservoir is right at 150 meters, which is well within the limits of “max capacity”, but the rise of downstream floods is creating a bigger problem as more rain falls behind it.

Downstream water levels rising:

This will limit how quickly the three Gorges Dam can discharge some of the building flow that is projected to reach the dam. Last year, the 3GD had no choice but to send flood waters through and overwhelming downstream because of deformation of the dam caused by extreme water levels. The concern now is that the integrity of the dam has been compromised and the “max” levels are now much lower and will cause more pass through of water levels. In 2020, the dam did very little (if anything) to stop the damages- there have been arguments made it actually exacerbated the issues as it released water in waves causing more floods and not preventing.

The Yangtze Economic Zone is an area the CCP has tried to build up in terms of manufacturing and farming. The whole region accounts for almost 40% of Chinese GDP and a large port of crop yield.

The mainstream of the Yangtze River covers an area of 1.8 million km2, accounting for 18.8% of the land area, 36% of the population and 40% of the GDP. The GDP growth rate will maintain above 6% in 2020 under different SSPs, and then the growth rate will slow down or stall, even with negative growth in SSP1 and SSP4; (4) The GDP Per of the Yangtze River basin shows growth under different SSPs and it will maintain a growth rate of 6–9% until 2020. While the average annual growth rate of the SSP5 will be about 2.56% at the end of the 21st century, and it will remain at about 1% under other scenarios. The below chart gives an view of how this is a main artery for trade, manufacturing, and crops shifting from the middle of the country back to the ocean/Shanghai.

The floods that are hitting China and Europe will have impacts on total crop yields, while droughts in Latin America will also impact crops- both at extremes creating problems going forward. Flooding has increased again in Henan providence China, which is the top producer of wheat.

The U.S. is also seeing more pressure with droughts expanding across large parts of the country and some key wheat/corn growing areas. On a global level, the underlying pressure is rising on.

The world is struggling under changing weather patterns that are flooding some areas and leaving others with “record” droughts. The shifts are impacting food output around the world and is a big driver for price increases and rising instability.

We have highlight the issues on water from the perspective of crops, but it is also a key driver for unrest in other parts of the world -IE Iran. When a person is starved of basic necessities (food/ water), they will be more apt to revert to violence or extreme measures to rectify the situation. It is a tail as old as time- if a person faces death (without food or water it is a certainty) and will resort to excessive or all means necessary to persevere. Even as bumper crops occurred in the U.S. for almost 5 years straight, food insecurity has risen around the world and is currently sitting at one of the worst levels in decades. The rise of inflation is exacerbating the issues that are already impacting the food and water markets.

Quick China Debt Update

The China debt market continues to struggle as the PBoC attempts to pull liquidity from the market and shore up bank balance sheets. Our view that the RRR cut wasn’t signaling a big change in stimulus was confirmed with the Prime Rates remaining unchanged. “The steady fixings for China's Loan Prime Rates reinforce our view that the People's Bank of China isn't keen to add aggressive easing. An earlier reduction in banks' required reserve ratio triggered speculation that the LPRs might also be lowered. Given the solid state of the recovery, that always seemed unlikely.

The aim remains on bringing debt under control across with another announcement coming across regarding Local Government Financial Vehicles (LGFVs).

CBIRC to banks and insurers:

There's been a lot of chatter in China's financial industry this past week about a certain "Document No.15," sent to banks and insurers by the industry regulator (CBIRC).

The document ordered financial institutions not to help local governments hide or increase hidden debt by lending to local government financial vehicles (LGFV) illegally. LGFVs are used by local governments largely to fund infrastructure. They are the biggest source of off-balance-sheet government debt risk in China. Some context: The CBIRC doesn’t really have much authority over the borrowers, which are local governments. So they're applying pressure where they can: financial institutions.

The most impactful requirement: Banks and insurers must not provide liquidity financing to LGFVs that hold implicit government debt. Seeing as this is the major purpose of many LGFVs, the order could see many funds cease operations. The CBIRC didn’t close the door for debt swaps, however. Although it did make swaps more difficult by centralizing approval power in the head offices of banks and insurers. Individuals inside banks and insurers found responsible for hiding or increasing implicit debt will be punished, according to the rules. The central government has been zeroing in on the off-balance-sheet debt of local governments this year. According to some official calculations, about a quarter of provinces will use more than half of their fiscal revenue between now and 2025 to repay capital with interest. That will make it very difficult for local governments to provide fiscal support to their economies.

This is going to make financing for local provinces very difficult- especially with some of the most levered facing maturities. Many of these areas are also facing record flooding and crop destruction, which will make their balance sheets even worse.

The RRR was a way to help banks preserve more capital as pressure is coming down from SPBs and LGFVs that are underwater. The floods and crop losses are going to create renewed problems for local governments, but also for the PBoC that has already been funneling funds down to the local level to help finance general government operations. Many of these bonds/loans are being financed with tax revenue and some governments are so cash strapped they are unable to pay wages and general benefits.

We have also been pointing out that China wants to pull down the real estate developers and general developer companies. They have been issuing debt and accumulating a significant amount of leverage. Evergrande was the latest to come under pressure as HSBC cut their ability to get mortgages in HK and tightened controls. “The recent selloff in China Evergrande Group shares and bonds reflects investors’ rising concerns over property developers’ credit risks. The jitters in the market are unlikely to abate easily, as the authorities take a tougher stance toward developers.

Despite short-term risks and market volatility arising from potential credit events, government officials are likely to keep policies tight on developers’ funding conditions and the broader property market -- as they see it as essential to prevent the buildup of an even greater, systemic risk. We expect credit risks to continue in the foreseeable future.”

They are just one of many that are seeing pressure mount as China Real Estate Loans roll over. Even as the pace slows- the below chart shows just how much leverage remains in the system. It will take more than just one year to pull down some of this excess, but will also be an underlying drag on economic growth.

The shifting moves by the PBoC will effectively stop the decline of credit impulses but keep them capped from running up the way they have in the past. The target of the RRR cut is very different this time and the adjustments on the MLF side helps to offset the increase in liquidity. They are also targeting the real estate developers and investments that will also drain some of the excess liquidity in the market.