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Thursday, 20 December 2012

Seeking cash...

Holes emerging in the edifice
Some of the headlines in the last couple of weeks:
- China's WMPs - wealth management products suffered their first recorded default.  Called "Weapons of Mass Ponzi" by some commentators, these lightly regulated or unregulated products are managed by various financial businesses but sold through banks and other networks to retail customers.  They are high risk and offer a higher return than typical bank products such as deposit accounts, which offer mostly negative rates of interest after inflation.  Customers of a mid-size bank Hua Xia protested when notes sold to them in one of the bank's branches defaulted.  The notes paid income from a domestic issuer unrelated to the bank and streamed income from a pawn shop and car dealership (details here).  As had previously been seen in the Zheijiang Guarantee scandal, part of the structure involved guarantees which were not met and bank staff were blamed.  More importantly questions were raised as to how many other schemes were likely to fail.

Despite assurances from regulators during the recent party congress, regulators do not know the extent of exposure and so this week the China Banking and Regulatory Commission ordered banks to check and ensure management of non-traditional products.
Take away: Expect vast amounts of these sub-prime style investment products to be flooding through the Chinese financial system.  It is doubtful that the regulators or the banks will be able to contain them for much longer or prevent contagion if too many collapse.

- Unimaginable sums of money have been flooding out of China - A report out this week covering illict flows from developing countries in 2000-2010 listed China as the top source of all flight money, with more funds leaving the country clandestinely ($2.74 trillion) than all of the other top 10 countries combined.  This is broadly in line with other studies on corruption in China (link here).  The atmosphere of corruption has remained pervasive since the recent party congress and Vice magazine had a great article covering the scope of illict behaviour of officials being reported daily across China ("Chinese officials at it again...").
Take away:  Victor Shih of Northwestern University has looked at the impacts sudden acceleration of capital flight could have on China's foreign exchange and fiscal position and this could be an unstabilising factor going forwards.


- China is seeking to attract massive amounts of new foreign capital from sovereign wealth funds and central banks - A recent relaxation by the State Administration of Foreign Exchange of an investment quota of $1 billion under the QFII program means that now, through small changes to their portfolio, reserve managers could cause large shifts of capital into China (details here).  There was speculation about motives and questioning as to how such a policy interacted with efforts to liberalise its currency,
Take away:  At a time when banks are seeing increasing shortages of cash towards the end of the year this move does suggest signifcant sums to flow into China in future.

- Chinese corporates facing tough times - An interesting piece describing actions on the ground at LDK, once the world's largest solar panel maker, but now subsisting on funds from its main state-bank creditors under the weight of an impossibly sized $3 billion debt is here.
Take away: Industries like shipbuilding and solar are at the forefront of the Chinese slowdown.  Expect to see a greater spread across industries, including the property sector and eventually (when problems find their way back to the creditors), to the financial system.  

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