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Tuesday, 12 February 2013

The Year of Transparency?

新年快乐!Kung Hei Fat Choi!  Happy Chinese New Year to readers!

- Announcement - Following on from last month's Moutai Awards" (茅台奖), we still have some uncollected Moutai Baiju so award winners please feel free to get in touch!!  -

Pollution update - Airpocalypse now
While many may have seen pictures of smog in Beijing and elsewhere, in Shanghai one young lady has been at the centre of the public concern over air quality.

(c) Shanghai Environmental Protection Bureau

This unlikely figure is the new Shanghai air quality mascot.  Posted by one locally based blogger the young girl pictured is shown in different moods which ties into the air quality - green being most satisfactory.  Currently air quality in Beijing and Shanghai is tipping the serious end of the scale, and one entrepreneur has started selling cans of fresh air.

Discomforts aside the fog in Eastern China does provide a metaphor for a few key themes we could expect to see in 2013.

Fog of war

No light matter, China (and Japan depending on your point of view) are threatening war over the islands, including the Senkaku, Diaoyu islands.  Currently air and sea patrols are ongoing and last week a Chinese ship locked on its targetting systems onto a Japanese ship

In tandem, both countries have recently been cited as having joined the currency war, a term coined by Guido Mantega, finance minister of Brazil in 2010, in which major economies engage in competitive devaluations of their currencies.  Commencing with the US Federal Reserves' Quantitative Easing (or money printing program) in 2008, both Japan (following an explicit announcement) and China (observed) have seen their currencies weaken this year. A recent statement by the G7 decrying a currency war and calling for stability ahead of an upcoming G20 meeting seemed to have little effect as volatility increased.

Promise of clear skies?
In one less discussed but important conflict progress is being made apparently.  Since the end of last year US authorities including the SEC and PCAOB have been negotiating with their Chinese counterparts to reach an agreement for the auditing of Chinese companies listed on US stock exchanges by US auditors (or verified by US aditors).  Paul Gillis, China accounting expert has details on his blog (here).  As had been discussed previously failure to resolve this could mean a mass delisting of Chinese companies from US exchanges.

However the China short-sellers, groups of analysts and funds seeking to expose and profit from Chinese corporate malfeasance are reportedly taking aim at Chinese companies listed in Hong Kong, of which there are many more, and for which there could be some bruising battles ahead.  Recent scandals involving Caterpillar and short favourite Zoomlion do not inspire confidence.

Bottom-up disclosure

Amidst strong speculation of future policy by outsiders, within China its leaders seem to be working hard to convey the message of a renewed focus on tackling social issues.  Several reports of top officials making impromptu visits to ordinary folk in remote areas have been reported by foreign media, including a a visit by prime minister Li Keqiang to the northern city of Baotou, where during an interview with a farmer, the farmer's son fell half-naked out of a cupboard behind the prime minister.

While applauded by bloggers as showing openness from the regime, the Baotou incident does remind one to ask just how many other things are hidden away in the closet in China and are likely to spring out at an inopportune time.

In terms of predictions for 2013, absent any big surprises it seems possible that many of the same issues will be redebated, not necessarily discovering any serious lurking issues in the background.  It seems possible that:

(i) NPLs will remain under-reported (and bad loans will continue to be unrecognised and accounted for);

(ii) Banks, especially state banks will continue lending;

(iii) another trust product, or several may fail;

(iv) large corporates will continue to load up on debt;

(v) overseas acquisitions will continue (just reading about possibly insolvent Suntech expanding into Uzbekistan);

(vi) one or more high level officials will be purged; and

(vii) great pressure will be placed on China's neighbours.

Now to wait and see...

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