tag:blogger.com,1999:blog-21095908700641250732024-03-13T11:16:51.423-07:00China MeltdownWatching developments in the People's Republic....The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.comBlogger41125tag:blogger.com,1999:blog-2109590870064125073.post-75914789197058504832015-08-02T17:21:00.000-07:002015-08-02T17:38:24.465-07:00China chaos and a new normal? A year in review<div dir="ltr" style="text-align: left;" trbidi="on">
Since taking a break this time last year, China's markets and their ongoing story have exploded into international consciousness. The dawning of not only several "black" trading days, but what was characterised as <a href="http://why%20the%20world%20should%20be%20freaking%20out%20about%20china%E2%80%99s%20economy./" target="_blank">China's "1929" moment</a>. So it would be good to note a couple of charts and comparing the similarity of the main Chinese index, the Shanghai Composite (SHCOMP) and the tech index (ChiNext) with some of the greater stock crashes of the last century:<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis3-0Q2skP8742AZp2jttya-NUTHkIQgOdp-FcPa1YtyQ2n9AWt2AbW5gJP_6hwLR0lokTksDn2hsWKbUbIEdqRhWDQmY91SEbs0Wep4wy0daSf700kQoMCnc9x46fk6TkLA0luLYhAvI/s1600/20150706_shcomp_1_0.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="337" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis3-0Q2skP8742AZp2jttya-NUTHkIQgOdp-FcPa1YtyQ2n9AWt2AbW5gJP_6hwLR0lokTksDn2hsWKbUbIEdqRhWDQmY91SEbs0Wep4wy0daSf700kQoMCnc9x46fk6TkLA0luLYhAvI/s640/20150706_shcomp_1_0.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: small;">Comparison against 1929 crash (c) Zerohedge.com</span></td></tr>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipGuoAKZWjd9paiRBQJBwvSGnW2plhylVZzSbi3fuqxcqkxvjq-la13GSHL6nmDz5ZIlAYPl9We964j_xcMyXJtvoJ2dMgiepE8Lr478V93UwmkbpfTc779wJEF1p-XWGZUNHMW_HU-mw/s1600/20150730chinext.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="431" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEipGuoAKZWjd9paiRBQJBwvSGnW2plhylVZzSbi3fuqxcqkxvjq-la13GSHL6nmDz5ZIlAYPl9We964j_xcMyXJtvoJ2dMgiepE8Lr478V93UwmkbpfTc779wJEF1p-XWGZUNHMW_HU-mw/s640/20150730chinext.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: small;">Comparison against the Nasdaq 2000 crash (c) Investinginchinesestocks.blogspot.com</span></td></tr>
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The desperation with with the Chinese authorities stemmed the losses was intense, including bans on selling, enormous purchases by Chinese SOEs and brokerage companies and of course, attacking "malicious" short-sellers both in China and internationally. News site Quartz had a good summary of <a href="http://bit.ly/1IGojuj" target="_blank">steps taken so far</a>. In addition as Reuters noted, China sought to exert its authority even outside its jurisdiction approaching Singapore and Hong Kong exchanges to <a href="http://reut.rs/1MAUHks" target="_blank">request trading records</a>.<br />
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As plenty of sensible commentators noted, the actions by the Chinese authorities are lunacy. A market majority of shares <a href="http://bit.ly/1fXHKmM" target="_blank">suspended </a>from trading and/or owned by a state rescue fund, in which <a href="ttp://gu.com/p/4agxj/stw" target="_blank">participants cannot sell</a> will not operate as a price discovery mechanism (which is the point of a stock market) and with renewed pressure as in Japan, such measures will fail anyway. Bridgewater Associates, one of the world's largest hedge funds issued a memo <a href="http://on.wsj.com/1Jzj4Zx" target="_blank">reversing its favourable view of China</a> (which they later sought to downplay), while large corporates revised their <a href="https://next.ft.com/8dacba88-36c4-11e5-b05b-b01debd57852" target="_blank">growth forecasts downwards</a>. Christopher Balding, an academic in China, explained some of the links between the stock market and the real economy in a <a href="http://www.baldingsworld.com/2015/07/30/the-great-bomb-transfer-and-contagion/" target="_blank">blog post</a>. Investment Bank UBS with a sizeable interest in China business, posted a video of its analysts falling over themselves to try and rationalise why everything would <a href="http://bit.ly/1fBI7Dr" target="_blank">probably just fine though</a>.<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihQo61pV0RunA7b_UGx6ytp7cuHp4DfFYHcQDhp_GF0qcV3HSG27LCYShp-B-IjFN9TT2kOSZZ0-8Sb1P8BioPwUyHJYv5PNZEwKDm5JQM9PbQZM1MSJnjiglN4_88u90nWBylxAmT5BQ/s1600/ubs.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="220" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihQo61pV0RunA7b_UGx6ytp7cuHp4DfFYHcQDhp_GF0qcV3HSG27LCYShp-B-IjFN9TT2kOSZZ0-8Sb1P8BioPwUyHJYv5PNZEwKDm5JQM9PbQZM1MSJnjiglN4_88u90nWBylxAmT5BQ/s400/ubs.png" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Bankers looking concerned (c) UBS</td></tr>
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<b>Revisiting the 1990s</b><br />
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It goes without saying that China's efforts to "rebalance" away from its investment driven growth model are in tatters. Not only are key foundations of the proposed rebalancing compromised (such as likelihood of the currency RMB revaluing, or the China - HK Stock Connect mechanism for outsiders to invest in Chinese shares) but the main thrust of the stock market push, the encouragement of middle-class Chinese to invest in the stock market has failed spectacularly and once again, Chinese savers have seen a transfer of their wealth (usually it is through means such as financial repression including via low interest rates). Stories of complete losses by amateur investors have <a href="http://www.cnbc.com/2015/07/28/chinese-farmer-invested-life-savings-in-stocks-lost-it-all.html" target="_blank">emerged</a>, only weeks after the heavy involvement of unsophisticated individuals had been noted in the financial media.<br />
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It is worth noting that the aggressive promotion of the Chinese sharemarket by state media had taken place during 2015 in what many interpreted as an attempt to distract from the property market bubble (seen with the collapse of apartment-builder <a href="http://www.bbc.co.uk/news/business-32391117" target="_blank">Kaisa </a>earlier in 2015). In short a messy situation!<br />
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That said though one aspect not mentioned in the discussion about the current situation is China has shut one of its markets before. It seemed relevant given the period when China shut its market before resuming state support. And the lessons it serves are not positive.<br />
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Referred to as the "327 Incident" (in reference to the code of the Chinese government bond traded), the taking of a significantly losing position by a subsidiary of the Ministry Finance (a centre of factional power for the Party in the Chinese financial system) in 1995 resulted in the cancellation of trading, the imposition of losses to the securities firm which held the correctly priced profitable position and the imprisonment of its head, and, the closure of the futures market for <b>18 years </b>(remaining closed throughout the 1990s and only reopening recently). A good summary below from the <a href="http://www.bjreview.com.cn/Cover_Story_Series_2010/2010-11/30/content_315810.htm" target="_blank">Beijing Review</a>:<br />
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<i>February 23, 1995 was the darkest day in China's securities history.</i></blockquote>
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<i>In 1992, China had issued 24 billion yuan ($3.6 billion) in Treasury bonds (T-bonds) coded "327" that were set to mature in June 1995. </i><i>Upon reaching maturity, the bonds were to be repaid with interest and discounts that reflected inflation.</i></blockquote>
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<i>Guan Jinsheng, then General Manager of the Wanguo Securities Co. Ltd. (Wanguo), expected inflation to dip and estimated that the 327 T-bonds with a par value of 100 yuan ($15) would be repaid at 132 yuan ($20). When the bond's market price hovered around 148 yuan ($22.3), Wanguo decided to hold a short position of the 327 T-bond contracts.</i></blockquote>
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<i>In striking contrast, the China Economic Development Co. Ltd., a wholly owned subsidiary of the Ministry of Finance (MOF), held a long position, expecting the government to raise the bond's discount rate.</i><i>On February 23, 1995, the MOF announced that it would repay the bond at 148.5 yuan ($22.4). </i></blockquote>
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<i>This news pushed up the bond's price to 151.98 yuan ($22.9). In a desperate attempt to recoup its losses, Wanguo sold an astonishing 1.46 trillion yuan ($220 billion) worth of 327 T-bonds eight minutes before the market closed, dragging its price down to 147.4 yuan ($22.2).</i></blockquote>
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<i>But the SSE announced that the contract sales in the last eight minutes were invalid, leading to 5.6 billion yuan ($843.4 million) in losses for Wanguo.</i><i>Because of the incident, Wei Wenyuan, then General Manager of SSE, was removed from office for a lack of regulation. Guan Jinsheng was imprisoned and Wanguo was merged into Shenyin Securities Co. Ltd.</i></blockquote>
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If such an approach is followed this time around, then expect a lot more pain.<br />
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com6tag:blogger.com,1999:blog-2109590870064125073.post-88873442825585922892014-08-02T16:33:00.004-07:002014-08-02T16:37:49.796-07:00The reform legacy - Part II<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">Since the last post there have been a couple of articles which highlight quite well the importance of the reform debate and the main themes. As the PBOC launched further stimulus (including via a new tool called "<a href="http://www.theaustralian.com.au/business/latest/china-central-bank-gives-cdb-1-trillion-yuan/story-e6frg90f-1226997156538" target="_blank">Pledged Supplementary Lending</a>" involving 1 trillion yuan for </span><a href="http://www.actionforex.com/analysis/daily-forex-fundamentals/pboc-added-new-stimulus-measures-to-boost-growth-20140707219569/" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">new lending</span></a><span style="font-family: Arial, Helvetica, sans-serif;">), James MacKintosh, Investment Editor of the Financial Times filmed an </span><a href="http://video.ft.com/3701165822001/Chinese-property-gamble/short-view" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">interesting presentation</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> giving some context to the resulting rise in share prices. While ordinarily share prices would be indicative of higher confidence and expectations for growth, MacKintosh noted that the sectors which had shown the greatest share price increases (and saw the best response to stimulus measures) were companies in the <strong>banking, property and industrial sectors</strong> - all sectors which the Chinese authorities wanted to steer investment away from (and into other sectors) as part of the reform and rebalancing process. Or as James put it:</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;"> "a return to pre-crisis business as usual...a pause in reform means less risk in property and banking as well as the old line state-owned enterprises".</span></blockquote>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAFYuaaB_qGLu8XIzRqxOu-vqAkG0kflB9EE0dpYG1i0kjc4PQRG4MAvXw-h7ekEI2IZ4B8JmuS8J0jDPzDqd5k7nZDtFDeafnOTEa25aboNni-kH9OBiAqalhlEX_rY43f3u-le0pL6o/s1600/james+mck.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAFYuaaB_qGLu8XIzRqxOu-vqAkG0kflB9EE0dpYG1i0kjc4PQRG4MAvXw-h7ekEI2IZ4B8JmuS8J0jDPzDqd5k7nZDtFDeafnOTEa25aboNni-kH9OBiAqalhlEX_rY43f3u-le0pL6o/s1600/james+mck.jpg" height="360" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Arial, Helvetica, sans-serif; font-size: small;">"China Property Gamble" (c) Financial Times</span></td></tr>
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<span style="font-family: Arial, Helvetica, sans-serif;">Of course what James didn't dwell on (but certainly implied) is that there would be more risk overall and in the medium to long term (hence the need for reform to reduce the risk, sadly not carried through). </span><span style="font-family: Arial;">Over at <strong>FTAlphaville</strong>, the suppression of risk was covered well in an article by <a href="http://ftalphaville.ft.com/2014/07/29/1911482/default-settings-in-china/" target="_blank">David Keohane</a> who noted falling bond yields, the <a href="http://www.bloomberg.com/news/2014-07-23/china-averts-second-corporate-default-as-huatong-pays-bonds-1-.html" target="_blank">bailing out of one trust</a> which had been set to default and a pessimistic analysis from reputed analyst Diana Choyleva of </span><span style="font-family: Arial, Helvetica, sans-serif;">Lombard Street Research who noted:</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;"> ...But the more sinister explanation [of failure of domestic demand to drive economic growth] is that the authorities are unable to provide a significant boost to growth even if they want to. They may be trying to boost credit to SMEs, but demand for loans has come off again. China needs to clean up after its debt binge, not stoke it further. The current level of debt may just about mean that Beijing has a chance to reform successfully even if that will involve a few years of meagre growth and financial distress. But the ongoing rapid rate of increase in debt suggests that policymakers do not have too long to postpone much-needed defaults...</span></blockquote>
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<span style="font-family: Arial, Helvetica, sans-serif;"><strong>Zerohedge</strong> meanwhile has taken a much more vigorous editorial line and especially with the Qingdao commodity financing scandal (including discussion of a <a href="http://www.zerohedge.com/news/2014-03-22/how-china-imported-record-70-billion-physical-gold-without-sending-price-gold-soarin" target="_blank">note from Goldman Sachs</a> as to the impact from an unwinding of metal-based rehypothecation). On the new stimulus measures and their indication of the slowdown in reforms, contributorTyler Durden is <a href="http://www.zerohedge.com/news/2014-07-28/chinas-qe" target="_blank">blunt</a>:</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">So whatever way you look at it, <strong>the PBOC thinks China needs more credit (through one channel or another) to keep the ponzi alive. Anyone still harboring any belief in reform, rotation to consumerism is sadly mistaken</strong>. One day of illiquidity appears to have been enough to prove that they need to keep the pipes wide open. The question is where that hot money flows as they clamp down (or not) on external funding channels.</span></blockquote>
<span style="font-family: Arial, Helvetica, sans-serif;">And <a href="http://www.zerohedge.com/news/2014-07-21/spot-china-liquidity-crisis" target="_blank">also</a>:</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Simply put - you can kiss goodbye any hopes of China ceasing its exuberant credit creation... (especially now that the CCFD ponzi scheme has been exposed via Qingdao</span><span style="font-family: Arial, Helvetica, sans-serif;"> -and <span style="color: black;">drastically reduced that channel). <strong>Reforms are all talk and the bubble will just grow bigger</strong> with fewer and fewer attractive outlets for that hot money<span class="Apple-converted-space"> </span></span></span><a href="http://www.zerohedge.com/news/2014-07-10/did-china-just-crush-us-housing-market" style="-webkit-text-stroke-width: 0px; background-color: white; color: #666666; font-family: "Lucida Grande", Verdana, sans-serif; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 17.33px; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="color: black; font-family: Arial, Helvetica, sans-serif;">(now that the US real estate transmission channel has been identified and likely closed)... cue real inflation.</span></a></blockquote>
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<span style="font-family: Arial, Helvetica, sans-serif;">From those Zerohedge articles are two charts of note, the first showing the total amount of credit (bank assets) in the Chinese economy and its rapid growth:</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKCo59QRhPjVocqB6CUmQ7-8FyHJ-nyBoyWaEysZJoJjgVB-A9hufUYN7tvZllGbwLYe1E_lQd_CL2uAwx_vQM_aA4qqSNfjo0qW2_eYl0CC6gMPA_2BnRjyOPpm-TuueoPj3TJ-TgVJI/s1600/China+vs+US+total+bank+assets+Q2_0.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKCo59QRhPjVocqB6CUmQ7-8FyHJ-nyBoyWaEysZJoJjgVB-A9hufUYN7tvZllGbwLYe1E_lQd_CL2uAwx_vQM_aA4qqSNfjo0qW2_eYl0CC6gMPA_2BnRjyOPpm-TuueoPj3TJ-TgVJI/s1600/China+vs+US+total+bank+assets+Q2_0.jpg" height="302" width="400" /></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">and the second the rise in rates which preceded the recent PBOC stimulus (after it apparently stopped conducting repo operations), which corresponds nicely with the increase in share prices mentioned before (imagine the effect on share prices if repo rates continue to rise and there is no new liquidity from the PBOC?!):</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrCpu0mjGRWn-_LPgkEY5aMZGj62IX51dch1eicG5a69vlCn3nyEd3XPNMQV2qVJCwwaLIZP5tl7eSLb4NnZd93o8Vj9uJumvLNobz2lzGAz3AOHQNyXAKHiJ1riD_jdOciRdfZZhD3uA/s1600/20140721_china2_02.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrCpu0mjGRWn-_LPgkEY5aMZGj62IX51dch1eicG5a69vlCn3nyEd3XPNMQV2qVJCwwaLIZP5tl7eSLb4NnZd93o8Vj9uJumvLNobz2lzGAz3AOHQNyXAKHiJ1riD_jdOciRdfZZhD3uA/s1600/20140721_china2_02.jpg" height="211" width="400" /></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Finally, while it will still remain for the next post to discuss some summer reading about the history of reform in China, it can be added one extra piece of reading on exactly this point - a 2013 IMF Working Paper: "China’s Path to Consumer-Based Growth: Reorienting Investment and Enhancing Efficiency" (</span><a href="https://www.imf.org/external/pubs/ft/wp/2013/wp1383.pdf" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">here</span></a><span style="font-family: Arial, Helvetica, sans-serif;">), which " proposes a possible framework for identifying excessive investment".</span></div>
The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-63340156835588270562014-07-20T06:09:00.001-07:002014-07-20T06:09:16.707-07:00The reform legacy - Part I<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">One of the most significant debates of the moment is the extent to which China is engaging in reform away from the production-heavy, subsidised, export-orientated economy towards a more balanced, consumption-led, open and lower growth (but more sustainable) model.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">This is the background amidst which debates such as regarding China's </span><a href="http://www.cityam.com/1405679929/lower-china-gdp-growth-acceptable-says-chinese-premier-li-keqiang" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">target rate of GDP growth</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> and the </span><a href="http://www.ft.com/intl/cms/s/0/05266aea-0841-11e4-acd8-00144feab7de.html#axzz37x7QJBUC" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">internationalisation of the currency (the Renminbi)</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> have occurred and there are plenty of opinions on offer. A good example was seen at the conference organised by the Financial Times' offshoot </span><a href="http://ftalphaville.ft.com/2014/07/11/1897262/camp-on-camera-ii/" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">FTAlphaville</span></a><span style="font-family: Arial, Helvetica, sans-serif;">, where celebrity guests Michael Pettis and Carson Block offered differing visions - in a short interview Pettis noted that rebalancing was proceeding in a more or less predictable manner (with reforms proceeding as announced in the Third Plenum), while for Carson Block, an impending debt crisis would likely arrive sooner and cause enough trouble as to hinder any meaningful schedule of reform. </span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">As it happens Pettis has considered the issue of debt quite specifically and a </span><a href="http://blog.mpettis.com/2014/07/bad-debt-cannot-simply-be-socialized/" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">recent post on his blog</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> argues its importance in understanding China's growth prospects and in understanding rebalancing - a feature of one of his recent books. A recording of Pettis speaking at the </span><a href="https://www.youtube.com/watch?v=pXu8FQC3Z38" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">2013 Wine Country Conference</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> sets out the background in excellent detail and is a real eye opener - Pettis likens the Chinese economic model to that of Japan "on steroids". There is an interesting contrast with Pettis' blog post - which concludes asking the question of where the great losses from the excessive debt will be recognised. In the Wine Country presentation Pettis details how losses in Japan were absorbed by the government when it took on the debts of the banking system rather than overseeing writeoffs (in a manner similar to which European sovereigns today are taking on the risk of their bloated banking sectors). It would seem likely that the same may occur in China, where corporate debt now has </span><a href="http://online.wsj.com/articles/china-tops-u-s-in-corporate-debt-issuance-1402898959" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">surpassed that of the US</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> and is estimated to be </span><a href="http://www.economist.com/blogs/freeexchange/2014/07/china-s-debt-gdp-level" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">200% of GDP</span></a><span style="font-family: Arial, Helvetica, sans-serif;">.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<strong><span style="font-family: Arial, Helvetica, sans-serif;">Leaning to the chaotic</span></strong><br />
<span style="font-family: Arial, Helvetica, sans-serif;">As Pettis notes in his presentation and elsewhere rebalancing is inevitable from a macroeconomic point of view and amidst the choices available to economic decision-makers are a range of outcomes from orderly rebalancing to chaotic. Recent news has suggested that (i) authorities in China are trying to delay rebalancing, through measures like the "mini-stimulus" (which will only worsen the outcome later on) and (ii) events on the ground may be starting to overwhelm the ability of the authorities to maintain control such that rebalancing will not be orderly.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">The mini-stimulus was unveiled in April 2014 with announcements of </span><a href="http://online.wsj.com/news/articles/SB10001424052702303847804579477060004679726" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">new spending targeting SOEs and state-focussed industries</span></a><span style="font-family: Arial, Helvetica, sans-serif;">, with results appearing to show increased production by mid June and into </span><a href="http://www.ibtimes.co.uk/chinas-state-owned-firms-record-higher-profit-mini-stimulus-measures-help-revive-economy-1456994" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">July</span></a><span style="font-family: Arial, Helvetica, sans-serif;">. So far as expected. But in addition to wondering where the next round of growth is going to come from since the administration's mini-stimulus has delayed SOE reform and shifting of production to the private sector, several themes have emerged in the background which could undermine the whole process. These are:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">1. The divergence between Government and Private Economics surveys</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">As this </span><a href="http://www.zerohedge.com/news/2014-06-22/china-beige-book-hsbc-manufacturing-pmi-paint-diametrically-opposing-pictures-chinas" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">article on Zerohedge</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> notes, essentially one of the teams producing the surveys is likely just making up the numbers since private surveys show economic stagnation while government produced statistics paint a rosy picture.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">One set of statistics is likely to be false and if it is the government produced statistics then the state of the Chinese economy could be grave.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">2. The property market is imploding</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Daily updates on the </span><a href="http://investinginchinesestocks.blogspot.com/" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">Investing in Chinese Stocks Blog</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> are offering a disturbing picture of financial collapse across the country with nationwide price falls in properties for sale in cities across the country, developers launching all manner of tactics to clear sales targets and credit guarantee and other private financing firms seeing their directors flee owing creditors millions. This is getting litte attention in the Western media although an article in </span><a href="http://www.zerohedge.com/news/2014-07-18/chinese-home-prices-decline-record-number-cities-average-sale-price-has-biggest-drop" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">Zerohedge</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> (drawing from a Bloomberg article) provides a useful summary.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">3. The commodities finance trade has frozen up</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Sophisticated China watchers will be aware of the holes in the great capital wall which have allowed capital to circulate through the Chinese economy and keep it functioning, including the remittance program which allowed wealthy Chinese to evade the limit on remittances and engage in massive capital flight by transferring funds out of China to buy real estate in developed markets like Canada, Australia and the US. One method of effecting remittances was through a hidden program at certain banks which was the subject of an </span><a href="http://www.reuters.com/article/2014/07/15/us-china-moneylaundering-wsj-idUSKBN0FK07Y20140715" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">expose by CCTV</span></a><span style="font-family: Arial, Helvetica, sans-serif;">, the State broadcaster. Commentators noted that the expose may have been part of a factional battle taking place between factions aligned with CCTV and the PBOC (since the programs were approved), but of even more significance is the emergence of fraud in the commodities trade.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Also arising as part of a corruption investigation, charges of fraud at the large port of </span><a href="http://www.ibtimes.co.uk/china-qingdao-police-probe-decheng-mining-over-port-fraud-claims-1452068" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">Qingdao</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> by Decheng Mining, a metals trader which offered financing and rehypothecated metal stocks (using the same collateral for multiple loans, including using forged documents) is of note not only because of the size of fraud or that international banks have been </span><a href="http://www.bloomberg.com/news/2014-07-14/standard-chartered-sues-decheng-mining-s-chen-for-35-6-million.html" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">involved</span></a><span style="font-family: Arial, Helvetica, sans-serif;">, but that the whole commodity financing industry in China is under threat and that as such a significant amount of liquidity for the Chinese financial sector which the commodity financing provides could be at risk. An interesting article refers to a recent </span><a href="http://www.zerohedge.com/news/2014-07-18/chinese-commodity-contagion-leads-first-letter-credit-settlement-failure" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">failure of a letter of credit settlement</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> - which does remind of failures of repo trades which presaged the Lehman collapse - which can only be understood as systemic.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">The next blog will look at some interesting summer reading which traces the historic background that helped lead to the current situation, but until then here is a shot from a new Chinese water park which speaks to more than just the plight of the swimmers...</span><br />
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-72313660626398265952014-05-05T02:03:00.000-07:002014-05-05T02:03:20.347-07:00A belief in the supernatural<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">Following the last post it emerged that there are another class of investors already taking losses (and expect more of these to appear). In perhaps what could be termed the ending of the Xiaochan put (a corollary of the Greenspan put, by which US markets had been supported by intervention by the Federal Reserve), so a report from Morgan Stanley detailed the vast sums wagered by speculators positioning for a continued rise in the Chinese currency (the Yuan/Renminbi) which came to an end as the Central Bank in China, the PBOC (led by Zhou Xiaochan) sought to stunt speculation in the currency:</span><br />
<blockquote class="tr_bq">
<span style="font-family: Arial, Helvetica, sans-serif;">The seemingly incessant strengthening trend of the Chinese Yuan (much as with the seemingly inexorable rise of US equities or home prices) has encouraged huge amounts of structured products to be created over the past few years enabling traders to position for more of the same in increasingly levered ways. That was all going great until the last few weeks which has seen China enter the currency wars (as we explained here). The problem, among many facing China, is that these structured products will face major losses and as Morgan Stanley warns "real pain will come if CNY stays above these levels," leading to further capital withdrawal, illiquidity, and a potential vicious circle as it appears the PBOC is trying to break the virtuous carry trade that has fueled so much of its bubble economy.</span></blockquote>
<span style="font-family: Arial, Helvetica, sans-serif;">and losses were estimated to be in the billions of dollars, and worryingly (given the deterioration going on in the Chinese economy) many of the holders of the loss-making positions were Chinese corporates:</span><br />
<blockquote class="tr_bq">
<span style="font-family: Arial, Helvetica, sans-serif;">In their previous note, MS estimated that US$350 billion of TRF have been sold since the beginning of 2013. When we dig deeper, we think it is reasonable to assume that most of what was sold in 2013 has been knocked out (at the lower knock-outs), given the price action seen in 2013...."Given that, and given what business we’ve done in 2014 calendar year to date, we
think a reasonable estimate is that US$150 billion of product remains."...</span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: Arial, Helvetica, sans-serif;">...The potential for US$4.8 billion in losses for every 0.1 above the average EKI could have significant implications for corporate China in its own right, as could the need to post collateral on positions even if the EKI level is not breached... </span></blockquote>
<span style="font-family: Arial, Helvetica, sans-serif;">On the latest check this trend seemed set to continue with weak economic statistics, regulatory concern and weakness in the currency all referenced in a </span><a href="http://www.bloomberg.com/news/2014-05-04/morgan-stanley-sees-yuan-selloff-as-sinopac-barred-china-credit.html" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">Bloomberg </span></a><span style="font-family: Arial, Helvetica, sans-serif;">report. As mentioned in that report, the spectre of capital flight and further destabilisation of Chinese financial markets is a not shallow risk.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"> </span><br />
<strong><span style="font-family: Arial, Helvetica, sans-serif;">Hope and dreams</span></strong><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Notwithstanding some less than pleasing numbers and </span><a href="http://blogs.wsj.com/chinarealtime/2014/05/02/leaked-comments-from-top-property-developer-china-is-built-out/" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">off-message disclosures</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> of some key figures in China's dynamic property sector and prices of apartments starting to be discounted in a way described as </span><a href="http://www.macrobusiness.com.au/2014/04/chinas-crumbling-property-market/" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">"crumbling"</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> (and </span><a href="http://www.scmp.com/property/hong-kong-china/article/1486698/china-home-price-inflation-slows-third-month" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">here</span></a><span style="font-family: Arial, Helvetica, sans-serif;">), the facade of the great China miracle continues for the time being, even with the recent announcement of a </span><a href="http://www.bloomberg.com/news/2014-04-30/china-set-to-overtake-u-s-as-biggest-economy-using-ppp-measure.html" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">passing of the US</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> on one economic measure (not without criticism, including from the </span><a href="http://ftalphaville.ft.com/2014/05/02/1842012/china-the-us-and-ppp-a-pretty-poor-parallel/" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">Financial Times</span></a><span style="font-family: Arial, Helvetica, sans-serif;">).</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"> </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">As an example of the continued hopefulness and ambition the recent report of an ultra-fast lift to be incorporated in a </span><a href="http://www.independent.co.uk/life-style/gadgets-and-tech/worlds-fastest-lift-climbs-95-floors-in-43-seconds-at-speeds-of-up-to-45mph-9275347.html" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">new development in Guangzhou</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> is a reminder of the Middle Eastern style optimism which has driven the China urban development story. Of course reality throws up questions such as the need for a giant financial centre development in somewhere like Guangzhou but the need to maintain a motivating ideology for the continued reckless and unsustainable growth seems still to be a concern of those in power and with commercial interests.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"> </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">This was noted by my recent reading of modern Party mouthpiece</span><a href="http://www.chinadaily.com.cn/" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;"> China Daily</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> whilst transiting at an airport, which dedicated an issue to President Xi's own notion of the "China Dream", a new guiding vision for youthful and emerging China (with the cover story </span><a href="http://europe.chinadaily.com.cn/epaper/2014-04/18/content_17443369.htm" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">"Dream Debate"</span></a><span style="font-family: Arial, Helvetica, sans-serif;">). While well composed and quite glossy, the feature section was disappointing as it fell into predictable patterns, including:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"> </span><br />
<ul>
<li><span style="font-family: Arial, Helvetica, sans-serif;">a </span><a href="http://europe.chinadaily.com.cn/epaper/2014-04/18/content_17443370.htm" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">piece</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> by American China apologist Robert Kuhn, who earlier said that the Bo Xilai scandal was only of interest to Westerners because it was "salacious";</span></li>
<li><span style="font-family: Arial, Helvetica, sans-serif;">an </span><a href="http://europe.chinadaily.com.cn/epaper/2014-04/18/content_17443377.htm" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">advocacy</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> of the status quo by Zhou Feng that contained such wonderful statements as "drastic measures are not necessary" and </span></li>
<blockquote class="tr_bq">
<div>
<span style="font-family: Arial, Helvetica, sans-serif;">"by withstanding the global financial crisis in 2008-09, the Chinese economy has become more resilient in its ability to deal with slower growth. Its trade sector, for example, has become used to operating with wafer-thin profit margins."</span></div>
</blockquote>
<span style="font-family: Arial, Helvetica, sans-serif;">(that would be resilience by going bankrupt!) </span><br />
<li><span style="font-family: Arial, Helvetica, sans-serif;">a wonderfully titled piece by Yu Yongding "</span><a href="http://europe.chinadaily.com.cn/epaper/2014-04/18/content_17443380.htm" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">No financial meltdown to worry about</span></a><span style="font-family: Arial, Helvetica, sans-serif;">", which argues that China will be fine because it does not have US subprime mortgages (trust loan anyone?)</span></li>
</ul>
<span style="font-family: Arial, Helvetica, sans-serif;">and so on.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"> </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Over at </span><a href="http://www.zerohedge.com/news/2014-05-04/beijings-tepid-efforts-slow-credit-boom-are-springing-giant-leaks" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">Zerohedge</span></a><span style="font-family: Arial, Helvetica, sans-serif;">, hyperbole notwithstanding there was a far more grim picture being painted of the situation in China currently:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"> </span><br />
<blockquote class="tr_bq">
<span style="font-family: Arial, Helvetica, sans-serif;">China is a case of bastardized socialism on credit steroids. At the turn of century it had $1 trillion of credit market debt outstanding—-a figure which has now soared to $25 trillion. The plain fact is that no economic system can remain stable and sustainable after undergoing a 25X debt expansion in a mere 14 years....</span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: Arial, Helvetica, sans-serif;">...The borrowing, building and speculating mania in China has obviously gotten so extreme that even the new regime in Beijing has been desperately trying to cool it down. But this will end up as a catastrophic failure—not the “soft landing” brayed about by Wall Street bulls who do not have the slightest comprehension of the difference between free market capitalism and the phony “red capitalism” that has been confected by the party-controlled apparatus of the massive, intrusive, bureaucratic and hierarchically-driven Chinese State..</span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: Arial, Helvetica, sans-serif;">At bottom the fatal error among China bulls is the failure to recognize that <strong>the colossal boom and bust cycle that China is undergoing is not symmetrical</strong>. The much admired alacrity by which the state guided the export boom after 1994 and the infrastructure boom after 2008 is not evidence of a superior model of governance; its only proof that when credit, favors, subsidies, franchises and speculative windfall opportunities are being passed out freely and to everyone, when there are all winners and no losers ( e. g. China’s bankruptcy rate has been infinitesimal), a statist regime can appear to walk on water....</span></blockquote>
<div>
<blockquote class="tr_bq">
<span style="font-family: Arial, Helvetica, sans-serif;">...In short, the Chinese population “can’t handle the truth” in Jack Nicholson’s memorable line. They by now believe they are entitled to a permanent feast and have every expectation that they party and state apparatus will continue to deliver it.<span class="Apple-converted-space"> <strong><em>As a result, Beijing has resorted to a strategy of tip-toeing around the tulips in a series of start and stop maneuvers to rein-in the credit and building mania....</em></strong></span></span></blockquote>
<strong><span style="font-family: Arial, Helvetica, sans-serif;">To the fireflies</span></strong><br />
<span style="font-family: Arial, Helvetica, sans-serif;">That last paragraph raised an interesting aspect (contrasting public expectations and management by the authorities). Exactly how well will China's population handle the transition which is to arrive once credit markets turn? On the basis of one unlikely tourist venture, possibly not well. The below picture (and final image of the post) is from angry holidaymakers who invaded the office of a tour company after a display of </span><a href="https://sg.news.yahoo.com/blogs/what-is-buzzing/chinese-tourists-storm-office-after-fireflies-failed-to-glow-085217310.html" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">firefly insects</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> did not materialise at an organised event:</span><br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrAhvtNIO6IfKSPTl_gkMdw8D1DpcYSSyGFiOJc4ugLWgwJKCA_Xth19lEM39-63SLGrmb3g_Gy2I8qPA_OvF9LkMHceaLYDQrpauYq_MqH9SM9mytbyuEy-4mq9TEny7bYM_-Q2_rtH8/s1600/2014-05-01T092904Z_335078567_GM1EA511C8S01_RTRMADP_3_CHINA.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrAhvtNIO6IfKSPTl_gkMdw8D1DpcYSSyGFiOJc4ugLWgwJKCA_Xth19lEM39-63SLGrmb3g_Gy2I8qPA_OvF9LkMHceaLYDQrpauYq_MqH9SM9mytbyuEy-4mq9TEny7bYM_-Q2_rtH8/s1600/2014-05-01T092904Z_335078567_GM1EA511C8S01_RTRMADP_3_CHINA.JPG" height="252" width="400" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Arial, Helvetica, sans-serif;"><span style="font-size: x-small;"><span style="-webkit-text-stroke-width: 0px; background-color: white; color: #414141; display: inline !important; float: none; font-family: arial; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 16.02px; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">Visitors shout at organizers during an event to release fireflies in Hangzhou, Zhejiang province, April 30, 2014. According to local media, about 10,000 people protested for a refund of their</span><span class="expandable-text" id="yui_3_9_1_1_1399280280499_763" style="-webkit-text-stroke-width: 0px; background-color: white; color: #414141; font-family: arial; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 16.02px; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span class="less-text" style="display: inline;"><span class="Apple-converted-space"> </span>tickets, claiming they could not find fireflies to release at night. Picture taken April 30, 2014. REUTERS</span></span></span></span></td></tr>
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-64397657437884242932014-02-15T08:15:00.000-08:002014-02-15T08:44:43.082-08:00The biggest loser?<div dir="ltr" style="text-align: left;" trbidi="on">
The start of 2014 has seen a flood of commentary regarding the Chinese non-bank (trust) financial sector - with the last minute bailout of the oddly named "<a href="http://www.ft.com/intl/cms/s/0/4e80205a-872c-11e3-ba87-00144feab7de.html" target="_blank">Credit Equals Gold</a>" trust fund (sold through ICBC branches) in late January and a number of <a href="http://www.reuters.com/article/2014/02/14/us-china-trust-default-idUSBREA1D06420140214" target="_blank">predicted defaults</a> of trust funds linked to the coal sector (or actual default in the case of <a href="http://uk.reuters.com/article/2014/02/12/china-trust-default-idUKL3N0LH1L320140212" target="_blank">Jilin Trust</a>) in February. As <a href="http://www.bloomberg.com/news/2014-02-10/junk-yield-premiums-soar-on-china-s-looming-first-default.html" target="_blank">Bloomberg</a> notes, yields on debt securities are also rising making finance more expensive for businesses in China, but the borrowing binge is continuing, with the <a href="http://www.ft.com/intl/cms/s/0/d8c3acae-9632-11e3-945d-00144feab7de.html?siteedition=intl#axzz2tNotYRhP" target="_blank">FT</a> reporting the highest rates of lending in four years (and a<a href="http://blogs.ft.com/beyond-brics/2013/12/02/chinese-business-piles-into-banking/?o=os#axzz2tPTS5pIX" target="_blank"> flood of new entrant</a>s into the trust and wealth management sector).<br />
<br />
As longtime financing expert <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10612451/Currency-crisis-at-Chinese-banks-could-trigger-global-meltdown.html" target="_blank">Charlene Chu</a> has noted, there is increasing currency risk in the system as more borrowers resort to offshore lending. In the same article in the Telegraph, George Magnus of UBS notes the similarity with Japan before its crash in the 1980s. Unhelpfully as <a href="http://www.telegraph.co.uk/finance/comment/10634339/World-asleep-as-China-tightens-deflationary-vice.html" target="_blank">Ambrose Evans-Pritchard</a> notes in his Telegraph comment piece, this is occurring amidst a policy of monetary tightening and contraction as the administration in China tries to rein in the heady boom of the last decade.<br />
<br />
Notwithstanding the current focus on losses within China it is interesting to note some consideration being given to just how much will be lost by foreign lenders. As <a href="http://seekingalpha.com/article/2022341-western-banks-and-china-interesting-times-are-coming" target="_blank">Sean Darby</a>, an equity strategist at Jeffries has noted there is significant exposure not only in Hong Kong (China's primary offshore investment centre), but in the banks of Australia, Europe and elsewhere. It doesn't help that in Australia's case, the large domestic banks which are stuffed high with local real estate loans, desperate for growth opportunities are now aggressively <a href="http://www.ifrasia.com/aussie-firms-on-the-move-in-prc/21132112.article" target="_blank">moving into the Chinese market</a> (see also <a href="http://www.smh.com.au/business/australian-banks-rush-to-lend-287-billion-to-chinese-borrowers-20140128-31kz8.html" target="_blank">here</a>).<br />
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The below chart from Bloomberg (full size image <a href="http://postimg.org/image/mnw649go5/" target="_blank">here</a>) shows the rapid growth of foreign lenders' exposure to China and in particular it is interesting to note the high exposures of British, French and Australian banks. This may be something they come to regret.<br />
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<tr><td class="tr-caption" style="text-align: center;">(c) Bloomberg</td></tr>
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-56052442975201802292013-12-28T12:37:00.000-08:002013-12-28T12:37:21.397-08:00A year to savour?<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">2013 saw a lot of changes to the mood in China, with the transition of Xi Jinping and introduction of a reform agenda, launched last month at the Third Party Plenum. There was plenty of political intrigue with the trial of Bo Xilai, endless other officials and detention of Zhou Yongkang. The first hints of the banking crisis emerged, with spikes in the interbank market in June and early December. Property and asset markets remained turbulent and tensions in Western China remained. And regional tensions escalated with the declaration of the Air Defence Identification Zone over the disputed areas of the South China Sea.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"> </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">It seems fairly likely that recent interbank stress has involved non-disclosed defaults by Mainland institutions - China Everbright Bank's default during the first Shibor Spike was only revealed this month when a note in its IPO prospectus revealed two of its branches had </span><a href="http://blogs.wsj.com/chinarealtime/2013/12/16/china-everbright-admits-to-interbank-loan-default/" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">defaulted in June</span></a><span style="font-family: Arial, Helvetica, sans-serif;">, although quickly paid up (while at the time reports of branch closures and ATM shutdowns were dismissed as due to technical errors). As in June the PBOC did belatedly</span><a href="http://online.wsj.com/news/articles/SB10001424052702304244904579277162412502876" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;"> intervene to calm the markets</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> with liquidity injections (a Christmas offering if you like), but there is little likelihood this pattern of crisis and belated resolution won't be repeated.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"> </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">As noted on the </span><a href="http://investinginchinesestocks.blogspot.com/2013/12/earn-60k-on-10-million-yuan-deposit.html" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">Investing in Chinese Stocks Blog</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> and elsewhere, the shadow banking system is rampant and a massive risk to the banking system as all manner of schemes with high and unsustainable returns have spread amidst sluggish regulated below inflation rates available in the mainstream banking system. Worse still, as has been noted before, although the entities providing such returns (trusts and other structures sold as "wealth management products") are outside the formal banking system, their products are sold to bank customers and banks either own or have exposure to the entities. The bankruptcy of mining giant </span><a href="http://www.ft.com/cms/s/0/e91bcad0-66d2-11e3-aa10-00144feabdc0.html#axzz2onPCAOGG" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">Liangsheng</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> (a coal acquisition group overburdened by debt) is an example likely to be seen more frequently and already of a scale which could threaten China's banking system. Most significantly losses track back immediately to the investors and a big state owned bank - as the FT states:</span><br />
<blockquote class="tr_bq">
<em><span style="font-family: Arial, Helvetica, sans-serif;">Liansheng had little trouble finding willing lenders among China’s burgeoning shadow banks, which regulators have allowed to help plug the financing gap.</span></em></blockquote>
<blockquote class="tr_bq">
<em><span style="font-family: Arial, Helvetica, sans-serif;">From late 2011 to early 2012, Jilin Trust, one of China’s vast array of non-bank financial institutions, sold to investors an investment product worth Rmb1bn backed entirely by loans to Liansheng.</span></em></blockquote>
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<em><span style="font-family: Arial, Helvetica, sans-serif;">Jilin Trust warned investors at the start of this month that the first tranche of the Liansheng loans was nearing maturity and that the mining company had yet to cover what is owed, according to China Business News, a local financial newspaper. </span></em></blockquote>
<blockquote class="tr_bq">
<span style="font-family: Arial, Helvetica, sans-serif;"><em>...Liansheng’s troubles are a reminder of the thin dividing line between China’s banks and its shadow lending industry. The Liansheng loan product sold by Jilin Trust was distributed in part via </em><em>China Construction Bank</em><em>, the country’s second-biggest lender by assets.</em></span></blockquote>
<blockquote class="tr_bq">
<em><span style="font-family: Arial, Helvetica, sans-serif;">Banks tell customers they do not guarantee trust products, which offer returns far higher than traditional bank deposits, but buyers often ignore the warnings in the belief they carry the banks’ implicit backing. The Liansheng investment product targeted an annual return of 9.8 per cent.</span></em></blockquote>
<span style="font-family: Arial, Helvetica, sans-serif;">And notwithstanding the proposed interest rate liberalisation, repression in the banking system creates opportunities for the shadow banking system to flourish while as the former chief economist and spokesman of the National Bureau of Statistics in China describes it, the banking system does not work in any efficient manner at all, but rather could be run by a canine:</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"> </span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">“Banking in China has become like a highway toll system,” Yao Jingyuan said at a Saturday summit on China’s economy held at Nanjing University. “Banks charge every time money goes through them.</span></blockquote>
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<span style="font-family: Arial, Helvetica, sans-serif;">"With this kind of operational model, banks will continue making money even if all the bank presidents go home to sleep and you replaced them by putting a small dog in their seats.”</span></blockquote>
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<span style="font-family: Arial, Helvetica, sans-serif;">Yao added that there were no longer any real bankers in China, and that most bankers had become “freeloaders” who latched onto the wide profit margin they could enjoy by taking advantage of interest differences between deposits and loans.(</span><a href="http://www.scmp.com/news/china-insider/article/1389717/dog-could-run-chinas-banking-system-says-former-state-council" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">here</span></a><span style="font-family: Arial, Helvetica, sans-serif;">).</span></blockquote>
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<span style="font-family: Arial, Helvetica, sans-serif;">With this sort of oversight it will be a wonder if any Chinese banks don't get into trouble next year. </span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">In the meantime, this article will be rounded out with a couple of photographs which seem to capture the mood at the moment.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">"President Li buys his own steamed buns"</span></div>
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<div class="separator" style="-webkit-text-stroke-width: 0px; background-color: white; clear: both; color: black; font-family: Arial, Helvetica, "Nimbus Sans L", sans-serif; font-size-adjust: none; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 18px; margin: 0px 0px 15px; text-align: center; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyELYqZZYE_eJiYFHq2q8FfpfLLDrTBBb57yAhygcSvDFLkD8lyThc3uVnTFAcnFDjNzIrH6RvIqpvA7HvQbrQraC1iVwaW2f4pCjg5xf1JMdZrkKA_uCLzuLW6sdYD7ixfmrTN_om1fs/s1600/20131228xibaozi-165210_copy1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" height="210" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyELYqZZYE_eJiYFHq2q8FfpfLLDrTBBb57yAhygcSvDFLkD8lyThc3uVnTFAcnFDjNzIrH6RvIqpvA7HvQbrQraC1iVwaW2f4pCjg5xf1JMdZrkKA_uCLzuLW6sdYD7ixfmrTN_om1fs/s320/20131228xibaozi-165210_copy1.jpg" width="320" /></span></a></div>
<span style="font-family: Arial, Helvetica, sans-serif;">The above is the actual headline from the report of an </span><a href="http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20131228000119&cid=1101" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">unusual purchase by a Chinese President</span></a><span style="font-family: Arial, Helvetica, sans-serif;">. Given the clear level of deference and hierarchy still in place in China, what hope is there of genuine financial reform? For example as with the PBOC, so the shipbuilding industry has also been </span><a href="http://www.reuters.com/article/2013/12/09/us-china-shipping-idUSBRE9B80Q320131209" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">bailed out</span></a><span style="font-family: Arial, Helvetica, sans-serif;">.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">The likely outcome for the Chinese financial sector in 2014?</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCNNVQJY0s0_GSJbnOnz3HgOt_23Kt3XgolFFL6pFEgK6z2zVp1gVpSsr7Xu7VxOpPthKZb8JxpFnwu2kx-IRAyCYWJ7kqclVAtqyJYJ0VvfjJAKQb_H-n-Y4rmTuEBO5xwGKZwm-l14A/s1600/xie-152231_copy1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"><img border="0" height="196" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCNNVQJY0s0_GSJbnOnz3HgOt_23Kt3XgolFFL6pFEgK6z2zVp1gVpSsr7Xu7VxOpPthKZb8JxpFnwu2kx-IRAyCYWJ7kqclVAtqyJYJ0VvfjJAKQb_H-n-Y4rmTuEBO5xwGKZwm-l14A/s320/xie-152231_copy1.jpg" width="320" /></span></a></div>
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="-webkit-text-stroke-width: 0px; background-color: white; color: black; display: inline !important; float: none; font-family: Arial, Helvetica, sans-serif; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: 18px; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><a href="http://www.wantchinatimes.com/news-subclass-cnt.aspx?cid=1303&MainCatID=13&id=20131223000009" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">Xie Shuizhun</span></a><span style="font-family: Arial, Helvetica, sans-serif;">, a 46-year-old man from central China's Hubei province, earns his living by charging random strangers in Guangzhou's Baiyun district to beat him up, at a rate of 5 yuan (US$0.82) per punch. He insists the punches do not hurt him because he practices the ancient </span><span style="font-family: Arial, Helvetica, sans-serif;">Chinese art of Qigong, which allows him to inflate his belly like a rubber ball.</span></span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Back in 2014!</span></blockquote>
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com1tag:blogger.com,1999:blog-2109590870064125073.post-73558068639470713132013-11-13T18:30:00.002-08:002013-11-14T18:32:15.012-08:00The rising of three suns<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">Recently China watchers have added to their experience of weird weather phenomena by witnessing the rising of </span><a href="http://www.channel4.com/news/sun-rainbow-illusion-mystery-astronomy-china" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">three suns</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> in Chifeng city - due to the presence of ice crystals high in the atmosphere which reflect the sunlight downwards. Perhaps symbolic the phenomena occurred prior to the convening of the </span><a href="http://www.bbc.co.uk/news/business-24919043" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">third plenum Party conference</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> (that is the significant third meeting of Xi Jinping's premiership), when the most important policies and overall direction of the administration is laid out.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Reports from the main session of the plenum proceedings were mixed, commitments to market opening and deepening were contrasted with an </span><a href="http://qz.com/146463/chinas-third-plenum-is-over-xi-jinping-needed-to-deliver-alas-he-didnt/" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">absence of concrete measures</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> to tackle some of the more significant issues in China, including the rampant state owned entities which distort the Chinese economy and waste resources (summary also </span><a href="http://ftalphaville.ft.com/2013/11/13/1693332/the-morning-after-the-plenum-before/" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">here</span></a><span style="font-family: Arial, Helvetica, sans-serif;">). Meanwhile foreign journalists </span><a href="http://www.nytimes.com/2013/11/10/world/asia/reporter-for-reuters-wont-receive-china-visa.html?_r=0" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">faced difficulty</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> getting into China to report and/or (allegedly) the prospect of </span><a href="http://www.ft.com/cms/s/0/d121fd70-49f2-11e3-9a21-00144feabdc0.html" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">self-censorship</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> of certain significant news investigations.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">On the modernisation drive Bloomberg did report on developments from the new free trade zone in Shanghai, including the opening of a massive gold vault which will store up to </span><a href="http://www.bloomberg.com/video/gold-vault-opens-in-shanghai-free-trade-zone-ZYQ~20OORiuGFun9Dm~YUA.html" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">2,000 metric tonnes of gold</span></a><span style="font-family: Arial, Helvetica, sans-serif;">. Gold bugs are speculating on possible future outcomes from the high volumes of Chinese gold buying, constituting a seminal moment when gold had moved from "west to east". Adding to this, speculation of the adoption of </span><a href="http://www.reuters.com/article/2013/11/05/us-china-reform-ftz-idUSBRE9A414I20131105" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">international rather than Chinese law</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> in the free trade zones (similar to Hong Kong) suggest that much is happening.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">The reality may be different however. China's (and the world's) largest bank ICBC, has been added to the list of globally systemically important banks by the global bank regulator, the Financial Stability Board (which is hosted by the Bank of International Settlements), meaning </span><a href="http://www.cnbc.com/id/101188972" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">tougher capital requirements</span></a><span style="font-family: Arial, Helvetica, sans-serif;">. And there has been declining interest in lower tier banks coming to market - mid-sized Huishang Bank, which acts as an intermediary in the shadow sector (including transactions involving entrusted loans and other interbank off-balance sheet lending) saw lacklustre demand following its recent </span><a href="http://www.reuters.com/article/2013/11/12/huishangbank-ipo-debut-idUSL4N0IX0F920131112" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">Hong Kong IPO,</span></a><span style="font-family: Arial, Helvetica, sans-serif;"> with analysts divided as to whether the IPO of one of the original four Chinese bad debt vehicles, Cinda (an asset management company) expected in December will be well received. As even profligate local governments are staring to see more scrutiny (not only in calls for action from the central government but also from their </span><a href="http://www.wantchinatimes.com/news-subclass-cnt.aspx?cid=1202&MainCatID=12&id=20131114000007" target="_blank"><span style="font-family: Arial, Helvetica, sans-serif;">constituents</span></a><span style="font-family: Arial, Helvetica, sans-serif;">), the scale of Chinese indebtedness may be fully revealed.</span><br />
<span style="font-family: Arial;"></span><br />
<span style="font-family: Arial;">More abstract perhaps but there are some analysts who doubt the short term impacts of the proposed reforms to China's financial system. <span style="-webkit-text-stroke-width: 0px; background-color: white; color: black; display: inline !important; float: none; font-size-adjust: none; font-stretch: normal; font: 14px/18px Arial, Helvetica, sans-serif; letter-spacing: normal; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">Pu Yonghao, UBS's head of Asia research, says China may experience a period of economic hardship over the <a href="http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20131114000119&cid=1202" target="_blank">next two to three years</a>.</span></span><br />
<span style="font-family: Arial;"></span><br />
<span style="font-family: Arial;">And in other news it was reported that disgraced solar panel company Suntech has filed for provisional liquidation in the <a href="http://www.smh.com.au/business/carbon-economy/sun-almost-set-on-suntech-power-as-liquidation-looms-20131108-2x4yi.html" target="_blank">Cayman Islands</a> (following a buyout of some of its business and attempts to save it by the local government). There could be more to come.</span></div>
The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com2tag:blogger.com,1999:blog-2109590870064125073.post-82959603949245355022013-10-06T06:33:00.000-07:002013-10-06T06:33:20.151-07:00The psychology of grand gestures<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">These days many people approach China through the lens of superlatives - massive buildings and infrastructure, dynamic fast paced growth and grand government visions. Local press Caixin had a photo series of some of the <a href="http://english.caixin.com/2013-09-26/100586728.html" target="_blank">more opulent government offices</a> which had been built in recent years in some of the more deserted parts of China. This correspondent can recall travelling to Shanghai in the late 1990s and being impressed by the opulence of the central square and museum and the comparative poverty of the shopping mall below - which no doubt has long since been renovated. Perhaps, as suggested by the <a href="http://www.independent.co.uk/news/world/asia/dazed-and-confucius-nine-common-myths-about-china-8854734.html" target="_blank">Independent</a> newspaper it is easy to misinterpret what is going on in China simply by being an outsider. Nevertheless there does seem to be some insight from reviewing what will be termed the "grand gestures" being made by the Chinese in administration (and their possible view of events through this perspective).</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">To start with the US however, many have argued that the Chinese administration places great weight in its actions by what is happening in the US and arguably much of China's recent policy is seen to have been calibrated with big shifts in US policy. Hence many analysts point to the US-led financial crisis in 2008 as having caused a pivot in Chinese fiscal policy - when the administration not only decided to embark on the massive stimulus in 2009 and 2010 which saw more money lent out by the state-directed banking system than delivered by the US administration in the TARP (troubled asset relief program) which preceded the recapitalisation of the US banking system. More particularly, those analysts note that in addition to the decision that was made at the time, it was also a time in which the top of China's government interpreted that the US economic model itself was defunct - that no serious government would let its banking system collapse and that China was wasting its time trying to emulate the US (as it had been doing for many years since its own banks had been cleaned up in the 2000s).</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">Of course, such an interpretation fundamentally misunderstands capitalism, and it has been noted that in seeking to construct a capitalist economy China still hasn't taken to heart the idea that businesses need to fail (such that, although pain in the solar industry, one of the worst performers is being <a href="http://www.ft.com/intl/cms/s/0/cc3d3152-2671-11e3-9dc0-00144feab7de.html#axzz2gwgB6rE2" target="_blank">delayed</a>, at some point the domestic debt market will have its first <a href="http://www.bloomberg.com/news/2013-07-18/record-downgrades-foreshadow-first-onshore-default.html" target="_blank">default</a> and certain poorly performing big enterprises will go bankrupt). Nevertheless until a day of reckoning, the Chinese are doubling down on their existing policies and no doubt continuing the status quo (or trying to). </span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<b><span style="font-family: Arial, Helvetica, sans-serif;">Free China love zone</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">And hence the suggestion that China is drawing the same conclusions as to US decline. As the US government went into lockdown with the impasse over the debt ceiling, reports of frustrated Chinese tourists in Washington corresponded with the response in China itself - decrying the "<span style="background-color: white; color: #333333; line-height: 17.98611068725586px;">ugly side of partisan politics" (<a href="http://www.bbc.co.uk/news/world-asia-china-24377617" target="_blank">here</a>). And, as per the headline, the Chinese presidential administration was responding with one grand gesture - Chinese president Xi Jinping undertaking a charm offensive to South East Asia (as <a href="http://www.usatoday.com/story/news/world/2013/10/04/china-xi-jinping-southeast-asia-trip/2923959/" target="_blank">Obama's trip was cancelled</a>). The linked article didn't touch on the delicate nature of China's relations with South East Asia following disputes in the South East China Sea, which no doubt complicate the picture.</span></span><br />
<span style="background-color: white; color: #333333; line-height: 17.98611068725586px;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span>
<span style="background-color: white; color: #333333; line-height: 17.98611068725586px;"><span style="font-family: Arial, Helvetica, sans-serif;">Likewise on the economic front, China's opening of a<b> free trade zone in Shanghai</b> (immediately offering customs and warehousing facilities but with the suggestion of financial reform) was launched with uncertainty as regulations were still being drawn up, while many commentators, including the Economist concluded the measures were likely to disappoint (and a <a href="http://www.chinalawblog.com/2013/10/shanghai-free-trade-zone-as-damp-squib.html" target="_blank">damp squib</a> in fact). For this author the significance of the recent zone opening is more in the gesture than the outcome - many other cities around China are seeking to open free trade zones which may do brisker trade than Shanghai (including <a href="http://www.wantchinatimes.com/news-subclass-cnt.aspx?cid=1102&MainCatID=&id=20131002000118" target="_blank">Dongjiang </a>which is seeking to become a major aviation leasing and offshore centre) and more significantly the step is being promoted as a new track of reform mirroring the opening of the <a href="http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20131004000001&cid=1502" target="_blank">Special Economic Zones </a>in the 1980s.</span></span><br />
<span style="background-color: white; color: #333333; line-height: 17.98611068725586px;"><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></span>
<span style="color: #333333; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 17.98611068725586px;">The success of the zones will remain to be seen but it is unclear whether they constitute the reforms China needs. As a gesture though, the announcement of the Shanghai zone has had an impact and that may be enough to keep positive news going for now. On the other hand the gesture seemed to highlight current problems rather than hide them - <a href="http://www.wantchinatimes.com/news-subclass-cnt.aspx?cid=1102&MainCatID=&id=20131006000059" target="_blank">property prices in Shanghai </a>around the proposed zone have risen dramatically on the opening even as the included activities were not announced and there was no indication it will be successful.</span></span><br />
<span style="color: #333333; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 17.98611068725586px;"><br /></span></span>
<span style="color: #333333; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 17.98611068725586px;">If the real problems - property boom and collapse and strain in the banking sector do flare up then as a guide we must expect significant actions such as the credit squeeze of June 2013 - of which there will undoubtedly be more significant gestures to reassure confidence as real measures. </span></span></div>
The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-54548052251708960692013-08-20T18:49:00.000-07:002013-08-20T18:49:18.603-07:00A massive China sinkhole<span style="font-family: inherit;">Several major news outlets have reported on the problem of sinkholes in China. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Similar to the formations in the US and Central America, sinkholes often appear as a result of human activities - mining and construction or extraction of water for agriculture which alter the composition of below ground rock and soil which can then collapse. As <a href="http://edition.cnn.com/2013/07/24/world/asia/china-sinkhole-problem" target="_blank">CNN </a>reports these appearances can not only result in the occasional damage to pavements and roadways, but to vast swathes of often agricultural land in some areas which can end up sinking below the water level. Relocations of infrastrucure and people can follow in what is a disturbing development for some localities such as Jining in Shandong Province.</span><br />
<span style="font-family: inherit;"><br /></span>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlKp0z2JxsRa2UV4Cv2yXE5H3Qkd_QmdVmTiz_yGP1axT5nZCVTpvNskEP8R47buLcmk6zD03r6uG8mA01KlSC9j1MaZP4VZHTPC-FsLOR4R6-JDmx_cSbmhw2ijEcffavP6Wj-0-beU0/s1600/968250-five-killed-by-south-china-sinkhole.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><span style="font-family: inherit;"><img border="0" height="221" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlKp0z2JxsRa2UV4Cv2yXE5H3Qkd_QmdVmTiz_yGP1axT5nZCVTpvNskEP8R47buLcmk6zD03r6uG8mA01KlSC9j1MaZP4VZHTPC-FsLOR4R6-JDmx_cSbmhw2ijEcffavP6Wj-0-beU0/s400/968250-five-killed-by-south-china-sinkhole.jpg" width="400" /></span></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: inherit; font-size: small;">Infrastructure revealed in China (c) AFP</span></td></tr>
</tbody></table>
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Also disturbing and seemingly potentially catastrophic are emerging insights into the scale of capital shortfalls in China's banking system and economy. With the inner vaults of banks hollowed out by excessive lending, diversionary schemes and sources of risk <a href="http://online.wsj.com/article/SB10001424127887323423804579022451713979242.html" target="_blank">concealed from regulators</a> it is becoming a certainty that significant writedowns of bank assets will have to be made at some point.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">It is with this in mind then that reports are emerging of steps being taken to put into operation the clean up of banking balance sheets by special "bad bank" vehicles - namely "asset management companies" (AMCs) which were set up in the late nineties to absorb bad loan portfolios from the largest Chinese "Big Four" banks - ICBC, BOC, Ag Bank and CCB (which became Cinda, Huarong, Orient and Great Wall, each taking on the bad loan portfolios of one bank). </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Fraser and Howie in their book <i>Red Capitalism </i>walk through the tainted origins of the AMC's which bought the bad loans at full face value and failed to achieve much running off of the portfolios (often recovering as little as 20 cents in the dollar, barely covering their costs and instead rolling over the bad loans). Since then, apart from what the FT has investigated as seeming <a href="http://ftalphaville.ft.com/2013/08/14/1601882/whats-going-on-with-chinas-bad-banks/" target="_blank">repayments from the central government</a> and the AMCs taking on new debts and branching into active financing business, there has been nothing to quell serious doubts about whether the AMCs are fit for purpose (a historical perspective on the recovery process is <a href="http://www.hedgefundnews.com/news_n_info/article_detail.php?id=309" target="_blank">here</a>). </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">While analysts debate the room for manoeuvre for AMCs, the scope of the task is <a href="http://www.ft.com/cms/s/0/1dadd1da-031e-11e3-b871-00144feab7de.html#ixzz2cYuHQ7DL" target="_blank">substantial</a>:</span><br />
<blockquote class="tr_bq">
<span style="font-family: inherit;">...In 1998, when these AMCs were formed, the first Rmb1.4tn batch of bad loans were bought at face value, or 100 cents on the dollar, which was great for the big four banks, but less good for the bad banks. They recovered only about 20 cents on the dollar. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: inherit;">However, in the late 1990s, that Rmb1.4tn accounted for about 15 per cent of bank loans, according to CLSA. Ms Chu calculates that the Chinese banking system’s assets grew by $14tn between 2008 and 2013 – equivalent to adding the entire US banking system to its banks’ balance sheets. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: inherit;">This illustrates why China needs more than merely a government bailout to tackle bad loans this time and that<b> it will probably take a lot more than four privatised AMCs</b>.</span></blockquote>
<div>
<span style="font-family: inherit;">And with the application by Cinda to launch an <a href="http://www.reuters.com/article/2013/08/19/cinda-filing-ipo-idUSL4N0GK0VW20130819" target="_blank">IPO in Hong Kong</a>, some are starting to question the viability of any such venture (given one as author contended, they have become <a href="http://www.scmp.com/business/china-business/article/1297653/chinas-insolvent-toxic-waste-dump-cinda-sale" target="_blank">"toxic waste dumps"</a> of bad loan portfolios) :</span></div>
<blockquote class="tr_bq">
<span style="font-family: inherit;">...today China's four big asset management companies look on
the surface like respectable universal financial services groups, with solid
balance sheets and handsome earnings. In February, Cinda announced profits for
last year of 14 billion yuan (HK$17.6 billion), while Huarong made 12 billion
yuan. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: inherit;">Sceptics claim these profits are illusory, produced by the
companies trading assets among themselves at artificially inflated values....For potential investors, however, earnings quality should be
only a minor concern compared with the enduring doubts that surround the
strength of the asset management companies' balance sheets. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: inherit;">Offsetting the liability of their bonds, their assets now
consist largely of what amount to IOUs from the Ministry of Finance. These are
not sovereign bonds, but merely a vague promise to pay at some point in the
future....If these IOUs are comparable to similar IOUs held by state
banks, then their eventual repayment is to be funded by recoveries from the bad
assets injected into the "co-managed accounts". </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: inherit;"><b>In short, it appears the recent restructuring of the asset
management companies was nothing more than a cosmetic exercise, which still
left them exposed to their original portfolios of worthless loans.</b> <span style="line-height: 115%;">If so, their liabilities far outweigh the true
value of their assets; they are insolvent. </span></span></blockquote>
<span style="font-family: inherit;"> And what could be the likely scale of losses in the banking sector? Goldman Sachs has come up with an estimate of <a href="http://usa.chinadaily.com.cn/epaper/2013-08/09/content_16883162.htm" target="_blank">$3 trillion</a> (which presumably doesn't factor in any downward adjustment to rates of growth stemming from the fact that official Chinese GDP may be<a href="http://www.baldingsworld.com/2013/08/12/why-does-anyone-still-believe-chinese-data/" target="_blank"> overstated by $1 trillio</a>n), which is about the size of China's coveted foreign reserves (which by the way may not be of any use in a domestic currency crisis, being held offshore and in another currency). And this may be the nail in the coffin - the backstop of every China watcher - the ability of the state to bail out any distressed entity may simply not be sufficient enough - as stated by Charlene Chu:</span><br />
<br />
<blockquote class="tr_bq">
<span style="background-color: white; line-height: 17.98611068725586px;"><span style="font-family: inherit;">There is tremendous confidence in the ability and the willingness of the Chinese Communist party to bail everyone out....But as the system gets bigger and bigger, there are more questions about how feasible that is.”</span></span></blockquote>
<br />
<span style="font-family: inherit;">Rather a large hole to fill.</span><br />
<br />The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-23462536028208371412013-08-08T19:29:00.002-07:002013-08-08T19:29:49.861-07:00In need of heroes<div dir="ltr" style="text-align: left;" trbidi="on">
A motley crew of martial arts masters gathered in Xinjjiang last weekend for a martial arts conference involving training sessions, discussions and lots of photos being taken using smartphones which some Chinese internet users derided as "cosplay for the elderly". Novelty photos aside the amount of conflicting messages now flooding out of China's economy and political management all points to authorities which are losing the initiative and are out of ideas. Reform needs to occur, but can the recently installed team deliver?<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9HJpDxTorbBjz5_X-QqEVIwe6yGt0ygti_WTLuAq5H58yKZQCsxgbgolVzC2uFFbTczaR_c-_JGAbzsUuN8Be0STFOflmMvozU3k7NPAOnt7mLbOWAUE5DNuUC_qJ26LWbE8Aa6miACU/s1600/1375696909195829.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="257" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9HJpDxTorbBjz5_X-QqEVIwe6yGt0ygti_WTLuAq5H58yKZQCsxgbgolVzC2uFFbTczaR_c-_JGAbzsUuN8Be0STFOflmMvozU3k7NPAOnt7mLbOWAUE5DNuUC_qJ26LWbE8Aa6miACU/s400/1375696909195829.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">The recession avengers? (c) ChinaNews.com</td></tr>
</tbody></table>
<br /><div>
It is telling that global markets have moved recently in a big and coordinated way on announcements of improving Chinese data - does anybody question the provenance of the official data? A few like <a href="http://english.caixin.com/2013-08-01/100564253.html" target="_blank">Caixin </a>do, but for the moment the theme is one China bringing support and <a href="http://www.nytimes.com/2013/08/09/business/global/trade-data-from-china-suggests-more-stability.html?_r=0" target="_blank">stability </a>to markets - quite absurd given the recent credit shutdown only back in June, when markets briefly went into a complete tailspin. Expect more volatility, not less.</div>
<div>
<br /></div>
<div>
<b>Policy feast</b></div>
<div>
Perhaps more noteworthy than statistics were policy announcements. A lot of them and conflicting as usual, but it seems that in pursuit of the great rebalancing, Xi and Li are ready to offer up the most sacrificial cows - could the authorities really be planning to ditch the <a href="http://www.breakingviews.com/two-child-policy-may-be-too-late-for-china/21101125.article" target="_blank">one child policy</a>, start radical agricultural land reforms, allow a <a href="http://online.wsj.com/article/SB10001424127887324136204578641622599923676.html?KEYWORDS=china+bank+reform" target="_blank">privatisation of a major bank</a> and ditching the <a href="http://www.businessweek.com/articles/2013-06-28/china-moves-on-reforming-hukou" target="_blank">hukou household registration system</a>? These and other areas involve policies that have been established for decades and there are too many with vested interests and different objectives throughout the system to allow the process to be easy. It must follow that there are two likely possibilities here: (i) such announcements are pure puffery and the administration does not intend to follow through with any such reforms (this would explain bad habits like shadow financing and subsidising inefficient industries like solar are seemingly dying hard in the current administration) or (ii) the circumstances have got so desperate that officials are willing to consider anything (likely given the constraints).</div>
<div>
<br /></div>
<div>
One voice that is reasonably clear on this issue is <a href="http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100025237/china-capitulates/" target="_blank">Ambrose Evans-Pritchard</a> in the Telegraph who recently commented that Chinese authorities had capitulated and given in to demands for more stimulus and to hold on reforms:</div>
<div>
<blockquote class="tr_bq">
Mr Li’s implicit argument is that kicking the can down the road buys time to push through the market reforms needed as China abandons its obsolete, top-down, investment-driven, 1980s catch-up model, and switches instead to a grown-up economy. </blockquote>
<blockquote class="tr_bq">
No doubt Mr Li genuinely hopes to push though these reforms, but he is up against an army of vested interests, and half the Standing Committee. </blockquote>
<blockquote class="tr_bq">
As the IMF’s Article IV report makes clear, very few reforms have actually happened. Investment is still 48pc of GDP. The savings rate is still rising. <b>China still has the most deformed economy of any major country in modern history</b>. </blockquote>
</div>
<div>
<b>Reform under the microscope</b></div>
<div>
Emerging litigation provides an excellent insight into the extent to which prior reforms have stuck and signs are not good.</div>
<div>
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The ongoing liquidation of former world leading solar cell maker <a href="http://www.ft.com/intl/cms/s/0/536335fe-9221-11e2-a6f4-00144feabdc0.html#axzz2bQbQNHWG" target="_blank">Suntech </a>in Wuxi is suggesting the recently introduced 2007 Enterprise Bankruptcy Law is not assisting an equitable distribution of assets or an efficient winding up of the bankrupt Suntech enterprise while the Wuxi government is seeming to have commandeered the process to the detriment of other creditors, including and especially foreign creditors. </div>
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As has been noted for some time, foreign investors who use offshore structures to invest into Chinese entities (typically through holding companies in the British Virgin Islands and the Cayman Islands) often end up holding not shares but low priority claims to revenues of the onshore Chinese company, often without adequate security. The result is several significant investors could end up with nothing:</div>
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Under Chinese law, foreign bondholders would be reimbursed only after domestic creditors, which means bondholders may end up with very little. Last week Suntech defaulted on a $541m bond issued in the Cayman Islands, which sparked a cross-default with other loans, including one from the International Finance Corporation, an arm of the World Bank.<br />“There are very, very few cases of defaults among offshore Chinese bonds and the recoveries have all been negotiated often with very unique circumstances, so there is no template to use to estimate the outcome in a case like Suntech,” says Kalai Pillay, Fitch Ratings’ head of industrials for Asia.<br />“But, no matter what, as an offshore creditor you are always structurally subordinated to onshore creditors. Any offshore bondholder has to assume that onshore creditors will get a full dollar before they get one cent.”</blockquote>
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And in another dispute centred on the tropical island of Hainan, a British investor has been <a href="http://www.ft.com/intl/cms/s/0/4e144596-fdbc-11e2-a5b1-00144feabdc0.html#axzz2bQbQNHWG" target="_blank">barred from leaving the island</a> and fears for his safety while unsuccessfully pursuing claims corrupt officials with fellow local directors from his property development venture conspired to illegally transfer and strip from the project entity the key valuable asset. It sounds more like post Soviet Russia than the great Chinese Dream Xi Jinping has been promoting of late (though the author is not quite sure exactly what that is!), leading to the question as to how many foreigners will be wiped out by an asset price collapse and general slowdown in China and how much money will they lose?</div>
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-27911053580627834722013-07-15T18:00:00.000-07:002013-07-15T18:03:00.004-07:00Growth is dead!! Long live growth!<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">It is a criticism with some basis that the pursuit of economic growth in China at all costs has become something of a mantra or cult and that even as the new fresh-faced regime seeks to move away from this to rebalancing and broader aims and social goals, western business media seem obsessive in their coverage of all pronouncements and speculation seeking to divine whether the magic number (annual GDP growth) will be 8%, 7.5%, 7.7% or something lower. What did Finance Minister Lou Jiwei mean when he said 6.5% growth was tolerable on the sidelines of a <a href="http://www.bloomberg.com/news/2013-07-12/china-finance-chief-lou-says-6-5-growth-wouldn-t-pose-problem.html" target="_blank">China-US summit in Washington</a>? That 6.5% was expected? That there was more comfort? to scare foreign speculators? To test the market impact perhaps?</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Alas, since the SHIBOR shock when the PBOC cut funding in the interbank market for a time, the Chinese administration is having to posture a lot and send signals to try and guide the markets - not something it is necessarily good at!</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Let's go back a step. There are plenty of reports indicating (from the Chinese authorities themselves and from outsider's analysis) that the existing model is dead. No more shopping centres/bridges/trains/roads to nowhere and hello consumerism. Sounds simple enough - after all it is the lack of consuming that causes the high savings which distort the global economy and cause deficits in developed countries (which have been the centre for slowdown which is threatening China's exports and the exporting model), goes the reasoning. Simple right? And follows a nice circular logic?</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Well not really! Some points to consider:</span><br />
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<b><span style="font-family: Arial, Helvetica, sans-serif;">Upside down fundamentals</span></b><br />
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<tr><td class="tr-caption" style="text-align: center;"><span style="font-family: Arial, Helvetica, sans-serif;">China bull...hanging in a tree (c) CEN</span></td></tr>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhA8oAnsdkgk9GGxRXZoeRtu7GoKD4NJBkM_cxnJbs_-hGfFhHT_-rayoX7n9oEuOxZ3Y-k_yFySAE8O9zDIwSFn8CQCsvCUrQpa0itcsEKyGhXMnw-rjmd5NmMxdg3PddlAsF75NqsOj4/s1600/article-2364099-1AD2AA85000005DC-765_634x777.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"></span></a></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">The low consumption is a result of the structure of the banking system and economic policy. The export preferencing low fx rate (in the RMB trading band) causes excess liquidity which is stored in US treasuries. The PBOC buys the US dollars from exporters injecting RMB into the economy which must be sterilised to prevent inflation by forcing banks to buy PBOC bills and hold high reserves. With scarce funds the banks prefer to lend to SOEs and live off the spread over fixed rate depoist source of funds which pay a low interest that is negative after inflation (due to the above). The Chinese people get negative interest rates at the bank and can only buy gold (which they are doing in record numbers) or real estate (did we mention the world's biggest building was built in Chengdu at the size of <a href="http://www.dailymail.co.uk/news/article-2352891/Worlds-biggest-building-opens-China-huge-fit-20-Sydney-Opera-Houses-inside.html" target="_blank">20 Sydney Opera Houses</a>?!- this in addition to more shopping space in that city than much of Europe).</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Regulation light wealth-management products have appeared to fill the gap offering high interest avenues for risky investments causing a further bubble, but the overlying point is that there is relatively little consumption. Currently, ordinary people in China subsidise the state and its enterprises. Their funds are transferred into investment. Along with Michael Pettis who has been saying this needs to change (and will change) for a long time, many key figures have made this point, including Patrick Chovanec who said recently on twitter that the solution is to reverse the process, by liquidating the US treasuries. Bringing the US dollars back into China to counteract receding investment and unsterilising - repurchasing the bills to put back yuan into the Chinese economy.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">It is the view of this blog that this will not happen without a crisis, because i) the treasuries are impossible to liquidate easily without risking the valuation of the remainder (although that is what the US wants and is trying to force through its QE based US dollar devaluation), ii) it would fracture the edifice of China invincibility that is keeping the economy running, iii) as Victor Shih has noted, by the time it did so wealthy individuals would have already withdrawn enough of their funds from China to wipe out capital in the Chinese banking system rendering it insolvent.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">That is a dire end-game scenario, but to return to the main point - consumption - no consumption is going to occur in a significant way unless all of the above happens. Consumption can't happen without structural reform (Chovanec would probably argue that Yuanisation of US treasuries so to speak could kick start sucha process, but this is splitting hairs somewhat).</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">If not for anything above you should at least get a sense that consumption will take a bit more to take root than a couple more empty shopping centres!</span><br />
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<b><span style="font-family: Arial, Helvetica, sans-serif;">Reactionary forces gathering</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">It has been noted that the SOEs, citadels of investment are fighting hard to stave off reforms and keep their privileges. This will slow or block reforms and recent articles suggest the reform movement is slowing - investment still made up a <a href="http://ftalphaville.ft.com/2013/07/15/1568152/chinas-gdp-and-the-investment-factor/" target="_blank">significant and growing part of gdp</a> in growth the second quarter.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Another more poignant example is the recent announcement of a massive ramping up of spending in the solar power sector - a sector flooded with capacity (45MW production capacity in China compared to global demand of 35MW) where high profile and industry wide bankruptcies are only starting occur. An official was quoted last year saying there would have to be consolidation and solar firms would have to close. Instead there is this <a href="http://www.ft.com/intl/cms/s/0/254914f0-ed29-11e2-8d7c-00144feabdc0.html#axzz2Z9sEEPPk" target="_blank">recent announcement</a> that screams return to the bad old days:</span><br />
<blockquote class="tr_bq">
<span style="font-family: Arial, Helvetica, sans-serif;">China aims to more than quadruple solar power generating capacity to 35 gigawatts by 2015 in an apparent attempt to ease a massive glut in the domestic solar panel industry.</span></blockquote>
<span style="font-family: Arial, Helvetica, sans-serif;">Within top sections of the Party there are reportedly divisions between different commissions and the Politbureau and this will only be likely to intensify.</span><br />
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<b><span style="font-family: Arial, Helvetica, sans-serif;">China on consumerism: You're doing it wrong!</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Many will have seen the report of a cartel seeking to sell chicken feet 46 years past its sell by date and many will have seen the reports of GSK and other multinational food and pharmaceutical companies investigated over corruption and also allegations of profiteering. Taking a step back from the specific facts and the overall sense seems to be that China is unhappy with and unable to bring about conditions for sensible prices for certain consumer goods (feeding into high inflation and risks of unrest) and instead of addressing the underlying cause is going about in a ham-fisted manner attacking the multinationals to try and force a way around the problem. A short term solution at best.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">More fundamentally as illustrated by an excellent observational piece in the FT about passengers on <a href="http://www.ft.com/intl/cms/s/2/9a491018-e9c1-11e2-bf03-00144feabdc0.html" target="_blank">China's first cruise ship</a>, Chinese consumers are just venturing into whole new markets and are very different from preconceptions. As with all China's modern history, things will not turn out as expected.</span><br />
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-80611310420966922902013-06-26T18:52:00.001-07:002013-06-26T18:52:42.130-07:00The fog of war<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">So much has happened in recent days (often behind the scenes, or at least in reporting columns) that it seems like a past era when only last Wednesday the Federal Reserve roiled world credit, equity, currency and commodity markets by announcing plans to exit (or slow down or taper) from its almost half decade QE money printing program. Pandemonium followed across emerging markets but for the first time ever the Chinese central bank, the People's Bank of China, and its liquidity operations (or to be precise, it's lack of liquidity operations for two crucial days) stole or at least shared the limelight with the Fed.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">The PBOC has been in the background supporting interbank lending and repo markets in China for some years, particularly as it does not conduct market operations around the interest rate itself (which unlike many large economies is fixed). Instead it smooths out fluctuations in the amount of money circulating between banks by transacting in its own instruments (or that was my recollection last time I checked!) - the point being that for some time now the PBOC has stepped in and provided liquidity to the market, typically around holidays and at key points during the calendar including tax payment time.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Where it gets interesting is trying to understand what actually happened and what it means. Some themes from this:</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">1) <b>Foreigners still don't understand China</b>. Two examples - Ford and banks Citibank and HSBC have both announced new product offering and initiatives in recent days. Details on this in a moment, but first to confirm a bit of terminology/details:</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">- <b>wealth management products (wmps - or <a href="http://chinameltdown.blogspot.com/2012/12/seeking-cash.html" target="_blank">weapons of mass ponzi</a>)</b> are unregulated high risk high interest fund-style products which have become popular in China due to low official interest rates. They are unregulated, risky and believed by many to be responsible for the massive risk exposures which will bring China's undoing. Often the underlying assets can be junk like cashflows from empty pawn shops or unbuilt buildings.</span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><br /></span>
<span style="font-family: Arial, Helvetica, sans-serif;">- one of the likely motivations of the cancelling of liquidity was to choke wealth management products by stopping their issuers (bank group companies) getting further credit via the banks (from the PBOC). As a matter of fact this will never work due to the channels by which money flows through the Chinese economy, but nevertheless has been flagged and could work in theory.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">So what was announced? Ford commented that Alan Mulally is working <a href="http://newswithtags.com/Alan%20Mulally/valuewalk-alan-mulally-overtime-to-bring-ford-motor-credit-to-china" target="_blank">"overtime" to rollout credit services to customers in China</a> and the above banks announced they had permission to <a href="http://www.ft.com/intl/cms/s/0/76d7fc72-de43-11e2-b990-00144feab7de.html#axzz2XMqEqqIa" target="_blank">sell local mutual fund products</a>.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Do you see a problem here? In a land awash with credit Ford wants to introduce more! And not just any credit - every type of credit imaginable - it was reported on several occasions last year that domestic construction equipment manufacturer Zoomlion saw many of its clients purchase concrete mixers purely for the purpose using them as collateral to take out loans. And with HSBC and Citibank what sane manager would want to dive into an overexposed product class which has been called toxic and a threat to the Chinese financial system?!</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">China is a ponzi economy alright - feted insider Jim Rickards has joined the naysayers and interviewed on it this week (see <a href="http://www.abc.net.au/news/2013-06-25/slashing-rates-a-big-mistake/4780352" target="_blank">here</a>). But if foreigners struggle to read China in a static period what hope do they have in a crisis?</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">There were plenty of views as to what was going on, and many focussed on the role of the PBOC.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">2) <b>the PBOC lost credibility and control</b> - By having to change its position, precipitated by an intervening crisis, the PBOC has conceded its ability to set the policy and ended up subsidising the banking sector - back to business as usual (and in particular continuing with backstopping to the state sector). Much of the commentary focussed on the intentions of the PBOC. </span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Did they intentionally pop a bubble and will it nevertheless blow anyway? Were the regulators drawing a line in the sand against the financiers? Were they trying to choke off only the wmp and shadow banking sector? Were they sending a warning to the new Chinese government to slow reforms and financial liberalisation (which they would argue will cause more chaos - as it happens the PBOC has always been a reactionist faction countering the modernisers at the National Development and Reform Commission)? Were they doing the bidding of the Communist Party which wants to put its stamp on things? Was the PBOC in fact irrelevant because the real momentum was with the unwinding of the carry trade (using US Dollar loans which had been priced low to borrow and speculate on the higher yielding Chinese Yuan).</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">FT Alphaville produced one of their <a href="http://ftalphaville.ft.com/tag/up-shibor-creek/" target="_blank">series of articles</a> (similar to gold repos, the London Whale and their previous series on <a href="http://ftalphaville.ft.com/tag/chinas-credit-conundrum/" target="_blank">Chinese Credit</a>) which is excellent. The <a href="http://www.bbc.co.uk/news/business-23043580" target="_blank">BBC</a> is covering the story in depth (finally, see also <a href="http://www.bbc.co.uk/news/business-23035230" target="_blank">here </a>and <a href="http://www.bbc.co.uk/news/business-23041912" target="_blank">here</a>). The <a href="http://www.economist.com/blogs/freeexchange/2013/06/shibor-shock" target="_blank">Economist </a>had one reactionary article, which was more circumspect however analysing the assumptions (and questioning a couple of them) still could suggest a very concerning outcome.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Interestingly for the Economist and a subsqent article in FTAV, there is a suggestion that looking at available evidence, the Chinese Yuan may be overvalued and <a href="http://ftalphaville.ft.com/2013/06/26/1547342/gold-the-china-connection/" target="_blank">at risk of a currency collapse/devaluation</a>.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">If this is true, something will have to buckle soon. Either the renminbi will be forced to devalue, popping lots of dollar shorts as it goes — behold, dollar-denominated defaults galore — or China will finally be forced to release its USTs so as to avoid the messy fiasco and to honour its dollar debts, and prove it’s a credible country after all. </span></blockquote>
<blockquote class="tr_bq">
<span style="font-family: Arial, Helvetica, sans-serif;">To clarify, we’re not arguing the Chinese are using gold to manage the exchange rate, rather that gold is sending us an important signal that a great unwinding of the CNYUSD relationship may be upon us very soon. Also, — more importantly perhaps — that in the game of global currency wars, the Fed has come out on top. </span></blockquote>
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<span style="font-family: Arial, Helvetica, sans-serif;">What happens next, of course, depends entirely on the degree to which China provides the liquidity its system is demanding and on the amount of dollar debt there actually is in the system. If it responds, the great unwind may be upon us quicker than we expected (which might explain why it’s so reluctant to do so). If it doesn’t… gold prices could be in for a rough ride in renminbi terms for some time still.</span></blockquote>
<span style="font-family: Arial, Helvetica, sans-serif;">Apart from the sense of irony that the nation with the world's largest foreign reserves (acquired to protect against a devaluation) could suffer such a fate (and by the way calculations have questioned whether China's massive reserves would be sufficient in a case of full scale currency slide anyway), the outcome would be calamitous. On this there are questions about the PBOC's ability to manage away from such an outcome.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">3) Finally it is unclear if all the drama is having anything like the intended effect of <b>slowing down alternative lending, or lending in general</b>. Not so says <a href="http://www.bloomberg.com/news/2013-06-26/wenzhou-shadow-banking-unscathed-by-china-crunch-as-rates-steady.html" target="_blank">Bloomberg</a>, while reports about the lending situation vary dramatically (see <a href="http://english.caixin.com/2013-06-26/100547177.html" target="_blank">here </a>and <a href="http://finance.caijing.com.cn/2013-06-26/112959060.html" target="_blank">here</a>). </span><br />
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-77496769899380698832013-06-03T19:22:00.001-07:002013-06-03T19:22:36.820-07:00Mixed messages<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Arial, Helvetica, sans-serif;">It is becoming very difficult to read and understand news from China. There are too many conflicting reports and inconsistent objectives and one wonders who is really in control. Could this be a prelude to stagnation? More on that in a moment.</span><br />
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<b><span style="font-family: Arial, Helvetica, sans-serif;">Turning back the clock</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">In recent days the markets, the investors into and the people living in many emerging markets seem to be reaching a turning point - in currency flows, sentiment and strategy. Recent protests which have broken out in Turkey, the Eurasian darling economy and one of the Goldman Sachs Next-11 post-BRIC economies have been followed this week by plunging stockmarkets and questions about the future. Prime Minister Recep Tayyip Erdogan, for a decade a popular, respected and dynamic leader, held responsible for bringing a long boom to Turkey has seemingly aggravated protests and been labelled in the international media as hubristic, tone deaf and too closely echoing an arab dictator than the enlightened leader considered previously. Once lauded for assertive diplomacy towards Israel, Turkey had even taken steps to <a href="http://news.bbc.co.uk/1/hi/8685846.stm" target="_blank">formulate a nuclear non-proliferation plan for Iran</a> with Brazil, another up-and-coming power (a first since the plan was outside usual US led efforts). The Lat-Am powerhouse is itself sliding into a deflationary spiral it seems with the falling Brazilian Real doing nothing to encourage local businesses into increased activity (contrary to predictions of finance minister Guido Mantega, who coined the term "currency war") and a recent minor bank-run has exposed the possibility of an imminent or likely <a href="http://www.cnbc.com/id/100753051" target="_blank">popping of a domestic credit bubble</a>.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Broadly speaking the cause for investor nervousness is the withdrawal of liquidity by the US Federal Reserve. Having supported emerging markets for years with its money printing programs, which have sent trillions of dollars into all manner of countries searching for yield (as the US has sought to inflate away its own debts), the announcements by the Fed that, with signs of inflation and asset price bubbles in the US economy, it will now taper and start to slow its Quantitative Easing program, many investors have started to close emerging market positions and withdraw funds from these economies.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">For China this matters too. It is subject to similar trends - foreign banks like HSBC have been exiting the local market, selling their stakes in national champion banks like ICBC and exiting the market (having failed to achieve the predicted growth) and foreign investors are withdrawing funds or holding back on future investments. As also noted however, the advent of ultra loose stimulus policies in Japan (which seek to replicate and extend the US easing policies to its own economy) poses a specific threat to China in that the rapid lowering of the Japanese yen may put a lot of pressure on Chinese exporters (causing them to have to drop their prices, at a time when labour costs are rising) and threaten to <a href="http://www.ft.com/intl/cms/s/0/58c0cd38-c852-11e2-8cb7-00144feab7de.html#axzz2VCHgsW00" target="_blank">burst Chinese asset bubbles </a>as real interest rates peak.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Apart from any particular difficulties China may face at the current moment all of the above suggests a broader shift might be underway and in fact far from a momentary pause, the current changes in fact form part of a move in economic activity as investment and fast growth dissipate from emerging markets elsewhere. In short we would be turning back the clock to a world before the BRICs and the paradigm of decoupling emerging markets. </span><br />
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<b><span style="font-family: Arial, Helvetica, sans-serif;">Steering the train</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Not that you would know any of this from reading certain news and reports. Two books have been published which detail the global commercial empire which has been constructed for the Chinese state's foreign commercial interests, each shining light on a hitherto dark area. </span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">In <a href="http://www.amazon.com/Chinas-Superbank-Influence-Development-Rewriting/dp/1118176367" target="_blank"><b>China's Superbank</b></a>, Henry Sanderson and Michael Forsythe delve into the rise of China Development Bank, the unique monolith nurtured by princeling Chen Yuan into the powerhouse which recently lent more to large infrastructure projects across the developing world than the World Bank and has been at the centre of the rapid growth of the Chinese economy (in particular inventing the controversial local government financing platforms which critics believe may become very risky for the Chinese economy soon). In <a href="http://www2.lse.ac.uk/asiaResearchCentre/events/individual/2013/130130-CarenalAraujo.aspx" target="_blank"><b>China's Silent Army</b></a>, Juan Pablo Cardenal and Heriberto Araujo have explored the many outposts of China's commercial interests around the globe and drawn insight from the vast range of projects and characters they have come across. As per an article in the N<a href="http://www.nytimes.com/2013/06/02/opinion/sunday/chinas-economic-empire.html?smid=tw-share" target="_blank">ew York Times</a> on the latter, the message is that China is taking over (and in case you missed it a Chinese company Shenghui completed the biggest Chinese acquisition of an American company when it bought Smithfield Foods, America's biggest pork producer).</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">And similarly, news of state backed hacking by Chinese government or military units (and/or their affiliates) along with announcements that the Chinese Navy is patrolling the waters of the United States Exclusive Economic Zone for the first time all point to increased strength and more aggressive posturing of China towards its neighbours (in addition to South China Sea disputes that is).</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">However, all is not as it seems. Several Chinese entities have seen their acquisition efforts falter, one example being financial behemoth CITIC which saw its $2 billion investment in an <a href="http://www.reuters.com/article/2012/08/30/us-citic-australia-idUSBRE87T1FW20120830" target="_blank">Australian iron ore mine</a> balloon to $8 billion (with delays) compounded by further $2 billion losses on unfavourable hedging. And as suggested in the sub-heading there may be some interesting historical parallels.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">For while there are outward signs of strong successes, in China proper there are reports which suggest all is not well and possibly stagnating. None of these will be unfamiliar to readers of this blog, but the scale of the reports is worth noting. <a href="http://www.economist.com/news/finance-and-economics/21578668-growth-wealth-management-products-reflects-deeper-financial-distortions?frsc=dg%7Ca&fsrc=scn/tw_app_ipad" target="_blank">The Economist</a> finally has a piece (though ostensibly told through a review of a book) suggesting the team finally acknowledge the scale of shadow banking in China and the risk dynamics. Debt levels at Chinese companies have been described as "<a href="http://www.abc.net.au/pm/content/2013/s3772226.htm" target="_blank">alarming</a>". The <a href="http://www.bbc.co.uk/news/business-22754725" target="_blank">BBC</a> and other outlets reported that China labour costs are now high enough that many factory owners are considering relocating. And of course the administration is quietly getting on with the task of battling gargantuan corruption of state officials.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">It was whilst reading about efforts at reform during the Brezhnev era of stagnation that the writer saw some detail about the failed anti-corruption campaign. For a bureaucracy the size of the Soviet Union (or China), taming an out of control culture of inducted officials was just too difficult. And yet meanwhile on the world stage the Soviet Union was at its zenith and projected its military and political power the furthest (though in doing so it set up the conflicts with each of the major powers that would later weaken its empire). The economic malaise had been set in motion many years before, and hence (to finish) a joke which may offer the reader some parallels with the current situation facing China:</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Vladimir Lenin<span style="background-color: white; line-height: 19.1875px;">,</span><span style="background-color: white; line-height: 19.1875px;"> </span>Joseph Stalin<span style="background-color: white; line-height: 19.1875px;">,</span><span style="background-color: white; line-height: 19.1875px;"> </span>Nikita Khrushchev<span style="background-color: white; line-height: 19.1875px;"> </span><span style="background-color: white; line-height: 19.1875px;">and</span><span style="background-color: white; line-height: 19.1875px;"> </span>Leonid Brezhnev<span style="background-color: white; line-height: 19.1875px;"> </span><span style="background-color: white; line-height: 19.1875px;">are all travelling together in a railway carriage. Unexpectedly the train stops. Lenin suggests: "Perhaps, we should call a</span><span style="background-color: white; line-height: 19.1875px;"> </span>subbotnik<span style="background-color: white; line-height: 19.1875px;">, so that workers and peasants fix the problem." Stalin puts his head out of the window and shouts, "If the train does not start moving, the driver will be shot!". But the train doesn't start moving. Khrushchev then shouts, "Let's take the rails behind the train and use them to construct the tracks in the front". But it still doesn't move. Brezhnev then says, "Comrades, Comrades, let's draw the curtains, turn on the gramophone and pretend we're moving!" </span></span></blockquote>
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-22179391180686894562013-05-06T17:22:00.000-07:002013-05-06T17:22:18.756-07:00Let them eat cake!<div dir="ltr" style="text-align: left;" trbidi="on">
<b><span style="font-family: Arial, Helvetica, sans-serif;">Dying days ahead of a revolution?</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Before entering into the Chinese presidency, current leader Xi Jinping was rumoured to have been handing out copies of de Tocqueville's <i><span style="background-color: white; color: #444444; line-height: 16px;">L'</span><span style="background-color: white; color: #444444; line-height: 16px;">Ancien Régime</span><span style="background-color: white; color: #444444; line-height: 16px;"> et la Révolution</span></i> as a signal on the need for the party to reform and commit itself to purging corruption and addressing the need for improving Chinese welfare following decades of breakneck till-we-choke economic growth. Recent reports that the territory of Macau, a gambling enclave which also operates as a centre of excess for Chinese gamblers (and a laundry for Chinese officials' cash proceeds) will see the opening of an ultra-luxury hotel <a href="http://www.ft.com/intl/cms/s/0/808d9fcc-ae43-11e2-bdfd-00144feabdc0.html#axzz2SXndxi1V" target="_blank">employing a descendant of the French King Louis XIII</a>, might have many readers exclaiming "<i>l'ironie!</i>". The comments of the project company's owner might suggest a reaction more along the lines of that to Marie Antoinette.</span><br />
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<i><span style="font-family: Arial, Helvetica, sans-serif;"><span style="background-color: white; line-height: 17.98611068725586px;">“The willingness of mainland Chinese to spend money on the very best is unprecedented,” said Mr Hung, who also plans an invite-only atelier of luxury brands offering bespoke couture. Graff Diamonds has already signed up."</span> </span></i></blockquote>
<span style="font-family: Arial, Helvetica, sans-serif;">That other established luxury brands are already slowing in China (and Hong Kong) seems not to matter to much to some, but the success of the project will remain to be seen. What was seen though were hordes of people at Chinese gold shops seeking to<a href="http://www.zerohedge.com/news/2013-04-17/gold-buying-frenzy-continues-china-japan-and-australia-scramble-physical" target="_blank"> aquire bullion following the price drop</a> - so perhaps luxury is second in mind for the moment?</span><br />
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<b><span style="font-family: Arial, Helvetica, sans-serif;">Dirty business</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Meanwhile in another corner of the Chinese economy there is plenty of unseemly behaviour being exposed in news out from the domestic bond markets - including profit skimming by traders and possibly the <b>death of an executive who fell from an office building</b>. More on that later.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">A number of outlets have covered recent developments in some detail. Caixin had a long piece detailing the executives arrested for dealing and <a href="http://english.caixin.com/2013-04-24/100519283.html?p1" target="_blank">profiting at their client's expense</a> as did <a href="http://uk.reuters.com/article/2013/04/18/china-bond-arrests-idUKL3N0D52ZN20130418" target="_blank">Reuters</a> (and <a href="http://www.reuters.com/article/2013/04/25/china-bond-investigation-idUSL3N0DC5BI20130425" target="_blank">here</a>). Simon Rabinovitch at the <a href="http://blogs.ft.com/beyond-brics/2013/04/24/china-bonds-scandal-wang-qishan-rides-again/#axzz2SY5hbbG1" target="_blank">FT </a>has also covered the issue and had a good piece explaining the involvement of reformer heavyweight Wang Qishan in not only cleaning up the interbank bond market, but also (possibly) intervening to block the NDRC from encouraging local governments to over-borrow. Those who have read <i>Red Capitalism</i> by Walter and Howie or other such works will know that the conflict between the reformist PBOC and statist NDRC, is one that has carried on since the first Chinese financial liberalisation in the 1990s. As noted in Simon's article:</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">"...bond traders have told beyondbrics that there may also be another, more political reason for his involvement. The interbank bond market has been carefully nurtured by the central bank, which has tried to ensure that risk is properly assessed and ultimately borne by market participants....Over the past two years, though, the NDRC has weighed into the market, pushing it as a venue for local governments to raise financing, even when their credit-worthiness is suspect. That has started to undermine the central bank’s efforts.</span></blockquote>
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<span style="font-family: Arial, Helvetica, sans-serif;">According to this version of events, Wang’s main target is not really the few bond traders under investigation. Rather, he is helping shine a strong light on the bond market to check the encroachment of the NDRC and keep the control in the central bank’s hands."</span></blockquote>
<span style="font-family: Arial, Helvetica, sans-serif;"> and this amidst other efforts to better identify brewing risks from interbank lending (<a href="http://www.chinascopefinancial.com/en/news/post/25692.html" target="_blank">here</a>). In sum though Wang may be successful, it does lead to a question of how much malpractice is out there? </span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">Details of the death of the chairman of one securities company were to be found in the <a href="http://blogs.ft.com/beyond-brics/2013/04/19/death-and-alleged-crime-in-chinas-markets/#axzz2SY5hbbG1" target="_blank">FT</a> rather than from a whitewashed press announcement from the <a href="http://www.jic.cn/news/company_news/904.html" target="_blank">company's own website</a> (which referred to death "for health reasons").</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;"><b>Crumbling city</b></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;">And in addition to some illicit brokerages it seems the buildings housing China's financial industry themselves may be at <a href="http://www.dezeen.com/2013/03/21/corrosive-concrete-halts-construction-of-pingan-china-tallest-building/" target="_blank">risk of crumbling</a>. <i>Vivre la différence!</i></span><br />
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-56366844605296271202013-04-14T17:49:00.001-07:002013-04-23T07:08:02.910-07:00More and more numbers<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: inherit;">China watchers will have been accustomed for some time to the news around numbers coming out of China. Last year, many headline news stories focussed on the magical figure of 8 - 8% GDP growth that is. Eight is a lucky number in China but in particular it had for a long time served as a useful baseline for configuring policy - 8% was supposed to be the level at which i) China's economic growth would comfortably surpass and ii) any concern of civil unrest could be dismissed because there would be enough jobs and development to keep the masses happy.</span><br />
<br /><span style="font-family: inherit;">Fast forward to 2013 and the new administration led by Xi Jinping has sought a reset. Not only had the stated headline growth in fact fallen below 8% (7.4% and 7.6% in the second and third quarters of 2012), but in recent days Xi announced that the </span><a href="http://online.wsj.com/article/SB10001424127887323820304578410153175852378.html" target="_blank"><span style="font-family: inherit;">days of fast growth were over</span></a><span style="font-family: inherit;">.</span><br />
<br /><span style="font-family: inherit;">This is nothing new to some readers, the leadership has been hinting at this policy for some time, particularly as some of the costs of rapid growth (including air pollution in Beijing, rivers full of dead livestock, restrictions on </span><a href="http://www.reuters.com/article/2013/04/11/us-britain-china-babymilk-idUSBRE93A0M320130411" target="_blank"><span style="font-family: inherit;">imports of uncontaminated foreign milk powder</span></a><span style="font-family: inherit;">) have become more visible. What is interesting is that some of the other numbers by which outsiders assess the economy are also pointing to shifts in the economic direction - and possibly not before time.</span><br />
<br /><span style="font-family: inherit;">The most significant statistic in this trend was that of exports to Hong Kong - as noted in a recent </span><a href="http://www.bloomberg.com/news/2013-04-10/china-export-gains-miss-forecasts-for-first-time-in-four-months.html" target="_blank"><span style="font-family: inherit;">Bloomberg </span></a><span style="font-family: inherit;">piece, and in other media, net global exports and imports rose around 10% (though imports greater leading to a sub $1 billion deficit), were overshadowed by an "astounding" 92.9% jump in exports to Hong Kong. Many speculated about the causes for this, most likely some sort of fraud or arbitrage activity. This blog has discussed arbitrage and speculation strategies which use recurring loans to take advantage of differentials between Hong Kong and Chinese versions of the currency (which are priced differently), often using fake invoices. Others have noted the use of inflated invoices to simply get capital out of the country (capital flight). Inflated tax rebates and faked local government data are also blamed, but there seem to be real questions as to the competency of Chinese authorities and the likelihood it points to weaknesses in the Chinese economy:</span><br />
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<i><span style="font-family: inherit;"><span style="line-height: 23px;">“The breakdown of exports by destination veers towards the absurd,” IHS economists Xianfang Ren and Alistair Thornton said in a note today. “There is plenty of anecdotal evidence to suggest that exporters are faking orders” and using a practice to obtain export-tax rebates, IHS said.</span><span style="line-height: 23px;">Zheng Yuesheng, a customs administration spokesman, said today that the practice of false trade declarations “does exist, but is definitely not mainstream.” Exporters must bear legal responsibilities if they do that, Zheng said.</span><span style="line-height: 23px;">The agency has made an initial probe into possible money flows disguised as trade with Hong Kong, and will “work with relevant departments to conduct deeper and more detailed investigations and research so that we can be completely clear about various reasons behind the extraordinary trade growth with Hong Kong,” Zheng said at the briefing in Beijing.</span></span></i></blockquote>
<span style="font-family: inherit;">Meanwhile other numbers released pointed to the continuing trend of increasing foreign exchange reserves and gold acquisitions, falling venture capital investment and continuing reported findings of high levels of corruption amongst public officials. The latest case involves the former head of the powerful Ministry of Railways, accused of accepting </span><a href="http://www.scmp.com/news/china/article/1212202/ex-railways-minister-liu-zhijun-seeks-avoid-death-penalty" target="_blank"><span style="font-family: inherit;">$10 million in bribes</span></a><span style="font-family: inherit;">. This follows releases of the business interests of ruling Chinese families by Bloomberg and the New York Times last year (a current investigation, by the </span><a href="http://www.icij.org/" target="_blank"><span style="font-family: inherit;">International Consortium of Investigative Journalists</span></a><span style="font-family: inherit;"> has hinted at information, but not made any significant disclosures yet). For less high profile convictions, the FCPA Blog maintains an accurate list of </span><a href="http://www.fcpablog.com/blog/2013/4/12/china-corruption-blotter-april-12-2013.html" target="_blank"><span style="font-family: inherit;">current reports of bribe taking</span></a><span style="font-family: inherit;">).</span><br />
<br /><b><span style="font-family: inherit;">All in a plan</span></b><br />
<span style="font-family: inherit;">Whilst looking into another topic this blog came across the latest <b>5 year plan for the Financial Industry</b> (released in 2012) and there are some numbers amidst all of the vague platitudes (of what harmonious things "shall" happen to improve the efficiency, growth and resilience of all elements of the financial sector). Overall dominant international law firm Linklaters published a </span><a href="http://www.linklaters.com/Publications/AsiaNews/LinkstoChina/Pages/China-issues-12th-Five-Year-Plan-Financial-Industry.aspx" target="_blank"><span style="font-family: inherit;">summary </span></a><span style="font-family: inherit;">talking up the plan as aiming "<span style="color: #333333; line-height: 18px; margin: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">to promote the </span><span style="color: #333333; line-height: 18px; margin: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">steady</span><span style="color: #333333; line-height: 18px; margin: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"> growth of the financial industry by introducing changes to further regulate and develop the market</span>", but the </span><a href="http://www.csrc.gov.cn/pub/csrc_en/newsfacts/release/201210/W020121010631355001488.pdf" target="_blank"><span style="font-family: inherit;">document </span></a><span style="font-family: inherit;">has several numbers and supporting statements which look odd:</span><br />
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<i><span style="font-family: inherit;">"The ratio of provisions set aside by commercial banks stood at 217.7%, exhibiting significantly enhanced overall strength. The share of assets brought by the securities industry reached RMB 2.05 trillion, exhibiting a 583% surge compared to the end of 2005 and substantially enhancing its risk resilience capability"</span></i></blockquote>
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<i><span style="font-family: inherit;">"Small and medium commercial banks were committed to ever deepening reform, while financial asset management companies made steady progress in their transformation"</span></i></blockquote>
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<span style="font-family: inherit;">"<i>Financial risks shall be maintained under control in general. Major financial institutions in banking industry shall preserve high capital quality and level, while the percentage of non-performing loans shall be kept at relatively low level, with increasingly stronger risk management capability"</i></span></blockquote>
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<span style="font-family: inherit;">"</span><i><span style="font-family: inherit;">The balance of payments shall be led to general equilibrium. Financial policies including<br />interest rate, exchange rate and foreign exchange administration shall play an important role in achieving the equilibrium in the balance of payments"</span></i></blockquote>
<span style="font-family: inherit;">The first statement while probably true suggests an out of control boom more than anything. The other statements, while based on similarly optimistic and suggestive numbers are likely false, particularly the last (except to the extent of <i>de facto</i> truth due to incorrect inputs).</span><br />
<br /><b><span style="font-family: inherit;">Discussion Topic</span></b><br />
<span style="font-family: inherit;">Since the Cypriot implosion there has been discussion of the pricing of CDS (credit default swaps, which pay out when entities default) for other Eurozone countries and, in some cases, how concern about CDS payouts (which have to be made by large investment banks) might change the profile of decision makes who are administering bailouts and devising restructuring plans (lest they be accused of stirring the markets by causing a default which triggers CDS payouts unnecesserily). A question for readers as to what impact there could be from the implosion of large Chinese banks or a change in the risk profile (and CDS pricing) for the Chinese government? China featured in the </span><a href="http://www.futuresmag.com/2012/12/26/credit-default-swaps-top-movers-switzerland-and-hu" target="_blank"><span style="font-family: inherit;">top 10 of CDS net notionals</span></a><span style="font-family: inherit;"> for governments in late 2012 and current statistics for liquid CDS (including China) published by Markit are </span><a href="http://www.markit.com/cds/most_liquid/markit_liquid.shtml" target="_blank"><span style="font-family: inherit;">here</span></a><span style="font-family: inherit;">. Any comments are welcome!</span><br />
<br /><span style="font-family: inherit;">On a final note of this numbers themed post, a few words from rapper Mos Def and his tune, Mathematics:</span><br />
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<i><span style="font-family: inherit;">Numbers is hardly real and they never have feelings<br />but you push too hard, even numbers got limits<br />Why did one straw break the camel's back? Here's the secret:<br />the million other straws underneath it - it's all mathematics</span></i></blockquote>
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<span style="font-family: inherit;"><b>FURTHER NOTE</b> - Michael Pettis has a new post on the GDP numbers which is pretty comprehensive. Has a nice discussion of the difficulty of stripping out activity to leave true economic growth - which unsurprisingly is a lot less in China than official figures indicate (</span><a href="http://www.mpettis.com/2013/04/11/the-challenges-for-chinas-new-leadership/" target="_blank"><span style="font-family: inherit;">here</span></a><span style="font-family: inherit;">). </span></div>
The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-72685152287182716532013-03-24T09:57:00.000-07:002013-03-24T09:57:27.315-07:00Floating corpses...In the wonderful booming economy of China, everything is in demand, or so the official line goes. Around the world, people and businesses expect China to have an insatiable demand for <i>everything</i>. Even as a recent <a href="http://blogs.ft.com/beyond-brics/2013/03/22/the-business-of-death-in-china/" target="_blank">Beyondbrics</a> post points out, burial space - the following extract gives some flavour of the demand for sea burials in Shanghai:<br />
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<i>And not everyone is lucky enough to be buried in Shenyang – or in fact, in the ground at all. The Shanghai government recently increased subsidies it pays for sea burial fivefold, from Rmb400 ($65) to Rmb2,000, leading to an explosion of would-be seafaring corpses. Some families were told they would have to wait until 2015 to have their relatives buried, until the government was able to persuade another ship owner to add his vessel to the sea burial fleet. It is hoped this will clear a backlog of 2,000 urns of ashes waiting to be scattered at sea.<br />In 2010, government officials were predicting the city could run out of room to bury its dead by the end of the decade. Shanghai Daily says so far 25,000 urns have been emptied at sea, saving more than 75,000 square meters of burial land. The city wants to boost sea burial to 2 per cent of total burials, up from 1.5 per cent now.</i> </blockquote>
As the article notes (and has been extensively reported worldwide), these are not the only corpses which are floating around China now or into the future, as recent weeks have seen discoveries of large numbers of <a href="http://www.bbc.co.uk/news/world-asia-china-21861987" target="_blank">animal carcasses in waterways</a>, including those feeding municipal water supplies. No reasons have been given by officials for the discoveries, although there is speculation that it may be an unintended effect of <a href="http://www.globalpost.com/dispatches/globalpost-blogs/weird-wide-web/16000-dead-pigs-1000-dead-ducks-found-china-rivers" target="_blank">recent food safety crackdowns</a>.<br />
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This provides an interesting backdrop amidst attempts by the top leadership to focus on <a href="http://www.clarionledger.com/viewart/20130305/NEWS02/130305044/New-Chinese-leadership-pledges-promote-social-wellbeing-over-growth-" target="_blank">greater wellbeing of ordinary citizens</a>. But it is reflective of the corporate atmosphere in China at the moment as well. Last week saw the first Chinese bond default as the main subsidiary of former solar giant <b>Suntech </b><a href="http://www.nytimes.com/2013/03/21/business/energy-environment/chinese-solar-companys-operating-unit-declares-bankruptcy.html?pagewanted=all" target="_blank">entered into bankruptcy</a>. This had been predicted by many for some time (and noted on this blog) and the fundamental weaknesses remain in the industry, as the opportunities for solar panel cells remain troubling.<br />
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How many other floating corpses will there be in China? Probably a lot. In addition to other Chinese solar companies like LDK and Chaori which are also facing significant weakness, signs of trouble in bigger state-owned companies were also present with news that CNPC was planning to sell stakes in certain <a href="http://english.caixin.com/2013-03-22/100505264.html" target="_blank">pipeline projects</a> (the linked article mentions strained working capital - not a good sign).<br />
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Strong earnings in the corporate sector are supposed to ensure that there is a successful rebalancing of the economy- with growth in Chinese consumer spending and slowing of exports. At least on the consumer side that does not seem to be happening. Local sportswear retailers, once the darlings of various stockmarkets when they listed shares a couple of years ago, are predicting <a href="http://www.chinadaily.com.cn/cndy/2013-02/26/content_16255567.htm" target="_blank">tough conditions for this year</a>, while international brand Nike has seen <a href="http://www.forbes.com/sites/greatspeculations/2013/03/18/nikes-china-and-europe-weakness-could-trip-up-n-america-growth/" target="_blank">declining sales</a> in comparison to this time last year. <br />
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Any doubts as to the difficulty of the consumer story in China should be satisfied by the below picture - taken from queues of people who attend a McDonald's restaurant promotion which involved a free breakfast giveaway. While the comments section of the article was full of debate as to why those queuing would cover their faces - the below image does not suggest a land of happy rampant consumerism!<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRpHwhbH4DKJwpwZ-MmmndMMwAxH4ufKAj4Nf5Cy6HG30Xzk20TOFCWLpp1G7_h4HbGHpHBno9vQRqnaIFs3u3gzNLayZZTmtkIGBOEH0bVAUSm_mAiLS4iRil4NScai9luHbFY2sDz9o/s1600/article-2295112-18BF943F000005DC-541_634x443.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="223" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRpHwhbH4DKJwpwZ-MmmndMMwAxH4ufKAj4Nf5Cy6HG30Xzk20TOFCWLpp1G7_h4HbGHpHBno9vQRqnaIFs3u3gzNLayZZTmtkIGBOEH0bVAUSm_mAiLS4iRil4NScai9luHbFY2sDz9o/s320/article-2295112-18BF943F000005DC-541_634x443.jpg" width="320" /></a></div>
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<b>Caption competition</b><br />
On a final note we are welcoming suggestions for a caption for this picture, which is of the underside of a newly built bridge in Nanning city, which unfortunately only clears a pedestrian walkway by 1.3 metres. Prizes to be announced!<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcgJMrjSYKSvmUNQlpoFPGdenlfXKwisBK-0F7XXbBf2pWrZrg5slUJlXhCmVo-1ps0Aw76xdcWy9T0jSg3Cb4fIRI_lXSJfeZHg5cLVn_zZ_O9BENtM6pd-eVi8Vd7AWQ85C_EijWMxY/s1600/article-0-18DBAB75000005DC-805_634x475.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="238" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcgJMrjSYKSvmUNQlpoFPGdenlfXKwisBK-0F7XXbBf2pWrZrg5slUJlXhCmVo-1ps0Aw76xdcWy9T0jSg3Cb4fIRI_lXSJfeZHg5cLVn_zZ_O9BENtM6pd-eVi8Vd7AWQ85C_EijWMxY/s320/article-0-18DBAB75000005DC-805_634x475.jpg" width="320" /></a></div>
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-49190461422617036112013-03-05T18:03:00.000-08:002013-03-05T18:03:36.541-08:00Crunch time!<div dir="ltr" style="text-align: left;" trbidi="on">
Very contrasting news and images coming out of China at the moment. While Wen Jiabao was singing his <a href="http://blogs.ft.com/beyond-brics/2013/03/05/chinas-growth-a-bountiful-half-decade/" target="_blank">final swansong</a> at the Party Congress this week amidst the formal handover of power, property owners were fleeing to government offices to process property sales before the hastily announced 20% <a href="http://www.dailymail.co.uk/news/article-2288351/Chinese-homeowners-desperately-battle-shift-property-capital-gains-tax-hits.html" target="_blank">capital gains tax commences</a>. It is intended to slow down rising property prices. It may have burst the bubble instead.<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigtJQm6SWbAATYHHicmsBvfMYafGvVIrQPkjPbkOUrJanzafiUzRDbhxu24bqrI60by5xDZkWB361fJyYnTB_ajsXxx9o_M8Y04ltqdiRI5gJEuPR1UGwzRWg-2XKc6EWnaYaHVqCBSS0/s1600/article-2288351-1871CC9D000005DC-610_634x422.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigtJQm6SWbAATYHHicmsBvfMYafGvVIrQPkjPbkOUrJanzafiUzRDbhxu24bqrI60by5xDZkWB361fJyYnTB_ajsXxx9o_M8Y04ltqdiRI5gJEuPR1UGwzRWg-2XKc6EWnaYaHVqCBSS0/s400/article-2288351-1871CC9D000005DC-610_634x422.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Express filing, Shanghai style</td></tr>
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<b>He did it his way</b><br />
Wen's China was on display for all American's midweek when longtime China Watcher Gillem Tulloch, of <b>ForensicAsia</b> (with the assistance of others behind the scenes like <b>Patrick Chovanec</b>), took CBS' 60 minutes team for a walk through <a href="http://www.cbsnews.com/video/watch/?id=50142079n" target="_blank">China's ghost cities</a>. The empty shopping centres, half started office blocks and empty landscape is one of Wen's legacies.<br />
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Another legacy is the opening up of reporting on social issues, along with professed policies by the leadership to do something about it. Reports have circulated of polluted "cancer villages" and the below from a <a href="http://www.dailymail.co.uk/news/article-2288377/Cancer-villages-Global-twitter-revolt-hamlet-wells-poisoned-disease-rates-soaring.html" target="_blank">Daily Mail piece</a> captures the mood at the moment:<br />
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<i><span style="font-family: Times New Roman;">The Chinese government has promised to tackle 'cancer villages' - areas where pollution is so bad it has lead to a huge rise in diseases like stomach cancer - after a huge social media backlash from both ordinary Chinese people and global campaigners.</span><span style="font-family: Times New Roman;">There has been an explosion of outrage about cancer villages on China's social media sites and blogs, which are used by increasingly powerful activists to raise awareness.</span></i></blockquote>
But problems run deep. As in the case of Dalahai, a village in Inner Mongolia profiled by <a href="http://english.caixin.com/2013-03-04/100497059.html" target="_blank">Caixin magazine</a> which has suffered from a nearby radioactive tailings dam, the villagers must drill to increasing depths to tap water which is safe to drink. It is a moot point anyway as many villagers have fallen ill, moved away or given up hoping for promised though inadequate compensation.<br />
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<b>Going green</b><br />
The Green agenda was supposed to be one of the highlights for Wen's legacy with the push for renewables and various environmental policies which have also failed. Instead the policy failure so evident in the Beijing smog has been upstaged by tycoon and philanthropist <span style="background-color: white; font-family: Georgia, Times, 'Times New Roman', serif; font-size: 14px; line-height: 22.453125px;">Chen Guangbiao, who made headlines for a number of radical stunts, including </span> selling cans of fresh air, recommending Chinese people eat less, and attending this week's Congress by bike, <a href="http://blogs.wsj.com/chinarealtime/2013/03/04/billionaire-calls-on-china-to-eat-less/?mod=chinablog" target="_blank">in a green suit</a>. While refreshing it is uncertain how likely any of his recommendations will be to advance the agenda.<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgaLzb30ZSECkt2bZoP7H15XCcHw2iCWvHjr-Ux_3xfJmUp203iDzJdT3WP6ce9lY4c8xES4lLc2T1FNDwczSuT61X9Su4VOytkqHcndCE3R_CM7QVX0YLel8SUIZBW_chW_IAQUFyVcd8/s1600/article-2288377-1872006F000005DC-917_638x346.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="216" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgaLzb30ZSECkt2bZoP7H15XCcHw2iCWvHjr-Ux_3xfJmUp203iDzJdT3WP6ce9lY4c8xES4lLc2T1FNDwczSuT61X9Su4VOytkqHcndCE3R_CM7QVX0YLel8SUIZBW_chW_IAQUFyVcd8/s400/article-2288377-1872006F000005DC-917_638x346.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">The wrong type of green (c) Reuters</td></tr>
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<b>The dead hand of the State</b><br />
One of the big obstacles to reform is the vested interests of state enterprises. <a href="http://english.caixin.com/2013-03-01/100495946.html" target="_blank">Caixin </a>had an excellent piece on the failures at the top of State shipping company Cosco which took up the completely wrong strategy and is now hemorrhaging cash. The FT mentioned the role that the head of M&A champion Sinopec had, in weakening regulation to restrict the sulphur content of its refineries near Beijing which have caused much of the smog. And on the green side, Caixin has just reported details of the termination of the head of <a href="http://english.caixin.com/2013-03-05/100497657.html" target="_blank">Suntech</a>, the failed solar company which officials were saying should have been consollidated with all the other failing solar companies by now.<br />
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Most worringly in a market where risks are dire and State Owned Enterprises have lavished shareholder funds - the property sector (which is now tanking), one key sensible measure - that the SOEs withdraw from the market, has been <a href="http://english.caixin.com/2013-03-05/100497638.html" target="_blank">ignored</a>. This and everything else does not bode well.<br />
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-67383715306570584802013-02-12T16:21:00.000-08:002013-02-12T16:21:17.310-08:00The Year of Transparency?<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: Arial, Helvetica, sans-serif; font-size: small;"><span style="white-space: nowrap;">新年快乐!</span><span style="white-space: nowrap;"><em style="font-style: normal;">Kung Hei Fat Choi! Happy Chinese New Year to readers!</em></span></span></h3>
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<span style="font-family: Arial, Helvetica, sans-serif;"><b><em style="font-style: normal;">-<span style="color: red;"> Announcement - Following on from last month's </span></em><span style="color: red; line-height: 16.363636016845703px; white-space: normal;">Moutai Awards" (茅台奖), we still have some uncollected Moutai Baiju so award winners please feel free to get in touch!! -</span></b></span></div>
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<span style="color: #444444;"><span style="font-family: Arial, Helvetica, sans-serif; line-height: 16.359375px;"><b>Pollution update - Airpocalypse now</b></span></span></div>
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif; font-weight: normal; line-height: 16.359375px;">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.</span></div>
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<tr><td class="tr-caption" style="text-align: center;">(c) Shanghai Environmental Protection Bureau</td></tr>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghmeBIlF-KVbI83SwQuvyAkpksJW22DW43NuI5zmrTk0XQcKqhy_LlvT1DCW2hrc35_qZTL17WG5RmI60MB6hEBcMv45vDrVP4GF0IHn-MxRQgVh1h4ScTykhG9sHz-9vdoiEj9oYvVHY/s1600/ShanghaiAQI2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Arial, Helvetica, sans-serif;"></span></a></div>
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<span style="color: #444444;"><span style="font-family: Arial, Helvetica, sans-serif; font-weight: normal; line-height: 16.359375px;">This unlikely figure is the new Shanghai <a href="http://hsu.me/2013/01/shanghais-new-air-quality-mascot/" target="_blank">air quality mascot</a>. 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 <a href="http://www.sullivanjournal.com/sports/outdoors/article_0451bc46-73af-11e2-99ff-001a4bcf6878.html" target="_blank">serious end of the scale</a>, and one entrepreneur has started selling <a href="http://www.telegraph.co.uk/news/worldnews/asia/china/9842406/Entrepreneur-sells-8-million-cans-of-scented-fresh-air-in-smoggy-China.html" target="_blank">cans of fresh air</a>.</span></span><br />
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<span style="color: #444444;"><span style="font-weight: normal; line-height: 16.359375px;">Discomforts aside the fog in Eastern China does provide a metaphor for a few key themes we could expect to see in 2013.</span></span></span><br />
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<span style="color: #444444;"><span style="line-height: 16.359375px;"><b>Fog of war</b></span></span></span><br />
<span style="color: #444444;"><span style="font-family: Arial, Helvetica, sans-serif; font-weight: normal; line-height: 16.359375px;">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 <a href="http://www.bbc.co.uk/news/world-asia-21347915" target="_blank">Japanese ship</a>. </span></span><br />
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="font-weight: normal; line-height: 16.359375px;">In tandem, both countries have recently been cited as having joined the </span><span style="line-height: 16.359375px;"><b>currency war</b></span><span style="font-weight: normal; line-height: 16.359375px;">, 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 <a href="http://www.telegraph.co.uk/finance/financialcrisis/9626542/Japan-to-join-currency-wars-as-exports-slump.html" target="_blank">announcement</a>) and China (<a href="http://www.cnbc.com/id/100444861/Has_China_Quietly_Joined_the_Currency_War" target="_blank">observed</a>) have seen their currencies weaken this year. A recent <a href="https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=newssearch&cd=1&cad=rja&ved=0CC0QqQIoADAA&url=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F2c69751c-74fd-11e2-8bc7-00144feabdc0.html&ei=BNIaUfDHJYGZhQe1oYHYBw&usg=AFQjCNEDXghlNsb6wHuh-q2uAyh8MawiDw&sig2=-fixH7_clZhG_gBjRxBNTQ" target="_blank">statement by the G7</a> decrying a currency war and calling for stability ahead of an upcoming G20 meeting seemed to have little effect as volatility increased.</span></span><br />
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;"><b>Promise of clear skies?</b></span></span><br />
<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;">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 (<a href="http://www.chinaaccountingblog.com/weblog/settlement-pending.html" target="_blank">here</a>). As had been discussed previously failure to resolve this could mean a mass delisting of Chinese companies from US exchanges.</span></span><br />
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;">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 <a href="https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=newssearch&cd=1&ved=0CC0QqQIoADAA&url=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fcc7ce982-73fc-11e2-bcbd-00144feabdc0.html&ei=wtQaUZGlLJCGhQfSwYBw&usg=AFQjCNGginIEfT00j_Y940rKICohFfn02Q&sig2=ENTWEe7uVcaHHAl9IURQsA" target="_blank">Hong Kong</a>, of which there are many more, and for which there could be some bruising battles ahead. Recent scandals involving <a href="http://www.ft.com/intl/cms/s/0/5dc97f12-7363-11e2-9e92-00144feabdc0.html" target="_blank">Caterpillar </a>and short favourite <a href="http://www.bloomberg.com/news/2013-01-10/big-china-short-shows-downside-of-kleptocracy.html" target="_blank">Zoomlion </a>do not inspire confidence.</span></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRXklhEkA3Szka2ZwJPLkp_uBz7DuolTSQ0Skkq_ygfnAMyzF5Zq7LuxAo6XE3QcjOoYztW2hFkc25ND6qKxzxFGlhqfLIBWrTiAGeCSbRNIfa1B5WRIXLpl7KGzGPO1B_KdBq2NqiCWE/s1600/130130163112-03-beijing-smog-0130-horizontal-gallery.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="360" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRXklhEkA3Szka2ZwJPLkp_uBz7DuolTSQ0Skkq_ygfnAMyzF5Zq7LuxAo6XE3QcjOoYztW2hFkc25ND6qKxzxFGlhqfLIBWrTiAGeCSbRNIfa1B5WRIXLpl7KGzGPO1B_KdBq2NqiCWE/s640/130130163112-03-beijing-smog-0130-horizontal-gallery.jpg" width="640" /></a></div>
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;"><br /><b>Bottom-up disclosure</b></span></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><span style="color: #444444;"><span style="line-height: 16.359375px;">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 </span></span><span style="color: #444444; line-height: 16.359375px;">prime minister </span><span style="color: #444444; line-height: 16.359375px;">Li Keqiang to the northern city of Baotou, where during an interview with a farmer, the farmer's son fell <a href="http://www.telegraph.co.uk/news/worldnews/asia/china/9854442/Chinese-toddler-moons-prime-minister-on-national-television.html" target="_blank">half-naked out of a cupboard</a> behind the prime minister.</span></span><br />
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<span style="color: #444444; line-height: 16.359375px;"><span style="font-family: Arial, Helvetica, sans-serif;">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.</span></span><br />
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;">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:</span></span><br />
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;">(i) NPLs will remain under-reported (and bad loans will continue to be unrecognised and accounted for);</span></span><br />
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;">(ii) Banks, especially state banks will continue lending;</span></span><br />
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;">(iii) another trust product, or several may fail;</span></span><br />
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;">(iv) large corporates will continue to load up on debt;</span></span><br />
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;">(v) overseas acquisitions will continue (just reading about possibly insolvent Suntech expanding into <a href="http://www.nasdaq.com/article/why-suntech-is-expanding-into-uzbekistan-cm216878" target="_blank">Uzbekistan</a>);</span></span><br />
<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;"><br /></span></span>
<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;">(vi) one or more high level officials will be purged; and</span></span><br />
<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;"><br /></span></span>
<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;">(vii) great pressure will be placed on China's neighbours.</span></span><br />
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<span style="color: #444444; font-family: Arial, Helvetica, sans-serif;"><span style="line-height: 16.359375px;">Now to wait and see...</span></span><br />
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<span style="color: #444444; font-family: Times, Times New Roman, serif;"><span style="line-height: 16.359375px;"><br /></span></span></div>
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-53539105849181022322013-01-17T17:55:00.000-08:002013-01-17T17:55:00.644-08:00Snakes and suitcases...<div dir="ltr" style="text-align: left;" trbidi="on">
<b>A year in review</b><br />
Last year was a very generous year of gift giving it seems with many Chinese seemingly awash with cash and, in some cases looking to transport it out of China. Seizures were reported at <a href="http://online.wsj.com/article/SB10001424127887323635504578213933647167020.html" target="_blank">airports in North America</a> and <a href="http://www.dailymail.co.uk/news/article-2242473/Any-change-toll-French-police-arrest-Chinese-pair-1-8-MILLION-euros-cash-stitched-inside-car-seats.html" target="_blank">a road checkpoint in France</a>, while even within China bank staff at one bank in Henan province spent their time in the new year counting through a <a href="http://www.dailymail.co.uk/news/article-2262803/Bank-staff-spend-days-totting-piles-cash-client-deposits-162-000-yuan-small-bills.html" target="_blank">large mountain of low value bills</a> deposited by one customer. With the Year of the Snake soon approaching and awards season kicking into full swing, it seemed like a good moment to reflect on some of the achievements of 2012 and make some predictions.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2Ne1IYMguZW4vtYRAnaS80vj4ChwuwSYmtMRkHC2DXtrseugMAk6HCOx5bzqpSbNnzMQr6GE4Y6JPDgNBwoD9KtUFjz3vm_kG-N9yhGPQNnXDzBz7FZ2u3QWuwfogoVK-bXBtiwLk10A/s1600/article-0-1654BF55000005DC-56_634x906.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2Ne1IYMguZW4vtYRAnaS80vj4ChwuwSYmtMRkHC2DXtrseugMAk6HCOx5bzqpSbNnzMQr6GE4Y6JPDgNBwoD9KtUFjz3vm_kG-N9yhGPQNnXDzBz7FZ2u3QWuwfogoVK-bXBtiwLk10A/s400/article-0-1654BF55000005DC-56_634x906.jpg" width="278" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">China's latest export?</td></tr>
</tbody></table>
<b>Intoducing the Moutai Awards"! 茅台奖!</b><br />
Inspired by the longstanding favourite of Baijiu connisseurs (although since being <a href="http://www.reuters.com/article/2012/12/24/us-alcohol-china-idUSBRE8BN0H220121224" target="_blank">banned at military banquets</a> it has <a href="http://www.hurun.net/usen/NewsShow.aspx?nid=408" target="_blank">fallen in popularity as a luxury item</a>), we now present our nominations for celebratory bottles of the oft-contaminated tipple to mark outstanding achievements (and notoriety) during the year.<br />
<br />
<b>Wedding of the year</b> - At a price tag of approximately <a href="http://www.dailymail.co.uk/news/article-2255688/The-worlds-best-father-Generous-Chinese-businessman-provides-100million-dowry-daughter-ahead-lavish-wedding.html" target="_blank">$150 million</a>, the dowry given by Wu Duanbiao, a Fujian businessman to his daughter at the start of her 8 day marriage celebrations in December seemed to include everything but the kitchen sink, which presumably could have been manufactured by Wu's ceramics firm Fujian Wanli Group.<br />
<br />
<b>Scoop of the year</b> - Although the <a href="http://en.wikipedia.org/wiki/Bo_Xilai" target="_blank">Bo Xilai affair</a> had readers worldwide captivated for many months and despite a commendable late effort by Bloomberg in exposing the complex web of connected <a href="http://www.bloomberg.com/news/2012-12-26/china-s-eight-immortals-beget-new-elite-of-princelings-graphic.html" target="_blank">Princelings</a> ruling over China's Bureaucracy and <a href="http://www.bloomberg.com/news/2012-06-29/xi-jinping-millionaire-relations-reveal-fortunes-of-elite.html" target="_blank">Xi Jinping's family wealth</a>, David Barboza of the New York Times stood out for his perfectly timed expose of <a href="http://www.nytimes.com/2012/10/26/business/global/family-of-wen-jiabao-holds-a-hidden-fortune-in-china.html?pagewanted=all" target="_blank">Wen Jiabao's family business interests</a>, on the eve of Wen's retirement. Not only creating a lot of attention, it caused an immediate response from the Chinese authorities and was probably the reason for a number of recent measures, including the proposed removal of <a href="http://www.nytimes.com/2013/01/17/business/global/hong-kong-takes-a-second-look-at-changes-to-corporate-database.html" target="_blank">directors' personal details</a> from the companies registry in Hong Kong (a key source for investigating officials' dealings) and the <a href="http://online.wsj.com/article/SB10001424127887324081704578231103586748598.html" target="_blank">collapse of HSBC's exit</a> from dominant insurer Ping An. Special mention also to John Garnaut for his research into reshuffles of the <a href="http://www.smh.com.au/world/corruption-fighter-liu-latest-china-casualty-20121109-293de.html" target="_blank">Chinese military leadership</a> prior to the leadership handover.<br />
<br />
<b>Broadcast of the year</b> - Congratulations to the team at Sinica who delivered a <a href="http://popupchinese.com/lessons/sinica/party-congress-preview" target="_blank">highly insightful discussion</a> on the eve of the party congress and leadership handover. Featuring a heavyweight panel of John Garnaut, Patrick Chovanec, Jamil Anderlini and regular hosts Kaiser Kuo and Jeremy Goldkorn. The explanation of the history of Bo Xilai and the leadership was very precise and revelations, including Bo's penchant for Sylvester Stallone, quite surprising! A runner's up award for Max Keiser who over a number of broadcasts on Russia Today has been seeking to highlight China's buildup of gold reserves which could shock markets in 2013.<br />
<br />
<b>Most creative use of official resources</b> - in a crowded field, Wusu City police chief <a href="http://www.bbc.co.uk/news/world-asia-china-20662118" target="_blank">Qi Fang</a> stood out for his resourcefulness, in housing his twin mistresses and employing them in the city's police department. Equal second place goes to <a href="http://news.nationalpost.com/2012/11/23/china-fires-official-after-sex-tape-shots-appear-on-microblogging-service/" target="_blank">Lei Zhenfu</a>, who found time to star in a sextape, and <a href="http://www.telegraph.co.uk/news/worldnews/asia/china/9558179/Chinese-civil-servant-sacked-over-luxury-wardrobe.html" target="_blank">Yang Dacai</a>, a Work Safety official from Shaanxi province who managed to amass a collection of luxury watches on his official salary and keep smiling amidst the human and machine wreckage of several traffic accidents. Definitely hard work did not go unrewarded this year.<br />
<br />
<b>For services to architecture</b> - Developers of the Meiquan 22nd Century building were a late contender, having commenced a Chongqing development due to be completed before the<a href="http://www.telegraph.co.uk/travel/ultratravel/9786754/Pirated-Zaha-Hadid-building-under-construction-in-China.html" target="_blank"> Zaha Hadid designed Wangjiang SOHO development</a> (which it is a poor copy of) is finished. Earlier in the year, plans announced for the completion of the world's tallest (and possibly ugliest building), <a href="http://www.dailymail.co.uk/sciencetech/article-2236300/Chinese-company-plans-build-worlds-tallest-skyscraper--just-THREE-MONTHS.html" target="_blank">Sky City in Changsha</a>, in an unbelievable 3 months, were noteworthy, as was the world's largest, the <a href="http://www.smh.com.au/travel/worlds-largest-building-nears-completion-20121221-2bqz3.html" target="_blank">New Century Global Centre</a> in Chengdu. But for sheer pointlessness the planners of the ghost town of Ordos in Inner Mongolia are the winner in particular because it was also able to be used this year as the<a href="http://vimeo.com/51333291" target="_blank"> world's largest skate park</a>. <br />
<br />
<b>Most subsidised sector</b> - Jury remains out on this one. Railways seem to be the winner with about <a href="http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1248523/1/.html" target="_blank">$104 billion announced for 2013</a> (following similar amounts in 2012). Shipbuilding and solar were notable also.<br />
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Congratulations to our winners! They or their representatives can get in touch for some fine baijiu tipple!<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirTYWXxXP9A98tpQyYnZjm1A9LM31zTcXwTyEXCMjayYK0V7Cp2ix0dPxXGDQez31FrRCP6Zi2bp0IKBynVwLTFa0yeL9GG3F9TPLO_tYvsO_dSn2Rg_JdNme63FApTGGr-836PjxEqpA/s1600/CDkweichow-moutai.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="319" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirTYWXxXP9A98tpQyYnZjm1A9LM31zTcXwTyEXCMjayYK0V7Cp2ix0dPxXGDQez31FrRCP6Zi2bp0IKBynVwLTFa0yeL9GG3F9TPLO_tYvsO_dSn2Rg_JdNme63FApTGGr-836PjxEqpA/s320/CDkweichow-moutai.jpg" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">(c) Shenzen Standard</td></tr>
</tbody></table>
Coming up next - some predictions for 2013...!<br />
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-58157706502896611342012-12-20T18:51:00.000-08:002012-12-20T18:53:43.556-08:00Seeking cash...<div dir="ltr" style="text-align: left;" trbidi="on">
<b>Holes emerging in the edifice</b><br />
Some of the headlines in the last couple of weeks:<br />
- <i>China's WMPs - wealth management products suffered their first recorded default</i>. 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 <a href="http://www.chicagotribune.com/business/sns-rt-us-china-banks-huaxiabre8b305m-20121203,0,5266991.story" target="_blank">here</a>). As had previously been seen in the <a href="http://english.caixin.com/2012-07-09/100408937.html" target="_blank">Zheijiang Guarantee scandal</a>, 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.<br />
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Despite assurances from regulators during the recent party congress, regulators <b>do not know</b> the extent of exposure and so this week the China Banking and Regulatory Commission <a href="http://www.reuters.com/article/2012/12/19/us-china-banks-products-idUSBRE8BI0CC20121219" target="_blank">ordered banks to check</a> and ensure management of non-traditional products.<br />
<b>Take away</b>: 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.<br />
<br />
- <i>Unimaginable sums of money have been flooding out of China</i> - 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 <a href="http://iff.gfintegrity.org/documents/dec2012Update/Illicit_Financial_Flows_from_Developing_Countries_2001-2010-HighRes.pdf" target="_blank">here</a>). 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 ("<a href="http://www.vice.com/read/chinese-officials-at-it-again-more-scandal-from-the-peoples-republic" target="_blank">Chinese officials at it again...</a>").<br />
<b>Take away</b>: 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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlZndeZMnPePvyWH_yofxyj6gLsskX1-xXVX2cf2_9HnQYXA2Z9kNWIhnKOLBMJlxT5p1tgDqtBWf9h_tDzu7FCZybpkxoXW_stsll6aLTqzM33i5nbRCsAqBnIDkP_zf4wb-Nj1ehZlI/s1600/map.bmp" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="488" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlZndeZMnPePvyWH_yofxyj6gLsskX1-xXVX2cf2_9HnQYXA2Z9kNWIhnKOLBMJlxT5p1tgDqtBWf9h_tDzu7FCZybpkxoXW_stsll6aLTqzM33i5nbRCsAqBnIDkP_zf4wb-Nj1ehZlI/s640/map.bmp" width="640" /></a></div>
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- <i>China is seeking to attract massive amounts of new foreign capital from sovereign wealth funds and central banks</i> - 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 <a href="http://ftalphaville.ft.com/2012/12/17/1311172/reserve-managers-turn-sultry-eyes-towards-china/?" target="_blank">here</a>). There was speculation about motives and questioning as to how such a policy interacted with efforts to <a href="http://ftalphaville.ft.com/2012/12/19/1313672/what-china-really-wants/" target="_blank">liberalise its currency</a>,<br />
<b>Take away</b>: 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.<br />
<br />
- <i>Chinese corporates facing tough times</i> - 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 <a href="http://seekingalpha.com/article/1059831-zombie-ldk-fires-thousands-stops-polysilicon-production-situation-dire" target="_blank">here</a>. <br />
<b>Take away</b>: 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. </div>
The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-49384298931304097582012-11-27T18:00:00.000-08:002012-11-27T18:00:39.209-08:00Lost century?<div dir="ltr" style="text-align: left;" trbidi="on">
<b><span style="font-family: Arial, Helvetica, sans-serif;">Back to work</span></b><br />
<span style="font-family: Arial, Helvetica, sans-serif;">Following a relatively smooth 18th party congress, China Inc has got back to work, albeit with a slightly different vision for more balanced growth. There was not so much to take away from the various press showpieces, especially since (as is usual), many of the real decisions had been made in the final days leading up to the summit. A post mortem piece in the <a href="http://articles.chicagotribune.com/2012-11-20/news/sns-rt-us-china-congress-pollbre8ak01f-20121120_1_jingxi-bo-xilai-party-boss" target="_blank">Chicago Tribune</a> highlighted the role of retired senior figures still play in the party - there must have been plenty of non-Chinese wondering what Jiang Zemin was doing centre stage at the conference. The Wen family saga rolled on, with a second instalment from the New York Times examining the very profitable stake held in insurance blue chip Ping An insurance by Wen's family and the <a href="http://www.washingtonpost.com/business/insurer-ping-an-attacks-nyt-story-on-wen-jiabao-family-getting-rich-after-it-avoided-breakup/2012/11/26/cf4eb38c-37e0-11e2-9258-ac7c78d5c680_story.html" target="_blank">lobbying to Wen</a> on behalf of Ping An in 1999. Wen's response included being <a href="http://blogs.wsj.com/chinarealtime/2012/11/21/wen-jiabao-please-forget-me/" target="_blank">asked to be forgotten</a>.</span><br />
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<span style="font-family: Arial, Helvetica, sans-serif;">In the swansong atmosphere it seemed likely that press would look around for an identifiable theme and many outlets settled on comparisons with Japan at its zenith. One comparison, in a fairly high level of detail for the BBC was quite simply titled "<a href="http://www.bbc.co.uk/news/business-19948730" target="_blank">Will China fall flat on its face</a>"! One of the most concerning points of comparison, which has been noted elsewhere, was the different developmental stage between China and Japan - thanks to its one child policy and it starting form a much lower income base, China has rapidly accelerated the aging of its population to now approaching Japanese levels (though getting a dividend along the way with a relative boost of young workers which is now decelerating) and consequently may grow old before it grows rich. </span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">More worrying in the immediate term was the surprisingly candid, though balanced piece by Charles Dumas of <a href="http://www.ft.com/intl/cms/s/0/223184dc-2fec-11e2-891b-00144feabdc0.html#axzz2DO9Pwek6" target="_blank">Lombard Street Research</a> who nicely brought together all of the strands of the Chinese economy which are of concern - debt, stimulus, defaults. What is particularly worrying is the ease with which, in 2 places, Charles can lead to a conclusion of the occurrence of banking crises - <i>as a matter of course</i>, as inevitable as a policy setting! - w<span style="background-color: white; line-height: 18px;">ithout policy change (debt reduction) and with trend growth shifting down to 5 per cent, "a plague of banking crises" could be a result, as could occur if financial liberalisation proceeds. This is not the story spun by the large financial institutions promoting use of the Chinese currency (the Yuan/Renminbi) in trade settlement and with greater convertibility.</span></span></div>
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<span style="background-color: white; font-family: Arial, Helvetica, sans-serif; line-height: 18px;">But these two things combined paint a worrying picture. If China has all of the preconditions of a Japanese style financial collapse - sufficient to bring about the slow burning decline of a "lost decade" or "lost generation" (a term in vogue even in the West as it pushes through austerity, or in the case of the European Union, <i>can-kicking</i>), then could the less favourable demographics, level of social cohesion or uncertain environment make the impact for China worse than Japan? As it happens there are deep social divisions in China with assertive foreign policy in areas like the South China Sea stirring tensions amongst the population and with reports of <a href="http://news.nationalpost.com/2012/11/21/outrage-in-china-after-five-runaway-boys-die-in-a-dumpster-after-lighting-fire-for-warmth/" target="_blank">inequality </a>and <a href="http://theconversation.edu.au/inequality-fuels-tension-between-chinas-minority-uyghurs-and-hans-10967" target="_blank">division </a>within Chinese society attracting increasing concern and attention. The task of the Chinese Communist Party to reinvent itself for slower growth and <a href="http://www.channelnewsasia.com/stories/afp_asiapacific/view/1235315/1/.html" target="_blank">newer ideologies</a> also complicates things. Added <a href="http://www.smh.com.au/world/public-anger-in-china-erupts-online-as-official-caught-in-sex-tape-scandal-20121126-2a2o0.html" target="_blank">sleaze and corruption scandals</a> make for grim prospects.</span><br />
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<span style="background-color: white; line-height: 18px;">Underlying the resurgence of nationalism is a sense of continuity with the period from the mid-19th century until the mid-20th century, when the sovereignty of the Chinese empire and state was subjugated to foreign powers and influence, starting with the First Opium War until the expulsion of foreigners after the Second World War (the <a href="http://en.wikipedia.org/wiki/Century_of_humiliation" target="_blank">Century of Humiliation</a>). As commentators have noted, the current administration perpetuates the focus on restoration of international profile and prestige while <a href="http://www.ft.com/intl/cms/s/2/634a39ec-e888-11e1-8ffc-00144feab49a.html#axzz2DO9Pwek6" target="_blank">skipping over the Party's failures</a>. Inability for self-criticism may come to harm the Party and the nation in years to come, and should the effects of China's boom be felt across one or more generations, Chinese may have to face up to another century of lost potential in many years to come.</span></span></div>
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<tr><td class="tr-caption" style="text-align: center;">Cracks appear in the China bull market (c) Caixin</td></tr>
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-51524825019266458942012-10-30T17:47:00.000-07:002012-10-30T17:47:07.615-07:00Generation game<div dir="ltr" style="text-align: left;" trbidi="on">
<b>Solar flare up</b><br />
Since the last post there have been moves to further consolidation and government control of the solar industry as two of the largest players, <b>LDK</b> and <b>Suntech</b> are facing increased <a href="http://www.greentechmedia.com/articles/read/ldk-now-officially-a-chinese-state-owned-enterprise" target="_blank">state involvement</a> and even <a href="http://www.altenergystocks.com/archives/2012/10/the_battle_for_the_heart_of_suntech_1.html" target="_blank">takeover</a>. Amidst global oversupply, plummeting prices and possible trade law sanctions, a couple of themes are present (i) use of bankruptcy is not prevalent yet (with rollovers of debt preferred) and (ii) increasing state involvement. An excellent article by Tim Worstall in Forbes had a headline which summed up the situation - "<a href="http://www.forbes.com/sites/timworstall/2012/10/05/china-still-hasnt-got-the-hang-of-this-capitalism-thing/" target="_blank">China still hasn't got the hang of this capitalism thing</a>", namely the importance of unprofitable enterprises going bankrupt. It would seem fairly obvious that there are plenty of impediments to swift and orderly wind-down of institutions - loss of face, bureaucratic interference, vested local government interests and the like.<br />
<br />
But it wasn't supposed to be like this - the article refers to an official who pronounced that the government intended the industry to consolidate - i.e. a large number of enterprises close or merge - intentions which were complicated by unwillingness of banks and local governments to toe the line. And what a contrast from the fanfare in a previous Forbes article announcing the launch of the new US style bankruptcy regime <a href="http://www.forbes.com/2007/06/12/china-bankruptcy-law-face-markets-cx_jc_0612autofacescan01.html" target="_blank">China in 2007</a> - the predictions of a "high level of sophistication" and "determination to build a sound legal system" seem over-enthusiastic statements now. Possibly due to the need to promote stability ahead of the leadership change next month, officials seem to be falling back to tried and tested methods of state interventionism, which will only continue to propagate distortions in the current financial system.<br />
<br />
<b>It's a family affair</b><br />
At the time of writing there has been an overwhelming response to the <a href="http://www.nytimes.com/2012/10/26/business/global/family-of-wen-jiabao-holds-a-hidden-fortune-in-china.html?ref=wenjiabao&_r=0" target="_blank">New York Times' investigation</a> into the wealth and connections of Chinese Premier Wen Jiabao's family. It is not just that the Chinese administration has blocked access to the Times' website (as it did with Bloomberg and the Brookings Institution when they released similar findings regarding incoming <a href="http://www.economist.com/blogs/analects/2012/10/chinas-ruling-families" target="_blank">Xi Jinping and Li Keqiang</a>), responded with what the Financial Times referred to as a <a href="http://blogs.ft.com/beyond-brics/2012/10/29/china-to-new-york-times-plagiarise-this/#axzz2AjxA6YpV" target="_blank">"hatchet job" piece</a> in the People's Daily, or that unusually the administration has instructed lawyers to deny and look at pursuing legal redress (which members of the legal community thought were <a href="http://www.thelawyer.com/chinas-premier-turns-to-lawyers-from-jun-he-and-grandall-amid-new-york-times-row/1015249.article" target="_blank">poorly thought out</a>) With the <a href="http://www.guardian.co.uk/commentisfree/2012/oct/26/new-york-times-china-coup" target="_blank">Guardian </a>comparing it to the Pentagon Papers as the most "direct challenge to a sitting government", it is clear that the investigation has ruffled feathers at a sensitive time. <br />
<br />
It is not clear yet if there will be a lasting impact from these revelations about China's leaders - the Economist which has a special report covering the upcoming Party Congress, concludes that all the disclosures strengthen the case for reform. Like many similar autocracies the connected elite of China have had an entrenched position for a long time in China and it seems unlikely that this will change after the handover beyond certain personnel changes (which was the conclusion of Katherine Hille in the <a href="http://www.ft.com/intl/cms/s/0/514e16a6-21a8-11e2-b5d2-00144feabdc0.html#axzz2AjycliaD" target="_blank">FT</a>). But could tensions between ruling factions and their connected others spillover after the transition?<br />
<br />
Factional tension was suggested by Hille (noting rumours on Chinese social media that information in the New York Times had been provided by factional opponents of Wen) and more broadly the Wen revelations have opened a greater discussion on corruption in China, which as the <a href="http://ftalphaville.ft.com/2012/10/29/1167401/questioning-chinas-governance/" target="_blank">FT Alphaville</a> blog noted that perceptions of corruption were reaching levels where they could be destabilising. Cue then a closed door lecture from a Chinese (or Hong Kong-based) academic arguing that China is in fact <a href="http://www.theepochtimes.com/n2/china-news/chinese-tv-host-says-regime-nearly-bankrupt-141214.html#.UI8kMB8krhM.twitter" target="_blank">nearly bankrupt</a> and a warning from permanent China bear Gordon Chang warning that there is now a <a href="http://www.forbes.com/sites/gordonchang/2012/10/28/the-great-chinese-stampede-hot-money-leaving-the-country/" target="_blank">"stampede"</a> of money and even officials are now fleeing China and all does not seem well.<br />
<br />
A light-hearted piece in the Daily Mail might suggest otherwise (with news of a marriage of the niece of president-in-waiting Xi Jinping to a young unknown British businessman, <a href="http://www.dailymail.co.uk/news/article-2224730/British-businessman-Daniel-Foa-36-married-powerful-family-China.html" target="_blank">Daniel Foa</a>) but there is a very deep family tension involved in this year's leadership trauma. Forming part of a highly recommendable podcast of experts (comprising <a href="http://popupchinese.com/lessons/sinica/party-congress-preview" target="_blank">Chovanec, Garnaut and Anderlini</a>) was a real insight into the the deep inter-generational enmity between Jinping and Xilai (and their factions in the Party), which had arisen between their fathers, Xi Zhongxun and Bo Yibo, during the cultural revolution. Garnaut in particular has been in explosive form revealing casualties of the factional struggles for position in both the <a href="http://www.watoday.com.au/world/marching-order-photos-give-clue-to-next-military-lineup-20121022-281ur.html" target="_blank">military</a> and <a href="http://www.theage.com.au/world/chinas-leadership-transition-facing-chaos-20121029-28fjt.html" target="_blank">political </a>leadership. Add to this interventions of factions led by Hu Jintao/Wen Jiabao and Jiang Zemin and things look set for an explosive mix.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhl5VZTcCG9khLV0QfxHFknWbWitNkpgOgeW0jbU_hv8NTuTAKTqz459WLcufhbt8a2_eAOfHpclTyOhWFTjnaO-CiJqTmGCtlLovsJZyn54ww7tt6rgSkwU7C0xn7piRbWOKaiDvYZcCg/s1600/foa.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhl5VZTcCG9khLV0QfxHFknWbWitNkpgOgeW0jbU_hv8NTuTAKTqz459WLcufhbt8a2_eAOfHpclTyOhWFTjnaO-CiJqTmGCtlLovsJZyn54ww7tt6rgSkwU7C0xn7piRbWOKaiDvYZcCg/s320/foa.jpg" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">An Englishman called Daniel Foa holds a book (c) ImageChina</td></tr>
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As has been noted China's new leaders are likely to signal a clear directional change in policy very soon after the handover (as has been customary). Whether they retain a princeling dominance and an absolute autocracy or opt for a more compromising approach (such as a management focussed <a href="http://www.vancouversun.com/news/Will+China+adopt+Singapore+model/7437452/story.html" target="_blank">Singaporean</a> model) will remain to be seen.</div>
The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-30257715894797804532012-10-09T17:51:00.001-07:002012-10-09T17:51:48.530-07:00Two steps forward?<div dir="ltr" style="text-align: left;" trbidi="on">
<b>Gathering headwinds...</b><br />
After a break from blog-posting it is interesting to see a consensus forming as doubts further crystallise around the China and BRICS growth story. At least on one report, the IMF has joined the increasing ranks of observers who are <a href="http://in.reuters.com/article/2012/10/08/imf-india-china-growth-forecasts-idINDEE8970F220121008?type=economicNews" target="_blank">bearish on growth prospects</a>, while in Beijing another chapter in the grizzly <b>Bo Xilai </b>saga progressed when, on the eve of a national holiday, it was announced that a consensus on the persistent political questions had been <a href="http://www.bloomberg.com/news/2012-09-28/bo-xilai-is-expelled-from-communist-party-referred-to-judiciary.html" target="_blank">reached </a>- Bo Xilai would be expelled from the party (to face a criminal trial) and the 18th National Party Congress would take place on 8 October (apparently a date which will bring good fortune). <br />
<br />
Good luck will be needed, because China is facing a number of headwinds, including tensions with Japan over <a href="http://www.reuters.com/article/2012/09/28/us-china-japan-usa-idUSBRE88Q1ZL20120928?feedType=RSS&feedName=topNews&rpc=71" target="_blank">disputed islands</a> and the slowing economy which has even been noticed in the wealthy tech hub of <a href="http://www.zerohedge.com/news/2012-09-27/chinese-mega-city-verge-bankruptcy" target="_blank">Dongguan</a>. Aggressive positioning such as talk of <a href="http://www.telegraph.co.uk/finance/china-business/9551727/Beijing-hints-at-bond-attack-on-Japan.html" target="_blank">rapid sales of Japanese bonds</a> by the Chinese (at a time when it is trying to diversify its holdings of US treasuries), a no-show by Chinese banks at an IMF Conference in <a href="http://www.japantoday.com/category/politics/view/chinese-banks-sit-out-tokyo-imf-linked-events" target="_blank">Japan</a> (when Chinese banks may need assistance from the IMF sometime in the future) and announcements of ever-increasing local stimulus (which UBS called "<a href="http://ftalphaville.ft.com/2012/09/10/1152081/is-the-2012-china-stimulus-some-kind-of-unicorn/" target="_blank">unicorn</a>", JP Morgan called <a href="http://blogs.marketwatch.com/thetell/2012/10/08/jpm-china-local-government-stimulus-castles-in-the-air/" target="_blank">"castles in the air"</a> and the Beyond Brics team have taken to comparing by <a href="http://blogs.ft.com/beyond-brics/2012/09/25/sichuan-fires-up-huge-investment-plan/#axzz28klvCQdv" target="_blank">regional cuisine</a>), seem counter-productive while uncertainty surrounded China's leader-in-waiting, who <a href="http://www.bloomberg.com/news/2012-09-12/china-s-silence-on-xi-speculation-contrasts-with-past-rebuttals.html" target="_blank">disappeared for 12 days</a> recently.<br />
<br />
The human side to the evolving atmosphere has come to the fore recently - not only with the riots at Foxconn facilities (and if you are hoping to read this on an iphone 5 - <a href="http://www.cityam.com/latest-news/iphone-5-supply-threatened-foxconn-strikes" target="_blank">deepest sympathies</a>), but also with deflationary prospects further reducing likelihood of a rebalancing and growth in consumer demand. Gavekal Dragonomics has noted that given the current destocking cycle and <a href="http://www.reuters.com/article/2012/10/09/us-china-economy-cpi-idUSBRE8980DB20121009" target="_blank">fading CPI numbers</a>, a little bit of inflation <a href="http://blogs.ft.com/beyond-brics/2012/10/08/china-inflation-friend-not-foe/#axzz28klvCQdv" target="_blank">may be a good thing</a>. At the sharper end, industries like solar are desperately trying to <a href="http://www.bloomberg.com/news/2012-10-09/suntech-cuts-solar-output-capacity-hires-ubs-to-reduce-debt.html" target="_blank">slash costs and restructure debts</a>.<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAfz_8yzEbhTWoQCvKmrWIYdIJ891PkKBvfcy7KB-z6_D_d861vLxiTg1ZSSfVk5lCNisoHM0Jlz9TFpSFv2sVIumBpPC80tb1j_gelxI1zqjqyV_UYHONHmwhhLxIt1GMusRCz0VstUU/s1600/article-2214145-1563282F000005DC-472_306x423.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAfz_8yzEbhTWoQCvKmrWIYdIJ891PkKBvfcy7KB-z6_D_d861vLxiTg1ZSSfVk5lCNisoHM0Jlz9TFpSFv2sVIumBpPC80tb1j_gelxI1zqjqyV_UYHONHmwhhLxIt1GMusRCz0VstUU/s320/article-2214145-1563282F000005DC-472_306x423.jpg" width="230" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Chinese de-stocking in action</td></tr>
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<b>A gold postscript</b><br />
There have been some interesting commentaries about global currencies and the monetary system in the past couple of weeks, including from the <a href="http://econ.st/R4rVeY" target="_blank">Economist</a> and from George Magnus of <a href="http://ftalphaville.ft.com/2012/10/09/1197791/magnus-on-spending-our-way-out-of-the-mumps/" target="_blank">UBS</a> who still sees issues from global savings imbalances. Following on from the last post there has been some further discussion of the possibility that China is in fact <a href="http://www.abc.net.au/news/2012-09-21/rising-price-of-gold-feature/4274770?section=wa" target="_blank">stockpiling gold</a> (<a href="http://www.businessinsider.com/the-gold-story-of-the-decade-2012-10" target="_blank">here </a>also and even that <a href="http://world.hawaiinewsdaily.com/2012/09/china-and-russia-are-ruthlessly-cutting-the-legs-out-from-under-the-u-s-dollar/" target="_blank">China and Russia are stockpiling</a> in concert in response to US quantitative easing). Ironically for both China and Russia, any suggestion of monetary system strength has been challenged by heavy use of <a href="http://ftalphaville.ft.com/2012/10/02/1186921/the-russia-liquidity-house/" target="_blank">reverse repos</a> by the countries' central banks (by which the central banks inject cash into the domestic banks in exchange for securities - other link <a href="http://www.ft.com/intl/cms/s/0/607839b6-085f-11e2-b57f-00144feabdc0.html" target="_blank">here</a>).<br />
<br />
It was noted in the commentary of the Russian moves that the repos coincided with announcements from the Central Bank of Russia that it would not intervene to support the Ruble (Russia's currency). While it was noted that this was a gesture likely to be received well by markets as pro-reform (like Renminbi liberalisation in China), especially given the CBR's previous failures to do so, the alternative explanation, that the central banks simply <i>do not have</i> sufficient resources to defend their currencies from outflows. Parallel to this it was announced that official estimates predicted a sooner than expected <a href="http://www.ft.com/intl/cms/s/0/313c4ffc-0d6e-11e2-bfcb-00144feabdc0.html#axzz28ekLs97r" target="_blank">ending for Russia's long established current account surplus</a>, due to falling exports and high government expenditure.<br />
<br />
Beyond any policy preferences the central banks may have in pursuing reverse repos (and the short term stimulus they provide), there remain risks for the central banks, namely i) that they will become less effective and ii) the central bank will run out of resources to execute the repo operations. There is evidence of both these effects in China (links <a href="http://www.ft.com/intl/cms/s/0/dce84bd2-11f9-11e2-b9fd-00144feabdc0.html?ftcamp=published_links%2Frss%2Fmarkets%2Ffeed%2F%2Fproduct#axzz28qF8PlN3" target="_blank">here</a> and <a href="http://blogs.ft.com/beyond-brics/2012/10/09/china-running-out-of-repo-rope/#axzz28klvCQdv" target="_blank">here</a>). <br />
<br />
Some analysts expect ineffective repos could lead to an RRR cut (reducing the amount banks are required to hold in deposits) which could free up lending and accelerate inflation and stoke lending and the property bubble - something it turns out is additionally caused by social factors including the one child policy according to <a href="http://www.foreignpolicy.com/articles/2012/09/28/bachelor_padding" target="_blank">Foreign Policy magazine</a>. Growth in the Chinese property market is already picking up, but as shown by Also Sprach Analyst in a current series, the current valuation models may <a href="http://www.alsosprachanalyst.com/special/china-real-estate-market-rebound" target="_blank">significantly miscalculate the market</a>.<br />
<br />
A call for more clarity on China is probably due. Or at least after the unicorns are gone.<br />
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-90838497243187561522012-09-05T18:32:00.004-07:002012-09-05T22:22:21.310-07:00Gorillas in the mist<div dir="ltr" style="text-align: left;" trbidi="on">
Goldman Sachs Asset Management chairman <b>Jim O'Neill</b> popped up in the news this week, releasing a note to clients with some <a href="http://www.businessinsider.com/goldman-jim-oneill-china-2012-8" target="_blank">revised thinking</a> on prospects for China's economy. With still a favourable overall view, O'Neill considered several likely outcomes for Chinese growth, including a <a href="http://blogs.barrons.com/emergingmarketsdaily/2012/08/30/goldmans-oneill-ponders-china-hard-landing-sees-scenario-where-it-may-be-difficult-to-make-money-in-chinese-stocks/" target="_blank">"pessimistic" outlook </a>of 7% GDP growth. An interesting point in his analysis - that in any worst case growth scenario, the Chinese government is "surely to step in", attracted some comment as many noted that given certain conflicting undercurrents and factional conflicts within the administration and the Chinese Communist Party, the Chinese authorities may not be willing or able to intervene. <br />
<br />
Similar to the reaction when various large Chinese cities announced vast <a href="http://in.reuters.com/article/2012/08/22/china-investment-tianjin-idINL4E8JM0VF20120822" target="_blank">new spending programs</a>, some observers were sceptical as to whether bold political action will be as likely be delivered as in 2008. O'Neill's fund meanwhile has been promoting a new set of fast-growing <b>MIST</b> countries (Mexico, Indonesia, South Korea and Turkey) which have been the star performers in the fund's popular <a href="http://www.bloomberg.com/news/2012-08-07/goldman-sachs-s-mist-topping-brics-as-smaller-markets-outperform.html" target="_blank">Next 11 fund</a>. And the failure to even consider a less than 7% GDP growth outcome (when some commentators consider that growth may be negative) suggests O'Neill might just be missing a gorilla in the room - Asian (and Chinese) slowdown which others believe may not be <a href="http://www.telegraph.co.uk/finance/economics/9518859/Global-crisis-moves-East-as-China-suffers-rapid-downturn.html" target="_blank">priced in by the market</a>.<br />
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<b>A very strategic resource</b><br />
The last couple of weeks saw a renewed debate considering the <a href="http://www.telegraph.co.uk/finance/personalfinance/investing/gold/9511886/US-will-return-to-gold-standard-says-Euro-Pacific-Capital-chief-Peter-Schiff.html" target="_blank">return of a gold standard</a> as a way to restore stability to the global economy and encourage growth (and end America's money printing), even while the balance of opinion believes such a standard is <a href="http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100019683/the-monetary-maginot-of-the-gold-standard/" target="_blank">a false hope</a> or otherwise likely to result in the stagnation currently seen in the Eurozone (which as Peter Coy explained arguably is committed to a <a href="http://www.businessweek.com/magazine/the-euro-as-good-and-bad-as-gold-11172011.html" target="_blank">new gold standard</a>).<br />
<br />
There is an interesting angle for China in this debate, as it has been active in the gold markets. As you may recall China has been trying a basket of different measures to manage its economy including Keynesian stimulus in 2008, enormous foreign exchange reserves, capital controls and now liberalising exchange rates (which may be countering each other in effectiveness). In fact reports have emerged which provide detail of China's activities in gold as well.<br />
<br />
In addition to <a href="http://www.dailyreckoning.com.au/chinas-gold-strategy/2012/08/21/" target="_blank">outright purchases</a> of the metal, interest was also expressed from Chinese companies in acquiring gold producers. In its report of China's largest gold producer, China National, considering the acquisition of a majority stake in the African subsidiary of the world's largest gold miner, Barrick, the <a href="http://blogs.ft.com/beyond-brics/2012/08/17/sunny-skies-a-glimpse-into-chinas-gold-ambitions/#axzz25S8JLuoW" target="_blank">Beyond Brics blog </a>reported that the company's president, Sun Zhaoxue believes that China should view gold as a "strategic resource as important as petroleum energy". That might partly explain why there is a <a href="http://usa.chinadaily.com.cn/epaper/2012-08/14/content_15674017.htm" target="_blank">gold mining division</a> in the Chinese internal security forces (the <a href="http://en.wikipedia.org/wiki/People's_Armed_Police" target="_blank">People's Armed Police</a>).<br />
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As well as its value as a metal, reserves of gold have been argued by some as a better store of value for a national central bank than government bonds, especially in a low inflation environment where the government issuer of the bonds is engaging in monetary easing (which depresses the yield as the price increases from the asset purchases). In China's case it is looking for an alternative store of value to offset its huge holding of US Treasuries (US government bonds) which earn low rates of interest because the US is engaging in Quantitative Easing (printing money by buying US Treasuries) and which it cannot liqidate easily. The liberalisation of the Renminbi (i.e. the process of opening the Chinese currency to full convertibility) is seen as one step that can counter-balance China's US dollar holdings (as the greater volumes of Renminbi will be used and deposited internationally). Sun Zhaoxue alludes to this in his article.<br />
<br />
However it is questionable whether holding gold <i>ipso facto</i> will ensure greater security for China. How so? Well looking into some of the debate around the merits of a gold standard suggested that the <b>credibility </b>of the system might be more important than the physical holding itself.<br />
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<b>I hold therefore I am</b><br />
Outspoken financial journalist Max Keiser, has looked at a number of commodity stories, including possible manipulation of the silver market by <a href="http://www.guardian.co.uk/commentisfree/2010/dec/02/jp-morgan-silver-short-selling-crash" target="_blank">JP Morgan</a> and its high frequency trading (HFT) business (background <a href="http://seekingalpha.com/article/815221-hft-tail-wagging-the-silver-price-dog" target="_blank">here</a>). In a <a href="http://maxkeiser.com/2012/08/16/kr328-keiser-report-frankenmarket/" target="_blank">recent broadcast</a> Keiser examined some of the justifications given by gold bugs (especially libertarians in the US), who he found often confuse their libertarian values (such as objectivism advocated by Rand) with the behavioural principles of the "Austrian school" (advocates of a gold standard). <br />
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A key question in the discussion was the degree to which financial institutions could issue credit secured against their gold reserves - it is only physical gold which is the "ultimate extinguisher of credit", but the use of fiat (paper) money removes the gold from credit making it easier to expand credit (which if prolonged can cause inflation and is exaggerated by quantitative easing). <br />
<br />
In his article Peter Coy blames the First World War for causing the inflationary expansion of credit which destabilised the gold standard, however according to the Cato Institute (which is apparently libertarian) in a <a href="http://www.cato.org/pubs/journal/cj19n2/cj19n2-4.pdf" target="_blank">paper</a> on this topic, von Mises, a key figure in this analysis, believed that instead of the war, it was the attempts by bankers to get around the gold standard and increase credit in the economy, when, from the 1890s the world's central bankers relaxed the standards of inter-central bank credits:<br />
<blockquote class="tr_bq">
<i>It was'' not the old classical gold standard, with effective gold circulation,'' that failed after 1929; what failed was'' the gold 'economizing' system and the credit policy of the central banks of issue'' </i></blockquote>
What von Mises proposed (to address this inherent conflict) was that the gold standard should be operated completely independently of monetary matters and essentially gold should be valued at production cost. And this is interesting because it seems to be a call for independence, similar to that underlying the <a href="http://en.wikipedia.org/wiki/Bitcoin" target="_blank">Bitcoin </a>digital currency, which operates free of any government and is instead backed by the power of the computing network of Bitcoin users (with no centralised issuing authority).<br />
<br />
All of this would suggest that credibility is important. As well as the amount of gold which the People's Bank of China (the central bank) or other bank may hold, financial market participants will also assess how credible those banks are in administering and valuing such reserves. This may not be as simple an assessment as it seems.<br />
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<tr><td class="tr-caption" style="text-align: center;"><span style="font-size: small;">In gold (and tungsten) we trust...</span></td></tr>
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<b>Frauds of the week</b><br />
Mentions must go out to: the Chinese Art market (worth $13 billion according to <a href="http://www.forbes.com/sites/abigailesman/2012/08/13/chinas-13-billion-art-fraud-and-what-it-means-for-you/" target="_blank">Forbes</a> magazine) and China Sky One Medical and its chief executive (which the SEC charged with securities fraud this week for <a href="http://www.reuters.com/article/2012/09/04/us-skyone-sec-fraud-idUSBRE8830Z920120904" target="_blank">overstating financial results</a>).<br />
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0tag:blogger.com,1999:blog-2109590870064125073.post-8650825178370163962012-08-15T20:55:00.001-07:002012-08-16T02:47:51.103-07:00The audacity of hope<div dir="ltr" style="text-align: left;" trbidi="on">
<strong>Bears rally</strong><br />
A couple of provocative headlines hit the newsfeeds this week as some notably bearish Chinese analysts digested the recent stimulus announcements. Gordon Chang's article <a href="http://www.forbes.com/sites/gordonchang/2012/08/12/china-is-running-out-of-money/" target="_blank">"China is running out of money"</a> certainly grabbed attention and while much of the discussion about the country's central bank, the People's Bank of China (and its ability to maintain the system of foreign exchange inflows) has been covered <a href="http://ftalphaville.ft.com/blog/2012/06/07/1032711/pboc-not-leaning-against-the-wind-anymore/" target="_blank">before</a>, details of how <b>short </b>some local authorities are of money right now is rather new (and emerging). <br />
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In contrast, investors' optimism about the extent of the current stimulus is well illustrated by a slide from a recent Rio Tinto investor presentation (below). Frequent readers will recognise one of the project leaders - the National Development Development and Reform Commission (<b>NDRC</b>) which Victor Shih and others have identified as being at times a very effective rubber stamp executing little scrutiny of projects it approves (including earlier in the year a project to <a href="http://chinameltdown.blogspot.co.uk/2012/06/goodbye-to-brics.html" target="_blank">influence the weather</a>).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXzrRMLD-tHcZhyR5EIUo9m0n4zQeT2du9_IWPWykYkqR8wJAnBY4cmr-Si1T-U8mqqpVziKwFvDpVxQk0r3sabGUhJhgAa0tfhLSvuCXU4lO7ltFu94yM0_Fy1lgynkLVps6ljin-Rf0/s1600/china-stimulus1.PNG" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="273" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXzrRMLD-tHcZhyR5EIUo9m0n4zQeT2du9_IWPWykYkqR8wJAnBY4cmr-Si1T-U8mqqpVziKwFvDpVxQk0r3sabGUhJhgAa0tfhLSvuCXU4lO7ltFu94yM0_Fy1lgynkLVps6ljin-Rf0/s640/china-stimulus1.PNG" width="640" /></a></div>
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Michael Pascoe of the Sydney Morning Herald is one China bull who saw only a soft landing from the stimulus and in pro-reform comments <a href="http://www.smh.com.au/business/china/chinas-soft-landing-proceeds-to-plan-20120713-220l2.html" target="_blank">of a Bank of China official</a>. Similarly <a href="http://online.wsj.com/article/SB10000872396390444832604577576110603191458.html" target="_blank">doveish comments from Jiang Chaoliang</a>, chairman of pillar bank AgBank (Agricultural Bank of China) suggested a benign situation of measured reform. However it is questionable how much the necessary reforms and consumption increases will proceed during a stimulus given fairly little progress made on such things during the last round of stimulus in 2008-9.<br />
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Meanwhile at respected magazine <a href="http://english.caixin.com/2012-08-13/100423159.html" target="_blank">Caixin</a>, Andy Xie sought to put recent conditions into perspective, with some dire forecasts for the property and finance sectors:<br />
<blockquote class="tr_bq">
<i>China's land market will experience a dramatic adjustment ahead. In most cities, land prices may fall by 80 percent. The financial consequences will be severe. Most bank loans are backed up directly or indirectly by land. If land prices fall so much, the banking system would suffer a crippling level of bad loans. Local governments increased their spending appetite during the heyday of land sales. They will have a difficult time adjusting to the new reality. Their struggle to source new revenues will be the main reason for social instability ahead.</i></blockquote>
And adding difficulty the FT's Beyond Brics blog noted, was that the fact that many statistics releases which drive the China news cycle seem to increasingly split analyst opinion (pointing to more or less future growth in equal measure). Similar to the debates as to whether key Chinese statistics are <a href="http://www.chariweb.com/2012/06/china-releasing-false-data-to-downplay.html" target="_blank">falsified</a> - a recent <a href="http://blogs.ft.com/beyond-brics/2012/08/15/chinese-bad-loans-reading-the-tea-leaves/#axzz23dZDlFgX" target="_blank">report </a>examined opposing interpretations of rising non-performing loans data by Reuters and Bloomberg. <a href="http://in.reuters.com/article/2012/08/15/china-banks-loans-idINL4E8JF0UL20120815" target="_blank">Reuters</a>' conclusion, that it was a positive sign (looking at the overall ratios provided by the China Banking Regulatory Commission), was favoured.<br />
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<tr><td class="tr-caption" style="text-align: center;">Chinese property, it's a long way down...</td></tr>
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<b>Reluctant consolidations</b><br />
While questions remain over the long term outcomes from the new stimulus, other commentators have noted falling profits across a number of sectors and in some cases a run of bankruptcies is looking likely. Three industries which have been observed to be at risk of widespread bankruptcies are the solar panel makers, shipbuilders and automakers.<br />
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For manufacturers of photo-voltaic cells there have been plenty of headlines for Chinese companies, themselves struggling against a backdrop of oversupply and falling prices. <b>Suntech</b>, the largest solar panel maker in the world, announced it had been defrauded by an Italian co-investor (who offered fake German bonds as security for a <a href="http://www.reuters.com/article/2012/08/06/suntech-bonds-fraud-idUSL4E8J309X20120806" target="_blank">payment guarantee</a>) and just recently obtained a <a href="http://in.reuters.com/article/2012/08/14/suntech-gsf-idINL2E8JE30020120814" target="_blank">worldwide freezing order</a> against its Italian partner's assets. Even without this, the company is struggling under a <a href="http://www.afr.com/p/national/suntech_under_siege_over_huge_fraud_DNpTDd52KPzjd4IGPmL0HI" target="_blank">weight of debt</a>. <b>LDK Solar</b>, based in Xinyu was bailed out by the local authority <a href="http://www.greentechmedia.com/articles/read/ldk-gets-80m-debt-bailout-from-hometown-of-xinyu-china/" target="_blank">last month</a>, although some commentators doubted whether even this would be sufficient to <a href="http://solarpvinvestor.com/spvi-news/261-bankruptcy-talk-surfaces-as-ldk-solar-drops-into-financial-abyss" target="_blank">restore the companies' prospects</a>.<br />
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Chinese shipbuilders meanwhile are continuing to tread water through the worst conditions in a decade. Major builders including <b>Rongsheng </b>and <b>Cosco </b>have recently been hit by <a href="http://www.ft.com/cms/s/0/7cb99e04-da05-11e1-902d-00144feab49a.html#axzz234ZDre00" target="_blank">profit concerns</a> amongst <a href="http://www.businessinsider.com/chinese-shipbuilding-declines-2012-7" target="_blank">falling orders</a> and <a href="http://www.businessweek.com/news/2012-07-26/china-shipyards-falter-as-vessel-glut-triggers-49-percent-order-slump" target="_blank">shrinking backlogs</a>, while there have been several bankruptcies including <a href="http://sinoshipnews.com/news_content.php?fid=3w3c195" target="_blank">Dalian Oriental Precision & Engineering</a> and a major shipbuilder in <a href="http://www.chinadaily.com.cn/bizchina/2012-06/27/content_15526093.htm" target="_blank">Zheijiang province</a>.<br />
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And local car manufacturers (who have been flooding dealers with <a href="http://www.bloomberg.com/news/2012-06-06/carmakers-aggravate-china-glut-as-dealers-struggle.html" target="_blank">unsold inventories</a>) face the prospect of being forced into bankruptcy by local authorities due to widespread anticipation of failures. As this report from Ken Rapoza in <a href="http://www.forbes.com/sites/kenrapoza/2012/07/29/chinese-auto-makers-may-be-forced-into-bankruptcy/" target="_blank">Forbes</a> explained: <br />
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<blockquote class="tr_bq">
<i>The Ministry said in a note published on Tuesday that it is considering the introduction of a withdrawal mechanism to force near-bankrupt automakers out of the bloated automotive industry. China has around 1,300 automobile makers, including 171 car, truck and bus makers and more than 900 specialty vehicle manufacturers, according to the government.<br />Nearly a quarter of these manufacturers are on the verge of bankruptcy, barely producing anything despite obtaining production approvals from supervising authorities, the statement said.</i></blockquote>
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<strong>Restructuring with Chinese characteristics</strong><br />
The announcement of forced restructuring of the automotive sector is interesting because it shows the role of the state in dictating the policy direction for much of the industry. State involvement has been a feature of industry restructuring throughout China's history, and most notably during the aftermath of the Asian crisis, when many International Trading and Investment Corporations (ITICs) - forerunners of current Local Government Financing Vehicles and investment trusts, collapsed and when the banking system was restructured.<br />
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At the time, there was no advanced nor comprehensive bankruptcy law governing the restructuring of state-owned entities and private entities. As William Gamble, an investor with experience in that period has <a href="http://www.emergingmarketstrategies.com/articles/34-why-chinese-stimulus-wont-work-.html" target="_blank">noted</a>, the bankruptcy legislation applicable in 1998, when GITIC collapsed, did not recognise security interests or allow for restructuring (nor could foreigners' investments into ITICS even be registered with Chinese regulators). <br />
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A new bankruptcy regime, which is more sophisticated and borrows elements from US legislation and other jurisdictions was implemented in 2007, but its effectiveness remains to be seen as courts and other officials establish a practice of using and enforcing the new regime. Also in a new trend, Simon Rabinovitch in an <a href="http://www.ft.com/cms/s/0/e4e57188-e455-11e1-affe-00144feab49a.html#axzz23eUQ0m00" target="_blank">FT </a>article this week, noted that more parties seem to be using local courts to resolve contractual and debt claims across a number of Chinese regions. <br />
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It seems there is much more than just a simple increase in litigation volumes - generally speaking local and regional state authorities, with their close ties to businesses seem to play a very dominant role in either leading arrangements to stave off bankruptcy (causing a lighter caseload and a slimmer practice of dealing with bankruptcies) or as in the case of the automotive industry - taking a dominant role in which foreign investors may be marginalised and/or unfamiliar. Reports of the pending bankruptcy of the <a href="http://english.caixin.com/2012-08-14/100423979.html" target="_blank">Zhongdan Guarantee company</a> (which was exposed by the collapse of the <a href="http://chinameltdown.blogspot.co.uk/2012_07_01_archive.html" target="_blank">Tianyu Construction Company</a> and <a href="http://www.alsosprachanalyst.com/economy/more-than-600-companies-were-affected-in-yet-another-credit-crisis-in-china.html" target="_blank">600 companies which were connected to it</a> by a network of guarantees) indicate that the Beijing city government is directing the restructuring response which is expected to get underway later this month. And Zhongdan apparently was also involved in <a href="http://www.alsosprachanalyst.com/financials/a-beijing-based-credit-guarantee-company-is-going-bust.html" target="_blank">selling WMPs</a> (below). Should there be more businesses like Zhongdan to be bankrupted, this could lead to a deterioration of market sentiment and intensification of any crisis, should it arise in China.<br />
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<b>"No touch" regulation</b><br />
Watchers of Chinese bank finances noticed a <a href="http://online.wsj.com/article/SB10001424052702303505504577401852477035194.html" target="_blank">shrinking of deposits</a> and increase in <a href="http://www.alsosprachanalyst.com/financials/interbank-assets-are-surging-within-chinese-banking-system.html" target="_blank">interbank liabilities</a> in bank capital reports which many commentators are blaming on the rise of WMPs - wealth management products, unregulated speculative investments which Chinese banks have been using to source new loan capital and which are popular with bank customers as they offer interest rates far above regulated deposits.<br />
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Nothing wrong with little or no regulation in the short term (in China) you might think, however it has emerged that many of the products do not have recourse to specific assets and are increasingly appearing to have the characteristics of a <a href="http://ftalphaville.ft.com/blog/2012/08/01/1104061/chinas-two-way-liquidity-risk-shadow-banking/" target="_blank">pyramid or ponzi scheme</a> (with there not being enough assets to cover redemption requests or meet all obligations), the collapse of which could trigger financial contagion. An excellent Reuters piece uncovered one product which it likened to an American subprime mortgage (of dubious quality), being marketed to the public under the name <a href="http://www.reuters.com/article/2012/08/06/us-china-banks-idUSBRE87501T20120806" target="_blank">"Golden Elephant"</a> and whose source of income derived from property assets which were yet to be built.<br />
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While Chinese regulated banks themselves have questions to answer regarding their NPLs (which may challenge their solvency) the growth of WMPs and so-called "shadow banks" could threaten a significant crisis in the Chinese financial system. Recent discussions on various blogs this week reminded that there are a number of precedents of this sort of scheme which could equally apply to China. For both Russia and Albania in the 1990s (and Poland in the <a href="http://online.wsj.com/article/SB10000872396390444184704577589202876123794.html?mod=googlenews_wsj" target="_blank">last few years</a>), <b>pyramid and ponzi schemes </b>were able to flourish escaping weak and slow moving regulators in a changing environment and, upon collapse, causing great damage to the economy. A great paper on the Albanian pyramid scheme phenomenon is <a href="http://www.imf.org/external/pubs/ft/fandd/2000/03/jarvis.htm" target="_blank">here</a>, while in Russia, the famous MMM and GKO scandals (the latter of which contributed to the collapse of the Russian government and precipitated the 1998 Asian crisis) have been well written about (Sergei Mavrodi restarted a new MMM-style scheme online <a href="http://www.time.com/time/world/article/0,8599,2042721,00.html" target="_blank">last year</a>).<br />
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How it all plays out in China will remain to be seen.<br />
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The analysthttp://www.blogger.com/profile/12266673530680149226noreply@blogger.com0