The fog of war

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.

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.

Where it gets interesting is trying to understand what actually happened and what it means.  Some themes from this:

1) Foreigners still don't understand China.  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:

- wealth management products (wmps - or weapons of mass ponzi) 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.

- 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.

So what was announced?  Ford commented that Alan Mulally is working "overtime" to rollout credit services to customers in China and the above banks announced they had permission to sell local mutual fund products.

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?!

China is a ponzi economy alright - feted insider Jim Rickards has joined the naysayers and interviewed on it this week (see here).  But if foreigners struggle to read China in a static period what hope do they have in a crisis?

There were plenty of views as to what was going on, and many focussed on the role of the PBOC.

2) the PBOC lost credibility and control - 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.

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).

FT Alphaville produced one of their series of articles (similar to gold repos, the London Whale and their previous series on Chinese Credit) which is excellent.  The BBC is covering the story in depth (finally, see also here and here).  The Economist 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.

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 at risk of a currency collapse/devaluation.

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. 

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. 

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.

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.

3) Finally it is unclear if all the drama is having anything like the intended effect of slowing down alternative lending, or lending in general.  Not so says Bloomberg, while reports about the lending situation vary dramatically (see here and here). 

Mixed messages

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.

Turning back the clock
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 formulate a nuclear non-proliferation plan for Iran 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 popping of a domestic credit bubble.

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.

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 burst Chinese asset bubbles as real interest rates peak.

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. 

Steering the train
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.  

In China's Superbank, 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 China's Silent Army, 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 New York Times 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).

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).

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 Australian iron ore mine 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.

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.  The Economist 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 "alarming".  The BBC 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.

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:

Vladimir Lenin, Joseph Stalin, Nikita Khrushchev and Leonid Brezhnev are all travelling together in a railway carriage. Unexpectedly the train stops. Lenin suggests: "Perhaps, we should call a subbotnik, 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!" 

Let them eat cake!

Dying days ahead of a revolution?
Before entering into the Chinese presidency, current leader Xi Jinping was rumoured to have been handing out copies of de Tocqueville's L'Ancien Régime et la Révolution 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 employing a descendant of the French King Louis XIII, might have many readers exclaiming "l'ironie!".  The comments of the project company's owner might suggest a reaction more along the lines of that to Marie Antoinette.

“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."           

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 aquire bullion following the price drop - so perhaps luxury is second in mind for the moment?

Dirty business
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 death of an executive who fell from an office building.  More on that later.

A number of outlets have covered recent developments in some detail.  Caixin had a long piece detailing the executives arrested for dealing and profiting at their client's expense as did Reuters (and here).  Simon Rabinovitch at the FT 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 Red Capitalism 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:

"...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.

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."

 and this amidst other efforts to better identify brewing risks from interbank lending (here).  In sum though Wang may be successful, it does lead to a question of how much malpractice is out there?  

Details of the death of the chairman of one securities company were to be found in the FT rather than from a whitewashed press announcement from the company's own website (which referred to death "for health reasons").

Crumbling city
And in addition to some illicit brokerages it seems the buildings housing China's financial industry themselves may be at risk of crumbling.  Vivre la différence!

More and more numbers

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.

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 days of fast growth were over.

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 imports of uncontaminated foreign milk powder) 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.

The most significant statistic in this trend was that of exports to Hong Kong - as noted in a recent Bloomberg 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:

“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.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.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.

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 $10 million in bribes.  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 International Consortium of Investigative Journalists has hinted at information, but not made any significant disclosures yet).  For less high profile convictions, the FCPA Blog maintains an accurate list of current reports of bribe taking).

All in a plan
Whilst looking into another topic this blog came across the latest 5 year plan for the Financial Industry (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 summary talking up the plan as aiming "to promote the steady growth of the financial industry by introducing changes to further regulate and develop the market", but the document has several numbers and supporting statements which look odd:

"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"

"Small and medium commercial banks were committed to ever deepening reform, while financial asset management companies made steady progress in their transformation"

"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"

"The balance of payments shall be led to general equilibrium. Financial policies including
interest rate, exchange rate and foreign exchange administration shall play an important role in achieving the equilibrium in the balance of payments"

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 de facto truth due to incorrect inputs).

Discussion Topic
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 top 10 of CDS net notionals for governments in late 2012 and current statistics for liquid CDS (including China) published by Markit are here.  Any comments are welcome!

On a final note of this numbers themed post, a few words from rapper Mos Def and his tune, Mathematics:

Numbers is hardly real and they never have feelings
but you push too hard, even numbers got limits
Why did one straw break the camel's back? Here's the secret:
the million other straws underneath it - it's all mathematics

FURTHER NOTE - 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 (here). 

Floating 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 everything.  Even as a recent Beyondbrics post points out, burial space - the following extract gives some flavour of the demand for sea burials in Shanghai:

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.
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.  

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 animal carcasses in waterways, 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 recent food safety crackdowns.

This provides an interesting backdrop amidst attempts by the top leadership to focus on greater wellbeing of ordinary citizens.  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 Suntech entered into bankruptcy.  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.

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 pipeline projects (the linked article mentions strained working capital - not a good sign).

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 tough conditions for this year, while international brand Nike has seen declining sales in comparison to this time last year.

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!

Caption competition
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!

Crunch time!

Very contrasting news and images coming out of China at the moment.  While Wen Jiabao was singing his final swansong 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% capital gains tax commences.  It is intended to slow down rising property prices.  It may have burst the bubble instead.

Express filing, Shanghai style

He did it his way
Wen's China was on display for all American's midweek when longtime China Watcher Gillem Tulloch, of ForensicAsia (with the assistance of others behind the scenes like Patrick Chovanec), took CBS' 60 minutes team for a walk through China's ghost cities.  The empty shopping centres, half started office blocks and empty landscape is one of Wen's legacies.

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 Daily Mail piece captures the mood at the moment:

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.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.

But problems run deep.  As in the case of Dalahai, a village in Inner Mongolia profiled by Caixin magazine 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.

Going green
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 Chen Guangbiao, who made headlines for a number of radical stunts, including  selling cans of fresh air, recommending Chinese people eat less, and attending this week's Congress by bike, in a green suit.  While refreshing it is uncertain how likely any of his recommendations will be to advance the agenda.

The wrong type of green (c) Reuters

The dead hand of the State
One of the big obstacles to reform is the vested interests of state enterprises.  Caixin 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 Suntech, the failed solar company which officials were saying should have been consollidated with all the other failing solar companies by now.

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 ignored.  This and everything else does not bode well.

The Year of Transparency?

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

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

Pollution update - Airpocalypse now

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

(c) Shanghai Environmental Protection Bureau

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Now to wait and see...