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China's Banks Need More Capital After Credit Boom, IMF Says

Thanks to a subscriber for this article from Bloomberg News which may be of interest to subscribers. Here is a section:

President Xi Jinping has highlighted financial stability as a top priority. People’s Bank of China Governor Zhou Xiaochuan warned in October about the risk of a ‘Minsky moment,’ or a sudden collapse of asset values. Financial watchdogs last month promised to overhaul regulation of asset-management products, which hold about $15 trillion and are seen as a key threat to stability.

Speaking to media on Thursday on a video call, the IMF’s deputy director of monetary and capital markets, Ratna Sahay, said China’s financial system held three main risks. She pointed to an increase in credit that in other countries has been linked to financial distress. An increasingly complex and opaque financial system makes it hard to identify risks, and implicit guarantees encourage excessive risk-taking, she said.

Credit growth needs to slow, guarantees should be gradually removed, and banks need more capital during that process, Sahay said. “Banks need to have some buffers in order to protect against any possible distress that might happen,’’ she said.

 



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Tencent Seen Doubling by Stock-Picker Already Up 6,000%

This article by Charles Stein for Bloomberg may be of interest to subscribers. Here is a section:

Fueled by fast-growing sales, Tencent and Alibaba have almost doubled in share price this year, and both have market caps above $400 billion even after slipping recently. Their parallel climb explains in part why Leverenz’s fund has returned 31 percent in 2017, on track for its best year since 2009.

The stocks come with political risks. The Chinese government in September made creators of online message groups responsible for managing information within their forums, a move that chilled users of WeChat, Tencent’s popular social network.

“If you are an investor in Tencent you are basically betting on management’s ability to adjust to policies,” Duncan Clark, chairman of technology consulting firm BDA China Ltd., told Bloomberg News at the time.

 



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Copper Falls to 2-Month Low on Worries of Slowing China Demand

This article by Yuliya Fedorinova for Bloomberg may be of interest to subscribers. Here it is in full: 

“Industrial metals prices will consolidate due to a marked slowdown in China’s metals consumption growth,” BMI Research wrote in an emailed note.

China’s frenzied construction of roads, bridges and subways is set for a major slowdown, adding a headwind to economic growth in 2018. Fixed-asset investment in infrastructure will grow 12 percent next year, according to the median estimate in a Bloomberg survey, down from almost 20 percent in the first ten months this year.

All 18 economists in the survey anticipated a moderation, adding to reports by Morgan Stanley, Goldman Sachs Group Inc. and UBS Group AG predicting a similar trend.

Adding to the selloff is speculation that metals prices have overshot fundamentals in the recent run up. Nickel has retreated 13 percent since early November, giving up some gains from earlier in the year.

"The recent rally in nickel was mostly due to expectations of increased use of the metal in batteries, which will definitely realize some day, but right now stainless steel, not EVs, is still major consumer of nickel and its market driver," Boris Krasnojenov, an analyst at Alfa Bank in Moscow, said by phone.

 



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China Shares Resume Decline as Year's Top Performers Take a Hit

This article by Emma Dai for Bloomberg may be of interest to subscribers. Here is a section:

The CSI 300 Index of large-cap stocks closed down 1.3 percent, with ZTE Corp. and BYD Co. both falling the 10 percent limit in Shenzhen, while BOE Technology Group Co. slid 9.7 percent. Shanghai-listed liquor giant Kweichow Moutai Co. couldn’t maintain its brief foray into positive territory and closed down 1.4 percent, its seventh straight loss since state media warned it was climbing too fast. The stock has slumped 14 percent since Nov. 16.

“Institutional investors are choosing to cash in toward year-end as valuations are near historic highs and market sentiment deteriorated after official media targeted Moutai,” said Shen Zhengyang, Shanghai-based analyst at Northeast Securities Co. He said the market “lacks steam” for further gains.



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After Sudden Rout, China Stock Traders Question Beijing Put

This article from Bloomberg News may be of interest to subscribers. Here is a section:

For Sun Jianbo, president of China Vision Capital Management Co. in Beijing, valuations among large-cap shares are too expensive for state-backed funds to intervene.

The CSI 300 traded at its highest level relative to the broader Shanghai Composite Index in at least 12 years at the start of this week as investors flocked to large caps such as Moutai and Ping An Insurance (Group) Co.

"There’s no need to prop up the market yet," Sun said. "A lot of big caps are still expensive and it would do more harm than good to state-backed funds if they buy now."

The divergence between large-cap shares and the rest of the market may be one reason why the government took aim at Moutai. Before Xinhua warned last week that gains in the liquor maker were excessive, the stock had more than doubled this year.



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One in three Chinese children faces an education apocalypse. An ambitious experiment hopes to save them

This article by Dennis Normile for Sciencemag.com may be of interest to subscribers. Here is a section:

One in three Chinese children faces an education apocalypse. An ambitious experiment hopes to save them – This article by Dennis Normile for Sciencemag.com may be of interest to subscribers. Here is a section:

The result is a widening gap between urban and rural educational achievement in China, Rozelle says. Many urbanites fit the stereotype of "tiger" parents, pushing kids to excel in school. After hours, their schedules are packed with music and English lessons and sessions at cram schools, which prepare them for notoriously competitive university entrance exams. More than 90% of urban students finish high school.

But only one-quarter of China's children grow up in the relatively prosperous cities. Rural moms have high hopes for their children; Rozelle's surveys have found that 75% say they want their newborns to go to college, and 17% hope their child gets a Ph.D. The statistics belie those hopes: Just 24% of China's working population completes high school.

Rozelle believes such numbers bode ill for China's hopes of joining the ranks of high-income countries. Over the past 70 years, he explains, only 15 countries have managed to climb from middle- to high-income status, among them South Korea and Taiwan. In all those success stories, three-quarters or more of the working population had completed high school while the country was still in the middle-income bracket. These workforces "had the skills to support a high-income economy," Rozelle says. In contrast, in the 79 current middle-income countries, only a third or less of the workforce has finished high school. And China is at the bottom of the pack. School dropouts don't have the skills needed to thrive in a high-income economy, Rozelle says. And, worryingly, the factory jobs that now provide a decent living for those with minimal training are moving from China to lower-wage countries.

Rozelle thinks a lack of opportunity isn't the only factor holding back China's rural children. Physically and mentally, they are also at an increasing disadvantage, hampering their performance in school and their prospects in life.



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Stronger enforcement, improving cashflow

Thanks to a subscriber for this report from Deutsche Bank focusing on the Chinese Environmental sector. Here is a section:

The sector’s valuation looks attractive at current levels compared with its own trading history and also with the index. The P/Es of most stocks are below/close to their average minus one standard deviation since 2015, in terms of both their own PE and also relative PE to MSCI China. We think that the sector’s current valuation offers decent safety margins to buy into most stocks.

China usually strengthens environmental enforcement during the last three years of Five-Year Plan periods as the country gets closer to assessment deadlines. We expect the same to take place from 2018, especially as the CPC's 19th National Congress recently mentioned that China plans to set up a "National Natural Resources and Ecology Administration" soon. We expect these factors to benefit this laggard sector, together with improving cashflow profile/earnings quality with selective companies over the next few years

 



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Foreign Banks Invited to End of the Credit Party

This article by Tom Orlik for Bloomberg may be of interest to subscribers. Here is a section: 

In the 2000s, China invited foreign banks into the domestic market, as it tried to manage down a legacy of bad loans. HSBC bought a share of Bank of Communications, Royal Bank of Scotland took a minority stake in Bank of China and Bank of America purchased a piece of China Construction Bank – helping them on their way to listing. Fast forward to 2017 and the bang is bigger. Based on an announcement Friday, limits on foreign ownership of Chinese banks and asset managers will be removed, and foreign firms will be able to take a 51% stake in securities and life insurance firms. But the aim is the same – helping clean up a financial mess, and prevent it from happening again.

Bloomberg Economics had flagged financial market opening as one of the possible deliverables from this week’s U.S. - China summit. Recognizing that the devil will be in the as-yet-unknown details, here’s our take on the implications:

There’s potential for a grand bargain here. China’s financial system will receive an influx of foreign capital and expertise.

That will help deal with the aftermath of a credit binge that has seen debt swell to 259% of GDP, and engineer efficiency gains that may help prevent a repeat occurrence. After paying the price of entry, foreign firms will get a piece of the Chinese market – the second largest and fastest growing in the world.

 



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Xi Jinping Unveils China's New Leaders but No Clear Successor

This article by Chris Buckley for the New York Times may be of interest to subscribers. Here is a section:

The five new Standing Committee members are party leaders with long careers in Chinese politics, including one of Mr. Xi’s longtime allies and a scholar of international relations. But the party declined to name a younger leader to the committee who might succeed Mr. Xi when his second term as president ends in 2023.

That was a departure from China’s carefully scripted transfers of power in recent decades and a possible signal that Mr. Xi intends to govern beyond this next five-year term. Mr. Xi may also want more time to test possible successors, while avoiding lame duck status with an heir waiting in the wings.

But by discarding the unspoken conventions that have ensured relatively stable leadership changes in recent years, Mr. Xi has pushed Chinese politics into new territory that critics have warned could lead to turmoil, or a cult of personality with echoes of Mao.

“If Xi goes for broke and breaks precedent by not preparing for an orderly and peaceful succession, he is putting a target on his back and risking a backlash from other ambitious politicians,” Susan L. Shirk, the chairwoman of the 21st Century China Center at the University of California, San Diego.

“By taking such a risk, he shows himself to be more like Mao than we originally thought — he demonstrates his power by overturning institutions,” said Professor Shirk, a former State Department deputy assistant secretary for China policy.

 



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Xi's China a boon for mining

This article from mining.com may be of interest to subscribers. Here is a section:

And Xi's enormous power also means his pet projects should receive the full backing of the state.

The One Belt One Road initiative to recreate the Old Silk Road connecting Asia with Europe was mentioned five times during the speech. (Mao Zedong and Deng Xiaoping received four mentions each)

Another mega-undertaking, Beijing-Tianjin-Hebei integration, which includes the Xiongan New Area, Xi mentioned twice.
And even if the party's priorities are shifting away from market-orientated reforms, Beijing's transformation of its heavy industries coupled with programs to fight pollution has already benefitted mining.

For instance, eliminating overcapacity has boosted profitability in the domestic steel industry and in the process steelmaking raw material prices have been dragged higher. At the end of last year consensus forecast for the iron ore price was $57 a tonne during 2017. Year-to-date it's averaging $71.

 



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