David Fuller and Eoin Treacy's Comment of the Day
Category - China

    Australia to join China-led bank despite US opposition

    This article by Jamie Smyth for the Financial Times may be of interest to subscribers. Here is a section: 

    Australia plans to join the Asian Infrastructure Investment Bank, it said on Sunday, reversing a previous decision to stay out of the China-led institution. But it has placed conditions on its future membership of the bank in an attempt to mollify concerns expressed by its main military ally, the US.

    ​“The government is today announcing it intends to sign a memorandum of understanding on the Asian Infrastructure Investment Bank, which would allow Australia to participate — as a prospective founding member — in negotiations to set up the bank,” the prime minister’s office stated.

    The decision followed moves this month by the UK, France, Germany, Italy and South Korea to join the AIIB. US officials have privately urged allies to stay out of the new bank, at least until Beijing addresses concerns about governance standards. Some in Washington view China’s launch of the AIIB as an effort to undermine the influence of the US-based World Bank.

    On Saturday, Russia’s first deputy prime minister, Igor Shuvalov, said his country plans to join the AIIB. Denmark, Brazil and the Netherlands will also participate, China’s finance ministry said at the weekend.

     

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    Beijing to Shut All Major Coal Power Plants to Cut Pollution

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

    The facilities will be replaced by four gas-fired stations with capacity to supply 2.6 times more electricity than the coal plants.

    The closures are part of a broader trend in China, which is the world’s biggest carbon emitter. Facing pressure at home and abroad, policy makers are racing to address the environmental damage seen as a byproduct of breakneck economic growth. Beijing plans to cut annual coal consumption by 13 million metric tons by 2017 from the 2012 level in a bid to slash the concentration of pollutants.

    And

    Nationally, China planned to close more than 2,000 smaller coal mines from 2013 to the end of this year, Song Yuanming, vice chief of the State Administration of Coal Mine Safety, said at a news conference in July.

     

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    More upside amid stronger easing; UG property & banks, DG healthcare

    Thanks to a subscriber for this report from Deutsche Bank focusing on China’s H-Share market. Here is a section: 

    We have been positive on Chinese equities for 2015 but caution readers of a weak start to the year (see 2015 China Outlook). After H-shares’ underperformance vs. DM, AsiaPac ex Japan and A-shares YTD, we now see more upside risks than downside ones and turn more positive on the market, in view of the following:

    We expect Chinese policy-easing efforts to intensify in 2Q15 (see policy easing cycle may start soon), including monetary, fiscal and property relaxation, given the below-target 1Q15 growth and the “bottom-line”- focused reaction function reiterated by Premier Li during the NPC. We see lower market rates and resumed credit growth ahead, and our economist forecasts GDP to bottom in 1Q15 and edge up to 7.2% in 4Q15. ? We believe the earnings cut cycle will come to an end by April, as the disappointing FY14 results season wraps up and consensus estimates get closer to our top-down forecasts. For FY15, we look for more evidence of cost reduction among mid-stream sectors to reinforce our expectation of a margin-driven non-financial earnings recovery.

    We see loosening global liquidity conditions and funds inflow as catalyzing catch-up with A-shares, considering 1) the Fed finally joined forces with other major central banks on the dovish side and suggested “lower for longer” rates over the coming quarters; 2) still deeply discounted H-share valuations suggest light investor positions; and 3) improving cyclical outlook and expediting reform in China.

     

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    Yuan Surges Most in a Year as Fed Eases Capital Outflows Concern

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

    China’s capital outflows concern may be tempered after the Fed’s comments, and the PBOC will likely become more flexible as worries about a weaker yuan ease, Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp., said in an interview.

    China is in talks with the International Monetary Fund to include the yuan in the institution’s basket of reserve currencies, PBOC Deputy Governor Yi Gang said in Beijing on March 12. The currency will decline 0.22 percent the rest of this year to 6.21 a dollar at the end of 2015, according to the median estimate in a Bloomberg survey.

    “The fundamentals are still bullish for the yuan with the government’s plan to make it a reserve currency,” said Scotiabank’s Tihanyi. The PBOC fixings also send a “strong signal” that the authorities favor a stable currency, he said.

     

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    Email of the day on China muddling through

    The following extracts from an article by Professor James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology, Sydney should help subscribers have confidence in China investments.

    “With China now having the world’s largest economy in terms of purchasing power, we should be cheering them on.

    The World Bank says that between 1980 and 2011, the number of people living in poverty in China fell by 753 million. That’s nearly two and a half times the population of the US, and an outcome unparalleled in history.

    The World Trade Organization says that China’s share of world’s goods exports has risen from 1.2 percent in 1983 to 12.1 percent in 2013. It’s now the world’s largest trader.

    The Boston Consulting Group found that when utilities and other costs are added to sharply rising wages, manufacturing costs in China are now only four percent less than in the US.

    To boost productivity, privatisation isn’t crucial; competition is the way that China’s government is currently muddling through reforming the financial sector.

    In 2015, yes, China will muddle through. And it will do so again next year.” 

     

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    China Stocks Rise Most in Week on Banks New Business Prospects

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

    “The market seems to be pricing in that the possibility that the regulator would allow banks to enter the brokerage space,” said Gerry Alfonso, a China equity sales and trading director at Shenwan Hongyuan Group Co. in Shanghai.

    Banks also gained after the government said it will allow regional authorities to convert some high-yielding debt into municipal bonds.

     

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    Factories Are Building a Robot Nation

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

    "At first, robots replaced workers who had jobs that exposed them to pollution, such as painting, or required that they repeat the same task," the equity manager said. "But gradually, robots have been used for trades requiring skilled workers, such as welders, because they are cost-effective."

    Yet some companies have automated their factories simply because they cannot find enough people. A mid-level manager at an electronic manufacturer said that many businesses that are unable to fill positions have had no choice but to install robots.

    "Workers quit every day," he said. "Physically challenging jobs under harsh conditions or jobs requiring repetitive processes are much less attractive to young workers than the older generation."

    Zhang Fan, who oversees automation at a Midea factory in Wuhu, in the eastern province of Anhui, said the plant installed one robot in 2011 and another in 2012 to rapidly move 70 kilogram air conditioners on an assembly line – a job that was too strenuous for people.

     

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    Alibaba Shares at Post-IPO Low After JD.com Tops Estimates

    This article by Spencer Soper may be of interest to subscribers. Here is a section: 

    The challenges in Taiwan and a Wall Street Journal report about Alibaba merchants paying people to pretend to be customers, called “brushing,” to pad sales figures have created some short-term negative publicity, Ji said.

    “We don’t think those views will have a negative financial impact on Alibaba,” she said. “But PR-wise, it may have some negative impact on the stock.”

    Alibaba, which connects consumers and businesses across its platforms, has a “credibility crisis” fueled by its failure to crack down on shady merchants, counterfeit goods, bribery and misleading promotions, China’s State Administration for Industry & Commerce said in January.

    James Cordwell, an analyst at Atlantic Equities LLP in London, said Alibaba’s fourth-quarter results raised concerns about e-commerce growth and advertising revenue. There may also be a selloff ahead of the first major lockup expiration for insider share sales in mid-March, he said.

    “Today’s weakness is no doubt also a result of strong results at key competitor JD.com and also the Taiwan withdrawal news,” Cordwell said.

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    Debt and (Not Much) Deleveraging

    Thanks to a subscriber for this heavyweight 136-page report from McKinsey. Here is a section: 

    Debt continues to grow. Since 2007, global debt has grown by $57 trillion, or 17 percentage points of GDP.* Developing economies account for roughly half of the growth, and in many cases this reflects healthy financial deepening. In advanced economies, government debt has soared and private-sector deleveraging has been limited.

    Reducing government debt will require a wider range of solutions. Government debt has grown by $25 trillion since 2007, and will continue to rise in many countries, given current economic fundamentals. For the most highly indebted countries, implausibly large increases in real GDP growth or extremely deep reductions in fiscal deficits would be required to start deleveraging. A broader range of solutions for reducing government debt will need to be considered, including larger asset sales, one-time taxes, and more efficient debt restructuring programs.

    Shadow banking has retreated, but non-bank credit remains important. One piece of good news: the financial sector has deleveraged, and the most damaging elements of shadow banking in the crisis are declining. However, other forms of non-bank credit, such as corporate bonds and lending by non-bank intermediaries, remain important. For corporations, non-bank sources account for nearly all new credit growth since 2008. These intermediaries can help fill the gap as bank lending remains constrained in the new regulatory environment.

    Households borrow more. In the four “core” crisis countries that were hit hard—the United States, the United Kingdom, Spain, and Ireland—households have deleveraged. But in many other countries, household debt-to-income ratios have continued to grow, and in some cases far exceed the peak levels in the crisis countries. To safely manage high levels of household debt, more flexible mortgage contracts, clearer personal bankruptcy rules, and stricter lending standards are needed.

    China’s debt is rising rapidly. Fueled by real estate and shadow banking, China’s total debt has quadrupled, rising from $7 trillion in 2007 to $28 trillion by mid-2014. At 282 percent of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany.* Several factors are worrisome: half of loans are linked directly or indirectly to China’s real estate market, unregulated shadow banking accounts for nearly half of new lending, and the debt of many local governments is likely unsustainable. 

     

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