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

    PBOC $162 Billion Loan Spurs Stealth-Easing Speculation

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

    “This is another targeted easing measure,” Chang Jian, chief China economist at Barclays Plc, wrote in a July 30 report. While the loan doesn’t represent “broad loosening,” it has “reduced recent market concerns about a shift in the PBOC’s stance away from easing towards neutral or tightening,” she said.

    Wang Tao, UBS AG’s chief China economist, says the measure is part of trying to “optimize” the implementation of its existing monetary stance, and doesn’t constitute a shift in policy, according to a July 24 report.

    In its Aug. 1 report, the PBOC said targeted measures have become a “new trend of major central banks” since the global financial crisis started and that it will keep using tools such as relending and rediscounting to guide institutions to “optimize their credit structure.”

    The CDB loan is the equivalent of an across-the-board cut of 1 percentage point in the ratio of deposits banks must hold as reserves, JPMorgan Chase & Co. estimated, scrapping its forecast for two 50 basis-point cuts from the current 20 percent reserve requirement ratio for large banks.

     

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    What Do Chinese Dumplings Have to Do With Global Warming?

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

    An artificial winter has begun to stretch across the country, through its fields and its ports, its logistics hubs and freeways. China had 250 million cubic feet of refrigerated storage capacity in 2007; by 2017, the country is on track to have 20 times that. At five billion cubic feet, China will surpass even the United States, which has led the world in cold storage ever since artificial refrigeration was invented. And even that translates to only 3.7 cubic feet of cold storage per capita, or roughly a third of what Americans currently have — meaning that the Chinese refrigeration boom is only just beginning.

    And

    Despite the expansion in frozen foods and refrigerators, the critical growth area is what’s known in the logistics business as the “cold chain” — the seamless network of temperature-controlled space through which perishable food is supposed to travel on its way from farm to refrigerator. In the United States, at least 70 percent of all the food we eat each year passes through a cold chain. By contrast, in China, less than a quarter of the country’s meat supply is slaughtered, transported, stored or sold under refrigeration. The equivalent number for fruit and vegetables is just 5 percent.

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    China Property Cooling Prompts Revival of Builder Bonds

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

    The central bank in May called on the nation’s biggest lenders to accelerate the granting of mortgages to first-home buyers. Some Chinese cities, including the northern city of Hohhot and the eastern city of Jinan, have started to relax property curbs to stimulate the local market.

    Allowing bond sales by property companies is part of government easing measures along with the removal of property curbs and the support of mortgage lending, according to Frank Chen, head of China research at CBRE Group Inc., a commercial real-estate services company based in Los Angeles.

    “The revival of property bonds is the right move in the long run,” given real estate’s close ties to many industries including cement, steel and even banking, said Chen in Shanghai. “Property is the single most important sector to the Chinese economy.”

     

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    Goldman, Warburg Pincus and others nearing $2bln Huarong deal-sources

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

    The seven investors are likely to sign an agreement over the next month, the people said.
    China Huarong had about $65.7 billion under management at the end 2013, making it the nation's biggest bad debt manager ahead of China Cinda Asset Management Co Ltd, which raised $2.8 billion in a Hong Kong initial public offering last year.

    CICC, Fosun, Goldman Sachs and Warburg Pincus declined to comment. COFCO, CITIC and Khazanah did not immediately respond to calls and emails seeking comments. The sources declined to be identified as the information is not public.

     

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    The Supreme Peoples Court Issues its Newest Five Year Reform Plan for the Courts

    This article from the Supreme People’s Court Monitor is noteworthy because an independent judiciary is a common characteristic of many of the most successful countries in achieving their development objectives. It is posted without further comments but here is a section:

    On 9 July, the Supreme People’s Court issued its fourth five year reform plan for the courts, approved by the Party leadership, which sets out 4 broad areas of reform, relating to 8 general areas. An overview has been released on Wechat and other Chinese social media and can be expected to be published very soon in more traditional media.

    The Court described it as taking first steps towards establishing a judicial system with Chinese characteristics and is intended to roll out reforms announced in the 3rd Plenum decision and the judicial reform decision announced earlier this spring and some of its themes were highlighted in press releases published just after Chinese new year.  Many of these issues are ones that have been discussed within the Chinese legal community for many years and draw on international expertise as well. The summary below highlights five of the eight broad areas. 

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    Strong Luye Pharma debut boosts prospects for 'China orphan' firms

    This article by Stephen Aldred for Reuters may be of interest to subscribers. Here is a section: 

    Morgan Stanley Private Equity Asia (MSPEA) delisted Sihuan from Singapore in late 2009 at a valuation of around $500 million, before relisting it in Hong Kong a year later with a market cap of around $3.7 billion, according to a source with direct knowledge of the matter.

    Sihuan's market value has since grown nearly 80 percent to $6.7 billion, not too far off China's biggest listed drugmaker - Shanghi Fosun Pharmaceutical Holdings Group Ltd (600196.SS) which has a market cap of $7.2 billion.

    MSPEA has not fully exited its investment but expects to make around eight times its initial investment when it does, said the source, who declined to be identified as details of the investment have not been made public.

    Luye's shareholders sold $253 million through the offering while the rest of the proceeds went to the company. For CDH the successful Luye debut is a welcome relief after the IPO of pork giant WH Group Ltd was canceled as mismanaged pricing and other woes led to weak investor demand.

    Investors in both Sihuan and Luye are also buying into strong growth prospects for China's drug market, although the sector remains underdeveloped and highly fragmented.
    The industry grew at a compounded annual growth rate of 19.3 percent in the five years to 2012 to be worth $69.7 billion and is expected to grow at a similar pace to reach $166 billion by 2017, according to consultancy firm Espicom. 

     

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    Email of the day on a mainland China focused ETF

    I was wondering what your thoughts were on the iShares Chinese A-shares tracker (FTSE/Xinhua China A50 (XIN9I index) on your web site. It looks to me like it might be finishing its lengthy base. Where would be a good point to buy from a technical point of view?

    Keep up the great work,

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    China health care Pharma sector comes of age

    Thanks to a subscriber for this highly educative heavyweight report from Standard Chartered focusing on China’s healthcare sector. The embedded audio visual summary is well worth taking 3 minutes to watch. Here is a section:  

    We would explain the smiley curve pattern in this way:

    Innovators: At one end of the smiley curve are innovators, including pharma companies that have accumulated vast knowledge and expertise over long periods. Others are laboratories and CROs (contracted research organisations), which specialise in innovation and benefit from the outsourcing of other companies’ main functions, from diagnosis and biologics manufacturing to R&D.

    Health-care service providers: Hospitals, clinics, doctors are the main points-of-sales for the medicine and services sub-sectors. They exert an important influence on sales and have first-hand intelligence on large numbers of patients. These companies should be able to capitalise on strengths to generate returns for investors.

    Consumables and distributors: We find these sub-sectors in the value chain less attractive. Despite entry barriers related to scale, knowledge or regulations, their business is too distant from the areas where real innovation is fostered or services are rendered. While they employ the latest technologies to improve efficiency, newer technologies could disrupt their value proposition. For instance, smart medical devices containing diagnostic sensors, such as Dexcom’s continuous glucose monitoring devices, facilitate information flow between patients, physicians and pharma companies; their use diminishes the value of the middle man ¡V distributors.

    Will China’s health-care market trend be similar to the US? If so, it would strengthen our case for investing in both ends of China’s smiley curve. Comparing the composition of China’s listed health-care companies with market caps above USD 500mn against the S&P500 Health-care Index, China’s device sub-sector is under-represented (8% in China vs. 15% in the US), suggesting its strong growth potential. In comparison, distribution is over-indexed (14% in China vs. 6% in the US), implying less headroom for growth.

     

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    China Coal to Olefins Industry

    Thanks to a subscriber for this fascinating heavyweight report from Deutsche Bank. Here is a section: 

    In its most recent 5-Year Plan (2011-15), the Chinese government laid out an aggressive time table for development of its coal-to-olefins (CTO), coal-to syngas (CTG) and methanol-to-olefins (MTO) industries (Appendix 1-3). 

    The economics of China coal-to-olefins (ethylene / propylene) is competitive relative to the world’s naphtha-to-olefins industry (Figure 2, Figure 20 & Figure 92-93). The world’s naphtha-to-olefins industry is Asia-based. Ninety percent (90%) of Asia’s olefin (ethylene) capacity uses naphtha as a feedstock (Appendix 6-10). Asia produces 34% of global ethylene. A fast-growing China CTO industry would displace its own naphtha to olefins industry (24% of global ethylene capacity). Somehow, this strategy does not make much sense; although it would produce short-term China GDP growth. 

    The economics of China coal-to-olefins however is not competitive relative to a growing North American and Middle Eastern natural gas-to-olefins industry (Figure 2, Figure 20, and Figure 94). From a cost perspective, a fast-growing China CTO industry would displace its own naphtha to olefins industry but then be displaced itself by a lower-cost North American and Middle Eastern natural gas-to-olefins industry. Somehow, this strategy makes even less sense; except for the fact that it creates plenty of China GDP by both building and then dismantling multiple China industry chains. 

    China’s coal-to-olefins and / or coal-to-urea do not make economic sense in a world awash in low-cost natural gas. Notwithstanding, China continues to grow its coal-to industries; maybe on the prospect that the world’s growing supplies of cheap natural gas could be short-lived.

    The production of olefins from coal requires an abundance of water (Figure 98) and produces an abundance of CO2 emissions (Figure 102). The addition of one 600k tpa CTO facility in Beijing would increase provincial CO2 emissions by 14%. China’s abundant water resource (Figure 95) is located in the South and South West part of the country; its coal resources are located in the North and North West part of the country (Figure 11-12) – bad luck.  

     

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