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

    China unveils agenda for comprehensive capital market reform

    Thanks to a subscriber for this note from Deutsche Bank which may be of interest. Here is a section: 

    To develop a multi-layer capital market with proper structure, complete function and effective regulation by 2020, the Guideline highlighted the development of direct financing, which includes three major areas of bond market, equity market and private equity.

    On bond market, the Guideline aimed to a) develop a scheme of local government bond issuance; 2) enrich bond products suitable for various investors; 3) develop bond types for SMEs; 4) connect different bond exchanges and 5) improve issuance procedure, rating mechanism as well as 6) promote asset securitization. To develop a multi-layered equity market and cultivate a healthy private equity market are other two major areas in promoting the direct-financing.

    In A share stock market, the approval-based stock issuance system will be replaced by a registration-based one, and such move will be accompanied by the new IPOs governing rules published by the Securities Association of China the same day of the Guideline. Regulators will crackdown insider trading, enhance information disclosure, improve delisting regime, and support pension funds investments into capital markets by preferential tax policies.

    The State Council also said it will foster the market for private equity funds and venture capital funds. Going forward, the placement of private equity won’t be subjected to administrative approval and funds of private equity and venture capital will be encouraged to support SMEs and newly emerging industries.

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    China Monroe Doctrine

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

    The seeds of conflict are evident. On his recent visit to Asia, President Obama made clear how the tensions between Japan and China over the Senkaku Islands (Diaoyu Islands to Beijing) could draw in the United States. His declaration that the Japan-administered rocks in the East China Sea “fall within the scope of Article 5 of the U.S.-Japan Treaty of Mutual Cooperation and Security” incensed China, which claims the islands. Mind your own business and get over the Cold War was the essence of the Chinese message to Washington.

    Vietnam and China also have maritime conflicts that have flared in recent days as a result of a Chinese decision to place an oil rig in the South China Sea. Chinese ships escorting the rig rammed and fired water cannons at Vietnamese vessels attempting to stop the move in potentially oil- and gas-rich waters claimed by Hanoi.

    The U.S. response in support of Vietnam, its erstwhile enemy turned pivot-to-Asia partner, was firm: “China’s decision to introduce an oil rig accompanied by numerous government vessels for the first time in waters disputed with Vietnam is provocative and raises tensions,” Jen Psaki, a State Department spokeswoman, said in a statement. “This unilateral action appears to be part of a broader pattern of Chinese behavior to advance its claims over disputed territory in a manner that undermines peace and stability in the region.”

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    China: The Chart Pack

    Thanks to a subscriber for this report from Westpac which may be of interest to subscribers. Here is a section: 

    Phat Dragon brought forward the timing of the enactment of growth stabilisation policies from midyear to ‘immediate’ not long after the NPC. Policy needs be loosened to a degree because without a replenishment of the investment pipeline, the growth pulse will slow to the point where domestic demand growth will fall below 7% in Q3. Chinese policymakers have little room to move nowadays, with domestic demand growth sub 7% viewed as unpalatable from the point of view of job creation and anything exceeding 8% likely to be inflationary.

    This change of tack by domestic policymakers will combine with an improvement in global economic conditions to lift the economy in late 2014, ensuring that it enters 2015 will some positive momentum.

    Phat Dragon anticipates that the world economy will be significantly firmer in 2015, which will assist China as it attempts to grow in a less credit-intensive fashion. While RRR cuts remain possible, Phat Dragon argues that it must be obvious that OMO could not achieve the same ends before the PBoC would choose that avenue for boosting liquidity. The most likely time for a RRR cut is probably post deposit rate reform, which now has a definite “within two years” timeframe attached to it. (Note that “in the near future” meant 11 months in the case of the wider CNY band, and deposit insurance/guarantee system is likely to be built first).

    Regarding China’s balance sheet challenges, the financial system will remain a source of bearish news flow. While Phat Dragon feels that the ultimate risks relating to Chinese debt are generally exaggerated (it still has a current account surplus after all, and is the world’s second largest international creditor) there seems little doubt in Phat Dragon’s mind that bearish views on the growth-credit nexus will be remunerative in the first half of this year.

     

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    Chinese Banks

    Thanks to a subscriber for this interesting report from Deutsche Bank which may be of interest to subscribers. Here is a section: 

    We undertook two proprietary studies, on 2,400 Chinese corporate bond issuers and 13,000 collective trust products, and identified credit risks worth Rmb237bn for these two markets, with listed banks exposed to 37% of these risks. Despite setting aside excess provisions of Rmb819bn, their valuation prices in NPLs of Rmb2.8tr. We expect the sentiment on Chinese banks to reverse after the end of the repayment peaks of the corporate bonds and trust products this May/June, when the market realizes that the actual default rates are materially lower than expected and a gradual rise in default rate is the usual path towards correct pricing of credit and an efficient capital allocation.

    Quantifying the expected default rate of the corporate bond market 
    Our proprietary study on 2,400 Chinese corporate bond issuers, with a combined issuance of 5,500 bonds, identifies 88 issuers facing suspension risks due to P&L losses in 2012 and 1H13 with 74 of them being SOEs that are unlikely to default. This leaves 14 privately owned entities (POEs) as higher risk bond issuers, in addition to the 8 POEs downgraded and on the negative watch list, with a combined issuance of Rmb28.6bn, or 39bps of the total outstanding corporate bonds, which reached Rmb7.4tr in February 2014. Around 65% of these loss-making issuers are involved in the overcapacity sector, namely steel (34%), mining (20%), metal (9%) and solar (2%), in terms of issuance size.

     

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    2014: a year of economic rebalancing

    Thanks to a subscriber for this interesting report by Michael Spenser for Deutsche Bank which may be of interest to subscribers. Here is a section:

    In recent weeks, investors have been treated to a litany of bad news from China: disappointing Jan-Feb economic data, the first ever default in the domestic bond market and another default in the trust sector. With slowing money supply and credit growth, fears of a ‘hard landing’ or systemic crisis have been re-ignited. We remain of the view that such concerns are exaggerated. The increasing profile given to credit events reflects, we think, a desire to educate depositors about risk more than a genuine increase in risk. 

    Nevertheless, the weaker economic data cannot be ignored and we have revised down our forecast for 2014 GDP growth to 7.8% from 8.6% previously and our CPI inflation forecast to 2.2% from 3.7% previously. This represents a mild pickup in growth in 2014 in both real and nominal terms relative to 2013, albeit less dramatic than we previously expected.

    We estimate that the Jan-Feb data are consistent with GDP growth slowing to about 7.4%yoy in Q1 from 7.7% in Q4. With growth slowing towards the bottom of the government’s 7%-8% comfort zone, this weakening momentum is likely to elicit a policy response. The decline in interbank rates in recent weeks may be the initial monetary component of this stimulus. Recent approvals of RMB142bn in government investment for five railway projects may be the beginning of the fiscal component. We think the government may also seek to accelerate growth-enhancing reforms, especially liberalization of private investment.

    But we expect any stimulus to be very modest. The slowdown is largely the outcome of the government’s efforts to rebalance the economy’s structure and senior policymakers have frequently noted that rebalancing is likely to depress activity in the near term. What they will seek to do is to support growth to prevent an increase in financial risks and to ensure adequate employment growth. Aggressive monetary stimulus could, to be sure, boost growth rapidly, but at the cost of the rebalancing agenda. So the reform agenda constrains the policy response in some ways but also shapes the response towards accelerated liberalization in a bid to support growth through means other than traditional stimulus.

    We think Q1 is likely to be the trough for growth this cycle, then, in part because we see a policy response aimed at providing a little stimulus. More important, though, we expect the external sector to re-emerge for the first time in four years as a source of growth in the economy. Exports grew at an annualized rate of about 17% over the last six months of 2013 and we expect that as US activity recovers from its winter chill the apparent pause in Chinese export momentum so far this year will be replaced by renewed growth. We look for net exports to contribute about 0.6ppts to GDP growth this year, a forecast that we view as conservative.

     

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    China Fines Nu Skin $540,000 for Illegal Sales and Claims

    This article by Ricardo Lopez for The Los Angeles Times may be of interest to subscribers. Here is a section:  

    The regulatory action ends a probe that began in January, when China's State Administration for Industry & Commerce began investigating the company following media reports.

    "We continue to believe in the potential of China's large and growing market," said Dan Chard, Nu Skin's president of global sales and operations, in a statement. "We remain committed to working cooperatively with the Chinese government to ensure the healthy, long-term growth of our business."

    Nu Skin was fined $524,00 for illegally conducting direct sales. The company was fined an additional $16,000 for product claims that Chinese regulators said did not have enough evidence. Six Nu Skin sales employees were fined a combined $241,000 for "unauthorized promotional activities."

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    Asian Currencies Drop Led by Rupiah as Fed Signals Rate Increase

    This article by Jeanette Rodrigues and Justina Lee for Bloomberg may be of interest to subscribers. Here is a section: 

    The Bloomberg-JPMorgan Asia Dollar Index fell to a six- month low after the U.S. central bank reduced its monthly bond- buying program yesterday by another $10 billion to $55 billion.

    The purchases could end in the second half of this year and borrowing costs may be increased around six months later, said Fed Chair Janet Yellen. China’s yuan sank to a one-year low after the nation’s central bank weakened the currency’s reference rate by 0.18 percent, matching a March 10 cut that was the biggest since July 2012.

    “Yellen’s comment seem more hawkish than expected,” said Samson Tu, a Taipei-based fund manager at Uni-President Assets Management Corp. “It may take one or two days for the message to be digested before emerging-market currencies can stabilize, and Asian currencies are facing the additional pressure of the weakening yuan.”

     

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    Taking a look at dividend yield in reported FY13 results

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

    Among the key listed Chinese developers that have yet to announce their FY13 results but will be reporting by the end of March, based on the actual 2012 dividends and our forecasted 2013 dividends, we expect high 2013 dividend yields for R&F, Greentown, Agile and Evergrande. Specifically, at the current share price, R&F is trading at a 2012A dividend yield of 7.8% and 2013E dividend yield of 9.1%. Greentown is trading at a 2012A dividend yield of 7.3% and 2013E dividend yield of 8%. Evergrande is trading at a 2012A dividend of 5.3% and 2013E dividend yield of 7.3% while Agile is trading at a 2012A dividend yield of 8.4% and 2013E dividend yield of 8.7%.

    Looking at the information on the short interests on Chinese developers, which are estimates based on DataExplorers and the DB Global Prime Finance team, we found that the size of the cumulative short positions on the China property names, including the high-quality state-owned developers like COLI and CR Land, has recently risen quite sharply. For example, the short interests/positions on COLI have increased 9% month-on-month, and based on our estimates, it would take about 8 days to cover the outstanding short positions. As another example, the short interests/positions on CR Land have increased 37% month-on-month, and based on our estimates, it would take about 11 days to cover the outstanding short positions.

     

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    Zombies Spreading Shows Chaori Default Just Start: China Credit

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

    Total debt of publicly traded non-financial companies in China and Hong Kong has surged to $1.98 trillion from $607 billion at the end of 2007. Some 63 companies have a debt-to- equity ratio exceeding 400 percent, compared to the average of 73 percent. In latest filings, 351 have negative ratios of earnings before interest, taxes, depreciation and amortization to interest expenses, while 409 have coverage of less than 1.

    Renewable energy, materials, household appliances and software companies dominate the rankings.

    Premier Li Keqiang is trying to balance efforts to avoid sharper slowdowns in economic growth with steps to rein in debt.

    Expansion in gross domestic product is set to cool to a more than two-decade low of 7.5 percent this year from 7.7 percent in 2013, according to the median estimate in a Bloomberg survey.

     

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    Xi Jinping Inner Circle (Part 1: The Shaanxi Gang)

    Thanks to a subscriber for this informative report by Cheng Li, Director of Research at John L. Thornton China Center, detailing the rise the Xi Jinping and those who have ascended to power with him. Here is a section:

    As for the “tigers,” since about a year ago 19 ministerial and provincial-level senior leaders have been arrested, including four members (two full members and two alternate members) of the newly formed 18th Central Committee.51 Many of the arrested leaders have had ties to the country’s most formidable special interest groups like the oil industry, including Jiang Jiemin, the minister who oversaw all major state-owned enterprises (SOEs) under the State-owned Assets Supervision and Administration Commission (SASAC). In addition, 30 executives of SOEs—including 20 CEOs—were arrested in 2013, representing various industries such as energy, transportation, telecommunications, finance, steel, and mining.

    Some critics may be cynical about the methods employed in the anti-corruption campaign, which relies more on the CCP’s traditional campaign mechanisms rather than the legal system. Zi Zhongyun, a distinguished scholar and former English interpreter for Mao Zedong and Zhou Enlai, recently wrote that the current anti-corruption campaign could not effectively prevent corruption—not only because there are far too many corrupt officials in the country, but also because such a campaign might lead to power abuse and undermine the role of the legal system and emerging civil society.53 While Zi and likeminded critics have valid concerns, one may reasonably argue that this criticism is unfair on the grounds that one simply cannot expect to establish a legal system in China in a short period of time. The fact is that, as Zi herself recognizes in her article, the campaign has already transformed the behavior of Chinese officials. Also, in the defense of Wang Qishan, Wang himself stated explicitly that the anti-corruption campaign should mainly deal with symptoms (....) now in order to gain the necessary time to find a way to cure the disease (....) in the future.

    It should be noted that the Third Plenum resolution did hold out promise for legal reforms, especially greater judicial independence. Under the current system local judges and secretaries of local discipline inspection commissions answer to local party chiefs, who exert political pressure on their decisions. Under the rule of Bo Xilai, for example, Chongqing city’s high court almost completely followed Bo’s orders. Abuse of power and police brutality became rampant in the city. The proposed vertical control of local courts by the national judiciary (and also the vertical control of local discipline commissions by the CCDI) should be seen as an encouraging policy move to prevent power abuse and strengthen the rule of law.

     

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