360° Coverage : For Some, China In 'No Win' Situation

2 Updates
For Some, China In 'No Win' Situation
Photo Credit: Forbes Business

For Some, China In 'No Win' Situation

Apr 1 2014, 1:57pm CDT | by

There’s good news and bad news on China’s credit markets. It all depends on who you talk to, and what they focus on. For the emerging market specialists at Schroders and Ashmore in the U.K., China’s...

Filed under: news

 
 
 

25 weeks ago

For Some, China In 'No Win' Situation

Apr 1 2014, 1:57pm CDT | by

There’s good news and bad news on China’s credit markets. It all depends on who you talk to, and what they focus on.

For the emerging market specialists at Schroders and Ashmore in the U.K., China’s default rate will rise, but will be more in line with that of the U.S.  China’s notorious shadow banking system — a form of informal lending — will also grow, but the Central Bank of China has been keen on plugging up holes where needed.  When Industrial and Commercial Bank of China (ICBC) saw one of its trust funds collapse under the weight of a poor investment that dominated its portfolio, the government came to the rescue.

ICBC said last week that real estate loans accounted for less than 1% of its non-performing loans.  However, defaults from commercial real estate developers are on the rise. Some, like Zhejiang Property, will need a government hand out or face bankruptcy.

Of course, not all entities in financial crisis will be saved.  The government might actually be fine with that. The country could use a shake out in sectors that have been overbuilt —  mainly automotive, solar and real estate.  That cleansing is good news for long term sustainability.

In the short-term, China continues on its leverage binge.  The Central Bank can put the breaks on it. But that will surely slow the world’s No. 2 economy even more than Beijing would like.

“I’d rather be highly leveraged on a good investment than unleveraged on a bad investment. It’s the asset quality that counts,” says Patrick Chovanec, Chief Strategist at Silvercrest Asset Management, a $15.3 billion financial advisory firm in New York.  ”The issue isn’t so much the total level of credit, but the rapid rise in that level, which usually implies malinvestment,” he noted in a conversation with FORBES via Twitter on Monday after-market  hours.

Chovanec has emerged as one of the more prolific bears on China, along with columnist Gordon Chang and Swiss fund manager Marc Faber of the famous Gloom, Boom & Doom newsletter. For them, going long China is walking the plank on a pirate ship.

Since the 2008 financial crisis, China’s economy has doubled from $4.5 trillion to $9.2 trillion GDP per year.  Most of that was done on fixed asset investment by the government in things like railroads, airports, and even entire towns.

That leverage is primarily in the private sector via bank loans and credit trusts such as ICBC’s problematic China Credit Equals Gold #1. 

In Zhejiang, an eastern seaboard province that is home to 54.9 million people, debt accounts for 220% of its $577 billion GDP, according to CEIC data. In major cities like Beijing, debt is 570% of its GDP of roughly $300 billion. In Shanghai, companies are levered up to 280% of that city’s GDP.  All told, China’s debt equals about 189% of its GDP compared to 260% in the hyper-levered U.S. economy.

Money from the U.S., U.K., Australia and Japan have flowed into the residential and commercial property markets in China. Worth noting, all of those countries have historic low interest rates, with U.S. and Japan rates near zero thanks to QE. The investment flow of foreign capital into property has helped make Hong Kong one of the most expensive cities in the world, and has put rents in Shanghai neighborhoods on par with Manhattan’s.

China’s housing prices have been tightly correlated with Fed QE, according to analysis by Newedge.

“The government is trying to curb these hot money flows from foreign investors and this will mean a lower account surplus for China,” says Robbert van Batenburg, Director of Market Strategy at Newedge, a broker/dealer in New  York.  Van Batenburg warns that a tightening of credit — not necessarily higher rates, but stricter regulations by financial authorities — will cut into the Chinese economy more than people think. And this will have ramifications in other markets, namely commodities and commodity exporters with close ties to China.

Tighter Credit Markets

The Shanghai Interbank Offered Rate skyrocketed in May 2013 to double digits, declined for the rest of the year and began its steady rise in Dec. 2013.  It’s now a very low 2.86%.  The one week lending rate is nearly double that at 4.2%.

Despite rates being far below where they were last summer, the Wall Street Journal reported last week that 30 companies have canceled bond sales due to lackluster appetite for China debt in the local market.  In March alone, five companies ran into credit problems, including two steel companies that couldn’t service their loans of over $500 million.  Chaori Solar become China’s first-ever bond default after missing payment of just $15 million in interest.  Zhejiang Property’s loan default — the biggest story of the week — now has the developer requiring government help to avoid insolvency./>/>

As credit tightens from the mainland as well as from abroad, China property prices are declining in second and third tier cities.  The tide is going out.  This will put added pressure on developers like Zhejiang, how may not have a rich uncle in Beijing to save them.

The slowdown in housing, exacerbated by credit, has led investment banks to lower their China growth forecasts.  Last week, China International Capital Corporation lowered its growth forecast to 7.3% from 7.6% in January.

Lowdown on China’s Slowdown

Heibei province is the home of Beijing.  It has the highest GDP per capita in the country.  Thanks to a cut in fixed asset investment, Heibei’s industrial productivity has dropped below that of summer 2008 — now less than 2.5%.  Only, in 2008, the government forced companies in the province to restrict industrial production in an effort to reduce pollution ahead of the Summer Olympics.  That’s not a problem in 2014.  Heibei IP is now below the national average growth rate of 9.5%, according to the National Bureau of Statistics.

As the economy slows, there is another China woe waiting in the wings: commodity credit financing deals.

Van Batenburg of Newedge says this is “a bubble waiting to explode.”  Such deals allow for Chinese companies to get trade-related loans based on the commodities they have in storage — such as soybeans and gold.

Goldman Sachs estimates that since 2010, such deals accounted for 31% of China’s short term foreign currency loans, or around $120 billion.  The Central Bank thinks this is too risky, and it is asking exporters and their brokers to clamp down on this form of leverage finance.

“China will strive to bring down this type of financing before U.S. interest rates rise,” says Van Batenburg. What does that mean? Less demand for certain commodities. China accounts for more than half of the world’s soybean imports, most of which come from the U.S., Brazil and Argentina.  China also accounts for around 30% of the world’s cotton and copper imports, and consumes half of the world’s cotton production and nearly half of global coal production.

Countries that export finished goods to China will turn out okay. But countries like South Africa will suffer most. In Brazil, companies like Vale, China’s leading supplier of iron ore, will have a tough time as China demand falters.   Vale shares are down 9.7% year-to-date, underperforming the MSCI Emerging Markets Index and the Bovespa in São Paulo.  But a worsening Chinese economy won’t make Vale’s performance any better.

This is the ‘no win situation’ argument.

China’s economy is highly leveraged and rife with speculative bubbles. Policy makers are determined to squeeze speculative capital out of the markets.  This risks the domino effect of tightening credit markets, rising defaults, and a further slowdown of the Chinese economy.

For Van Batenburg and others in the China bear cave, the leverage, one part an outgrowth of development, another part because of China’s unregulated shadow banking system, has led to a home-grown credit crunch that has the potential to cause systemic risk if this thing escalates.

See: Shadow Banking In China –The Economist

China’s Investment In U.S. Commercial Real Estate Surges – Bloomberg

On Credit, Beijing Embraces Failure – Reuters/>/>

Top Global Real Estate Markets For Affluent Chinese

Source: Forbes Business

 
Update
2

4 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new company (NewCo) and slashing th ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

4 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of the double tragedies of MH370 and MH17 ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

Three arrested over missing journalist in Maldives
Male, Sep 29 (IANS) The Maldives police Monday confirmed the arrest of three men in connection to the disappearance of journalist Ahmed Rilwan.
 
 
Iran foils BBC's plot to 'steal documents'
Tehran, Sep 29 (IANS) Iran's intelligence ministry has thwarted a plot by the British Broadcasting Corporation (BBC) to steal artistic, historical and cultural documents from the country's archive centres, the ministry has said.
 
 
Indian, Israeli prime ministers discuss defence, trade
New York, Sep 29 (IANS) With India-Israel ties on the upswing after Narendra Modi's election, the prime ministers of the two countries met Sunday to discuss boosting trade as well as cooperation in areas ranging from agriculture and water management to defence and cyber security.
 
 
Four-day polio campaign kicks off in Pakistan
Islamabad, Sep 29 (IANS) A four-day polio campaign started in Pakistan Monday with an aim to inoculate children against the disease.
 
 
 

Latest from the Network

Four-day polio campaign kicks off in Pakistan
Islamabad, Sep 29 (IANS) A four-day polio campaign started in Pakistan Monday with an aim to inoculate children against the disease. The campaign will be carried out across the country except for west Karachi, where a...
Read more on Business Balla
 
Mars rover Curiosity drills first hole into Mount Sharp
Washington, Sep 29 (IANS) In a bid to understand how the once wet Red Planet turned cold and dry, NASA's Mars rover Curiosity has successfully drilled the first sample-collection hole in Mount Sharp, a layered mountain...
Read more on Business Balla
 
China's Zhou wins women's kayak single 500m
Incheon, Sep 29 (IANS) China's Zhou Yu defended her title in the women's kayak single 500 metre at the 17th Asian Games here Monday. Zhou, 25, finished the race in a minute and 51.334 seconds, followed by Natalya...
Read more on Sport Balla
 
85 suspected militants surrender in Pakistan
Islamabad, Sep 29 (IANS) A total of 85 suspected militants have surrendered in Pakistan, media reported Monday. Khan Wasey, spokesman for the Frontier Corps (FC), Balochistan, said in a statement that the men belonged...
Read more on Politics Balla
 
Dakota Fanning 'super happy' in her relationship
Dakota Fanning is ''super happy'' in her relationship. The 20-year-old actress - who has been dating British model Jamie Strachan, 33 for over a year - has revealed she has no problem with the 13-year age gap. When...
Read more on Celebrity Balla
 
George Clooney's stag night
George Clooney's stag night involved two bottles of tequila and a £250 bottle of red wine. The 53-year-old actor dined with friends at pricey Da Ivo on Friday night (09.26.14), ahead of his marriage to human rights...
Read more on Celebrity Balla
 
Truck crash kills three in Netherlands
The Hague, Sep 29 (IANS) At least three people were killed and 18 injured when a truck crashed into a crowd during a motor sport event in The Netherlands. The incident took place Sunday in Haaksbergen town, Xinhua...
Read more on Politics Balla
 
Lenin's statue brought down in Ukraine
London, Sep 29 (IANS) Nationalists have brought down a statue of Vladimir Lenin in Ukraine, a move supported by officials, media reported Monday. People cheered and leapt for joy when the statue came crashing down...
Read more on Politics Balla
 
Sunny Monday morning in Delhi
New York, Sep 29 (IANS) It was a sunny Monday morning in Delhi with the minimum temperature recorded at 24.9 degrees Celsius, two notches above the season's average. The Met Office has forecast a clear day ahead. "The...
Read more on Politics Balla
 
Modi overshadowed Nawaz Sharif at UN: Pakistani daily
Islamabad, Sep 29 (IANS) Indian Prime Minister Narendra Modi's speech at the UN was everything his Pakistani counterpart Nawaz Sharif's was not, said a Pakistani daily Monday. An editorial "Modi at the UN" in the...
Read more on Politics Balla