Monthly Archives: October 2008

China’s Billionaire Boom Goes Bust

It has been a rough year for China’s superwealthy, according to Forbes latest annual ranking of the country’s richest:

The combined net worth of the 400 richest {Chinese} dropped to $173 billion from $288 billion. The top 40 lost $68 billion, or 57%. The minimum net worth slipped $20 million to $180 million. We found 24 billionaires, down from a record 66 in 2007. These losses would have been greater had it not been for the renminbi’s 10% appreciation against the dollar.

The bursting of the property bubble and the slump in stock prices in Shanghai and Hong Kong wreaked havoc among fortunes.

Among the biggest losers: last year’s wealthiest person, real estate heiress Yang Huiyan, whose net worth dropped $14 billion to $2.2 billion, but still enough to rank her third by Forbes’s reckoning; and Larry Yung, son of late vice president Rong Yiren, lost more than half a billion dollars in one day recently after his Citic Pacific conglomerate announced $2 billion in losses from those unauthorized currency bets we mentioned last week (see: “Two More Chinese Firms Reveal Forex Losses“).

Ouch.

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Hong Kong Finds More Melamine-Tainted Eggs

The melamine-tainted eggs are getting to be like the melamine-tainted baby formula.

First there was one manufacturer whose products were found to be contaminated. Then there were many. Tests in Hong Kong have found three more brands of Chinese eggs containing high levels of the chemical. This all suggests the problems with food safety still run wide and deep, and that melamine has got into the animal feed supply chain.

Another similarity: a potential cover-up. Officials in Liaoning many have known of the problem eggs as long as a month ago, according to Beijing news reports, and imposed a news blackout. All sadly familiar sounding, and symptomatic of a food safety system that is responding slowly, if at all, to Beijing’s attempts to reform it.

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Aluminum, Copper Smelters Facing Same Slump As Steelmakers

Aluminum smelters and copper refiners are facing the same problems as China’s steelmakers. Slowing economic growth in their domestic and export markets is cutting demand for their products, lowering prices and squeezing profits.

The biggest aluminum smelters met commerce and finance ministry officials today to ask for tax breaks and purchases by the state reserve. Bloomberg reports that China’s aluminum prices have fallen 22% this year to less than the operating costs of domestic smelters. The slump in demand  comes on top of a 15% tax imposed on exports of aluminum alloys in August to curb over-investment in the energy-intensive industry.

Meanwhile, Chinalco Luoyang Copper, part of Aluminum Corp. of China, or Chalco, the country’s largest metals processor, said its orders had fallen 20% in the last quarter. Rivals have also cut production. The industry is thought now to be operating at 80% of capacity.

Demand and prices for all three metals may well continue to fall through to next year, which will send a lot of smaller producers out of business.

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Dollar-Bound

Even with a slowing economy and export markets slowing faster, China has a lot of trade surplus dollars to recycle. Its foreign-exchange reserves are in excess of $1 trillion and they sit mostly in U.S. dollar-denominated assets.

The American currency depreciated steadily for the past four years, though it has rallied recently. This may be a technical rally due to a rare combination of unwinding of derivative positions at a time when shorting the dollar is nigh impossible because of the lack of liquidity; though the flight-to-quality rally school will remind you that, though counterintuitive, there is precedent for the dollar to rise during recessions.

Regardless, the losses on China’s dollar-denominated assets have grated with some officials. So has the fact that China has been subsidizing what is now seen as American extravagance and a broken U.S. financial system — while all the while being lectured about how China’s markets should become more like the U.S.’s; schadenfreude alert.

China has started to diversify its foreign-currency holdings, though that has perils of its own as some of the recent foreign exchange losses by Chinese companies have shown (see:”Two More Chinese Firms Reveal Forex Losses“) And more trade in recent years has been denominated in currencies other than the dollar, such as oil in euros. A lot of oil producers would be happy to undermine dollar hegemony, and a world where the dollar shares trade shelf space, so to speak, with the euro and the yen looks more like the multipolar world of the global economy.

But there is no substantive alternative to the U.S. dollar as the world’s default reserve currency. Neither the Europeans nor the Japanese want it. Nor can the renminbi, still not fully convertible, aspire to the role.

The notion of creating a non-national global reserve currency has been floated many times before, and will no doubt be giving another airing during the forthcoming run of proposed world leaders’ summits on the financial crisis and a new regulatory regime.

There was some corridor chatter about the idea at the Asia-Europe summit in Beijing at the end of last week. But it would be a brave punter who bet on it coming about. Indeed, the substantive move to come out of the summit on this front was a Chinese-Japanese agreement to support the dollar jointly. They just can’t afford otherwise.

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HK Extends Melamine Testing After Finding Chemical In Chinese Eggs

The melamine-tainted food scare just keeps on spreading. Hong Kong said tody that it is expanding its testing to include meat products imported from China after discovering excessive levels of the chemical in eggs yesterday.

The eggs, from Dalian Hanwei Enterprise Group, contained 4.7 parts per million of melamine, almost double the permitted maximum of 2.5 ppm, though only a hundredth of the levels found in some tainted diary products. The suspicion is that the contamination came from feed given to chickens that laid the eggs.

Last week, China’s health ministry said that more than 3,600 children remain sick after consuming melamine-tainted formula. Three are in serious condition.

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The Fictitious Economy

Not to poke fun at a touch of underpolishing by Xinhua‘s editors, but this Bystander is wryly amused by the state news agency’s English language report of Prime Minister Wen Jiabao’s press conference following the Asia-Europe summit:

“Lessons should be learned from the financial crisis, and the responsibilities should be clarified for governments, companies and supervision, respectively,” said Wen. He emphasized that the development of the fictitious economy should be balanced with the real economy, so as to prevent the problem of the fictitious economy from affecting the real economy.

Many a true word….

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Wen Supports Europe’s Call For Global Financial Regulation

Prime Minister Wen Jiabao has thrown China’s weight behind European calls for a new global financial regulatory regime. Speaking after the two-day summit of European and Asian leaders in Beijing, Wen said he would back the French-led initiative at the summit of 15 world leaders that U.S. President George W. Bush has called for next month in Washington to discuss the financial crisis. Reuters reports Wen as adding that  China would actively participate in the Nov. 15 summit with a “responsible and pragmatic” attitude.

No surprise perhaps that China would favor more rather than less regulation, nor that it would support any multilateral regime that would rein in the U.S. and U.S. financial institutions with global reach, and Wen’s public support for Sarkozy’s proposal may be a quid pro quo for the French president getting him a seat at the table; Bush had first tried to dodge a summit, and then to restrict attendance to G8 leaders. But Wen’s remarks also mark a subtle shift from China’s position that its main role in helping to resolve the financial crisis would be to sustain high growth.

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Flat Output Will Help Steelmakers Strike Better Iron Ore Deals

Confirmation of the problems in the steel industry comes from Shan Shanghua, secretary general of the China Iron and Steel Association (here via People’s Daily).

He says production will be flat this year at 500 million tonnes, revising the association’s previous forecast of 5%-10% growth. Nor does he expect output to grow next year. The world wide economic slowdown is to blame (see “Baoshan Steel Will Cut Prices, Again, As Demand Slumps“).

Shan was speaking at a conference in Qingdao that unofficially kicks off the annual price contract between Chinese steelmakers and their iron ore suppliers. As well as negotiating down record prices, the steelmakers want to overhaul the way prices are negotiated to unify the prices of imports from all countries, as Japan’s steelmakers do. The stalling of production growth, which has left 80 million tonnes of iron ore stacked up at Chinese ports, will give China’s steelmakers a stronger hand in those discussions.

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Two More Chinese Firms Reveal Forex Losses

Misery loves company. China Railway and China Railway Construction have joined Citic Pacific in revealing disastrous bets on foreign-exchange.

China Railway booked a $285 million loss and China Railway Construction booked a $45 million loss on forex operations in the first nine months of the year and in the third quarter respectively, Bloomberg reports. That combined $330 loss is dwarfed by the $2 billion in currency losses from unauthorized trades that Citic Pacific, the Hong Kong-listed arm of China’s largest state-owned investment company, revealed earlier this week.

No suggestion of any shenanigans at either of the rail companies; just old-fashioned misjudgment as both companies tried to put cash raised from recent share sales in Hong Kong to work. China Railway Construction, for example, put some of its money in to Australian dollar deposits, which offered a higher yield than yuan deposits. (Beijing wouldn’t let either company convert the Hong Kong dollars raised into yuan.) The Australian dollar fell 17% in the quarter. China Railways got tangled up in a convoluted hedge   against its Australian dollar and other foreign-exchange exposures.

Chinese companies aren’t alone in posting losses on foreign-exchange hedges as record high volatility in currency markets wreakes havoc on companies’ hedges around the world, but these three cases highlight Chinese firms inexperience and ham-fistedness in managing currency and the other risks that come with their venturing out into the world. With $56 trillion in outstanding foreign-exchange over-the-counter derivatives in the world at the end of  2007, according to the Bank for International Settlements, more losses seem inevitable.

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More Melamine Problems Pop Up

The melamine-tainted food scandal has taken a couple of bizarre twists.

First,  Britain’s Food Standards Agency said late last week that a Chinese-made novelty food product sold in U.K. sex shops has been taken off the shelves after being found to be contaminated with melamine. A FSA spokesperson said: “This is a first. We’ve never had to put out an alert before on “willy spread” – chocolate-flavoured or otherwise.” I think that is what is the known as British understatement.

Second, 1,500 dogs being bred for their fur have died after eating contaminated feed. The deaths are thought to have occurred over the past two months on a raccoon dog farm in Liaoning. The AP quotes Zhang Wenkui, a veterinary professor at Shenyang Agriculture University and who performed autopsies on a dozen of the dogs, as saying, “First, we found melamine in the dogs’ feed, and second, I found that 25 percent of the stones in the dogs’ kidneys were made up of melamine.”

Last year, dozens of dogs and cats in the U.S. died after eating melamine-tainted pet food and this year  a lion cub and two baby orangutans developed kidney stones after being fed with milk powder made by the Sanlu Group, which is at the center of the tainted diary products crisis that has left four people dead and hospitalized more than 50,000 children.

The two incidents only raise more questions about how far melamine has penetrated the food chain and whether the effort to regulate it is being overwhelmed.

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